Thursday, October 4, 2007

Incorporating a company under the MCA 21

Having been a lawyer assisting several multinational companies in India, I was recently entrusted with a personal responsibility of incorporating a company for a close friend of mine from the States. Whilst I normally would entrust the job to my team and do an overview of the task, this time around I was keen on undertaking this task myself.

There was several reasons behind me choosing to incorporate this company personally. Firstly, I had recently undertaken to contribute to an World Bank report which interalia contained several inputs on starting a company in India. The report much to my surprise placed India 120 in terms of ease of doing business, while all along I have been preaching that doing business in India is easy, smooth and that red tape and bureaucratic delays were a thing of the past. Secondly, I had recently addressed a gathering wherein I spoke on the recent changes in the process of incorporation undertaken by the Ministry of Company Affairs (MCA) and the MCA 21. Thirdly, and most importantly the client in question was a dear friend who intended to start his operations at the earliest.

My first endeavour was to gather an understanding of the manner in which the MCA 21 worked. For those of you who are unaware of the nomenclature, MCA 21 envisages electronic filing of documents and paperless administration and pertains to Registrar of Companies offices as stipulated in the Indian Companies Act, 1956 (the Act). One can get a complete understanding of the MCA 21 from the MCA portal. The key benifits envisioned by the MCA 21 are as under:
(a) On‐line incorporation of companies
(b) Simplified and easy mode of filing of Forms/ Returns
(c) Registration as well as verification of charges anytime and from anywhere
(d) Inspection of public documents of companies anytime from anywhere
(e) Corporate‐centric approach
(f) Building up a centralized database repository of corporates operating in India
(g) Enhanced service level fulfillment and customer relationship building
(h) Total transparency through eGovernance (i) Timely redressal of investor grievances (j) Availability of more time for MCA employees for qualitative analysis of corporate information

All the ROC's have virutally become back offices and several facilitaion centers have been set-up know as Registrar’s Front Offices (RFOs).

Armed with this knowledge, I proceeded to incorporating the company. For MCA21, the following four types of users are identified as users of Digital Signature Certificates (DSCs).
(a) MCA (government) employees ; b) Professionals (Chartered Accountants, Company Secretaries, Cost accountants ) who interact with MCA and companies in the context of the Companies Act, 1956.; (c) Authorized Signatories and Directors of Companies ; (d) Representatives of Banks and Financial Institutions
I had already solicited the help of my collegue Vinod [who works with us ] who also happens to be a CA.

The first step - OBTAIN A DIN /Director Identification Number
Process
An existing Director/ person intending to become a Director are required to make an application to MCA for allotment of a unique identification, namely, Director Identification Number (DIN). It is intended to be a lifetime number. For obtaining DIN, form DIN1, requiring personal details such as name, address, and email ID of the person making an application, is required to be filled in. There is a fee of Rs. 100/ for application for allotment of DIN. On submission of of form DIN1 online, applicant shall be allotted a provisional DIN and then he/ she is required to pay the requisite fees with reference to the provisional DIN obtained. The applicant shall be required to take a printout of the submitted eForm and will have to attach proof identity, proof of residence, proof of father’s name, proof of date of birth and photograph. The applicant shall be required to sign the physical copies of the form and get these documents duly notarzed/ attested by an approved authority. The applicant shall be required to send these documents along with the proof of payment made for DIN application to MCA DIN Cell at Noida. On receipt of these documents, the application will be scrutinised and on approval, the DIN shall become active. The outcome of application (approval / rejection) shall be communicated to the user through email. Also the applicant can enquire the application status by quoting provisional DIN allotted at MCA portal.

Comment:

DIN is a mandatory process for foreign directors too and is required while applying for Form 1A [Name Availability Form]. A provisional DIN number is allotted instantly upon uploading the required information on the MCA portal. Eureka, it works..

The process of obtaining a permanent DIN however takes approximately 4 weeks subject of course to documents being in order. Form DIN-2 needs to be submitted to the MCA along with the approved number of all companies of which they hold a director position. DIN-3 attested by Company Secretary is required to be submitted to the concerned Registrar of Companies (ROC).
The Second step - DSC/ Digital Signature Certificate

The Digital Signature Certificate (DSC) is another requirement that is now required to be accomplished. I suggest that the DSC be applied parallel alongside applying for Name Availability since the process of incorporation can be accomplished that much more faster. The DSC can be obtained from six private agencies authorized by MCA 21 (Ministry of Corporate Affairs 21st century).

For the purpose of using the new electronic filing system under MCA 21 Project the applicant needs to obtain a Class II Digital Signature Certificate. Company directors submit the prescribed application form along with proof of identity and proof of address. Each agency has its own fee structure which ranges from INR 400 to INR 2650.

Comment:

The process was remarkably smooth with the process taking around 2 days, although Vinod did share with me that he had encountered problems previously. If the directors are foreign in origin, valid address proofs in the form of passport duly notarised and photographs would need to be provided. It is advisable therefore that several copies [I had around 5 copies] of the address proof of the directors be notarised since this saves valuable time. A good CA is very necessary to ensure that there are no undue delays.

Step three - Applying for Name Availability

Perceived to be a simple step, this can at several instances be time consuming. It is therefore advisable to go in for professional consultation before one applies for name availability. Clients often feel that their chosen names would be made available to them as a matter of course. This of course is from from reality. There are a few tips to get your name of choice.

Firstly, caution must be exercised that the chosen name is not generic., in the sense the name must not be too general. For example Wipro technologies - while the name Wipro is just fine, the Registrar of Companies (ROC) would take objection to the usage of 'technologies'. This is because the ROC is guided by an internal circular to the effect which has come into effect post incorporation of most MNC's who tend to have generic names.

Secondly, a good CA would always suggest you to check informally at the ROC whether a choice of name would be available. This is quite critical to hasten the process.

Thirdly, in case of a wholly owned subsidiary, if the choice of name bears the name of the parent entity, it is always advisable to obtain an NOC from the parent entity to the effect that it has no objection in the Indian subsidiary using the same name. This is particularly so if the parent entity is a well known name eg., Walmart

Fourthly, it is necessary to provide six names in the order of preference. It is necessary to make an intelligent choice of names since the ROC is likely to grant the second choice if the first does not fit the bill.
Comment:

We were able to obtain the desired name with not much difficulty since we had done our homework of checking with the name with the ROC well in advance. Officially, the ROC accomplishes this taks in 7 days and I must say that more often than not this timeline is often exceeded. It amazes me as to how much can be accomplished with bureaucrats in India with the right connections.

Step four -Memorandum & Articles to be stamped
Once a name is approved, the Memorandum of Association and Articles of Association together with miscellaneous documents have to be filed within six months of the approval. In practice, if the proposed name is available the same is granted within 2 or 3 days.

The application should be accompanied necessarily by the following: (i) Unsigned copies of the Memorandum of Association and Articles of Association. (ii) Payment receipt. Ensure that the copies submitted to the Superintendent of Stamps or to the bank for stamping are unsigned and no promoter or subscriber has written anything on it by hand. The Superintendent returns the copies, one of which is duly stamped, signed and embossed evidencing the payment of the requisite stamp duty. The rate of stamp duty varies from State to State. According to Article 10 and 39 of the Indian Stamp Act,1899, stamp duty payable on memorandum of association and articles of association for a company to be incorporated in Mumbai, Maharashtra is: AOA: Rs. 1000/- for every Rs.500,000/- capital or part thereof subject to a maximum of Rs.50,00,000.00. Stamp duty for the MOA is Rs.200.00 Once the Memorandum and the Articles of Association of the Company have been stamped, the same is required to be signed by the Promoters of the Company including commencing with the name and description, father’s name, address, occupation and the number of shares subscribed for in their own handwriting which is duly witnessed. After signing the documents are to be dated. Declaration form 1: On Rs 100 stamp paper
Comment:
It took us around 2 working days to get the stamping done. The process was however delayed since we had to get the overseas directors to sign off on the Memorandum and Articles.
Final Steps - Documents to be presented to obtain the Incorporation Certificate
After the stamping of the MOA and AOA, 3 copies along with the following documents are required to be scanned and uploaded on the MCA-21 Portal: - The stamped copies of the MOA and AOA - Copy of the Form-32 along with the consent letters of the Directors of the Company, who are appointed therein. - Form-1 - application and declaration for incorporating of a Company and printed on non judicial Stamp paper worth INR 20. - Form 18-evidencing the address proof of the Company. - Form-1A-evidencing the name approval. - Copy of challan evidencing the fee with respect to above mentioned forms. - Power of Attorney from the subscribers in favor of any person for making corrections on their behalf in the documents and papers filed for registration .This must be on nonjudicial stamp paper of INR 100. - Identification of the subscribers by way of copy of driving license, passport, voters identity or ration card. These documents, in addition to their online uploading, are also to be filed in original with the ROC. Once the documents are uploaded and confirmation of payment of fee is received from the Bank by the ROC, it processes the papers in order of their receipt. A software ensures that the queue can not be jumped by ROC. The fees paid to the Registrar for registration are scaled according to the amount of the authorized share capital of a company as stated in its memorandum.
Comment:
The process of issuing a certificate of incorporation normally takes seven working days. Pursuant to incorporation, TAN and other necessary registrations as required can be obtained.

Concluding remarks
In all the process of inorporating of a private limited company in India can be a smooth process if the right tools of approach are adopted. We took around 18 working days to obtain the certificate of incorporation. I must make a special mention that that the government has made an honest attempt to smoothen the rough edges that one encountered in incorporating a company. This is not to say that the present system is fullproof as one can still find old barks of wood at the ROC reminding one that it may take a while before things are up to speed of this digital era.
[Please feel welcome to contact me vide e-mail at rajesh@ksandk.com]

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Interesting reading. I am looking to incorporate a company in UP. Would you be able to direct me to some one. Please mail be at sharma56@yahoo.co.uk

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