Commencement of Business under the Companies (Amendment

Commencement of Business under the Companies (Amendment) Act, 2015

The commencement of business is a crucial phase in the lifecycle of any company, as it marks the transition from incorporation to operational activity. The Companies (Amendment) Act, 2015, brought significant changes to the regulatory landscape concerning the commencement of business. This article explores the provisions of the Act, the processes involved, and the implications for companies under the Companies Act, 2013.

Understanding the Commencement of Business

The commencement of business refers to the point at which a company begins its commercial activities following its incorporation. The Companies (Amendment) Act, 2015, altered the requirements for companies, specifically regarding the declaration and filing procedures necessary before commencing operations.

Importance of Commencement of Business

  1. Legal Legitimacy: A formal commencement ensures that a company operates within the legal framework and fulfills all regulatory requirements.
  2. Investor Assurance: A well-defined commencement process builds trust among investors, indicating that the company is prepared and compliant before starting operations.
  3. Operational Readiness: Companies need to be adequately prepared, which includes setting up their internal structure, hiring employees, and securing necessary resources.
  4. Regulatory Compliance: Proper adherence to commencement regulations ensures that companies can avoid legal pitfalls and penalties.

Legal Framework: Companies (Amendment) Act, 2015

The Companies (Amendment) Act, 2015 introduced several key changes to the regulatory environment for companies, particularly regarding the commencement of business. The main amendments concerning this topic include:

1. Repeal of Section 149 (1)

One of the most significant changes was the repeal of Section 149(1), which previously mandated companies to obtain a “Certificate of Commencement of Business.” The repeal eliminated the need for this additional certification, streamlining the process for companies to begin their operations.

2. New Requirement for Declaration

While the need for a Certificate of Commencement of Business was removed, the Companies (Amendment) Act, 2015, maintained the requirement for a declaration to be made by the directors before commencing business. This declaration must confirm that:

  • The company has received the necessary subscription for its shares.
  • The paid-up capital of the company is not less than the prescribed minimum as per the Companies Act.

3. Filing of Declaration with the Registrar

Under Section 10A of the Companies Act, 2013, as amended by the 2015 Act, companies are required to file a declaration with the Registrar of Companies (ROC). The form for this declaration is INC-20A, and it must be submitted within 180 days from the date of incorporation.

4. Consequences of Non-Compliance

Failure to file the declaration within the stipulated time frame results in the company being unable to commence business operations. Additionally, penalties may apply to the company and its directors for non-compliance.

Procedure for Commencement of Business

The process for the commencement of business under the amended provisions involves several key steps:

Step 1: Incorporation of the Company

Before a company can commence business, it must first be incorporated. This process includes:

  • Filing Incorporation Documents: The Memorandum of Association (MOA) and Articles of Association (AOA) must be filed with the ROC.
  • Obtaining Certificate of Incorporation: Once the ROC approves the incorporation application, the company receives its Certificate of Incorporation, signifying its legal existence.

Step 2: Minimum Subscription Requirement

Before commencing business, a company must secure a minimum subscription for its shares. This means that the company must receive payment for at least 90% of the shares offered to the public. This requirement is essential for ensuring that the company has adequate capital to start operations.

Step 3: Declaration to Commence Business

Once the minimum subscription has been received, the directors must file the declaration with the ROC, as mandated under Section 10A of the Companies Act, 2013. The declaration must be accompanied by relevant documents, including:

  • Proof of receipt of the minimum subscription.
  • Details of the paid-up capital.

This declaration must be submitted using e-Form INC-20A.

Step 4: ROC Approval

Upon receiving the declaration, the ROC will verify the information provided. If everything is in order, the company will be allowed to commence its business activities.

Step 5: Commencement of Operations

After obtaining approval from the ROC, the company can officially begin its commercial activities, such as:

  • Engaging in contracts with suppliers and customers.
  • Hiring employees and establishing an operational framework.
  • Launching products or services in the market.

Compliance Obligations Post-Commencement

Once a company commences its business activities, it must adhere to various compliance obligations to maintain its legal status and ensure smooth operations.

1. Annual Filings

Companies are required to file annual returns and financial statements with the ROC as per Section 92 and Section 137 of the Companies Act, 2013. These filings ensure transparency and compliance with corporate governance standards.

2. Holding Annual General Meetings (AGMs)

Companies must conduct Annual General Meetings as mandated by Section 96 of the Companies Act, 2013. The first AGM should be held within nine months of the end of the first financial year, and subsequent AGMs must be conducted within six months from the end of the financial year.

3. Maintenance of Statutory Registers

Companies are required to maintain various statutory registers, including the register of members, register of directors, and register of charges, as mandated by the Companies Act. These registers should be updated regularly to reflect any changes in membership or directorship.

4. Compliance with Other Regulatory Requirements

Depending on the nature of the business, companies may also be subject to additional regulatory requirements, such as compliance with tax laws, labor laws, and industry-specific regulations.

Challenges in the Commencement of Business

While the process of commencing business has been simplified under the Companies (Amendment) Act, 2015, certain challenges still exist.

1. Understanding Regulatory Framework

Navigating the complexities of the regulatory framework can be overwhelming for new entrepreneurs. They must ensure compliance with various legal requirements and deadlines, which may be daunting.

2. Delay in Approvals

Delays in receiving approvals from regulatory authorities can hinder the timely commencement of business. Companies should proactively manage their applications and maintain regular communication with the ROC.

3. Financial Constraints

Securing the minimum subscription can be a challenge for startups and small businesses with limited resources. Entrepreneurs must develop effective financial strategies to attract investment and ensure adequate capital.

4. Operational Readiness

New companies may face operational challenges in setting up their infrastructure, hiring employees, and establishing supply chains. Proper planning and resource allocation are essential to mitigate these issues.

Impact of the Companies (Amendment) Act, 2015

The changes introduced by the Companies (Amendment) Act, 2015 have had a significant impact on the commencement of business in several ways:

1. Streamlined Process

The repeal of the Certificate of Commencement of Business has simplified the process for companies to begin their operations. Companies can now focus on fulfilling the essential requirements without the additional bureaucratic step of obtaining a separate certificate.

2. Encouraging Entrepreneurship

By reducing regulatory burdens, the amendments encourage entrepreneurship and make it easier for new businesses to enter the market. This, in turn, can contribute to economic growth and job creation.

3. Increased Transparency

The requirement for a declaration regarding minimum subscription ensures that companies have adequate capital before starting operations, promoting financial transparency and accountability.

4. Regulatory Compliance

The amendments reinforce the importance of regulatory compliance, ensuring that companies adhere to the provisions of the Companies Act and operate within the legal framework.

Conclusion

The commencement of business is a pivotal moment for any company, representing the transition from incorporation to active operations. The Companies (Amendment) Act, 2015 introduced significant changes that streamline the process and enhance regulatory compliance. By understanding the provisions of the Act and fulfilling the necessary requirements, companies can commence their operations legally and efficiently.

As businesses embark on their journeys, recognizing the importance of compliance and operational readiness will help them thrive in a competitive landscape. With careful planning and adherence to regulatory obligations, companies can effectively navigate the complexities of starting their operations and position themselves for long-term success.

In conclusion, the commencement of business is not merely a procedural formality but a crucial step that lays the foundation for a company’s future growth and sustainability. By ensuring compliance with the relevant legal provisions, companies can embark on their operational journey with confidence and clarity.