Starting A Company In India: New Reforms And Exemptions By The MCA For Setting Up A Business In India

Key Highlights:

  • The Ministry Of Corporate Affairs (MCA) is making its fair share of efforts to improve ease of doing business in India, especially to helping small businesses set up shop
  • As compliance forms an important aspect of setting up and running a business, the MCA has given various exemptions to companies to help them with ease of compliance
  • These exemptions range from putting no limits on share capital, clarifying that loans from shareholders count as “deposits”, and more
  • In our article, we’ve highlighted the key changes mentioned above and more to exhibit the various reforms brought in for companies looking to start a business in India

In today’s scenario, the Ministry of Corporate Affairs is making continuous efforts to provide ease of doing business in India by way of introduction of various benefits, relaxations and exemptions to varied structures of entities in India.

The intent behind such introduction of benefits is to provide the investors undertaking business in India with an integrated, streamlined and hassle-free process of continuing their operations in India. Consequently, it is important to understand that ease of compliance is directly proportional to the swift and smooth flow of business, wherein a certain degree of flexibility is given in day-to-day working.

Therefore, keeping into consideration the said factors, the Ministry has introduced various exemptions to companies to provide ease of compliance. Some of them are highlighted as follows:

No Minimum Share Capital For Starting A Company

One of the major benefits in this regard is that no minimum amount of share capital is required to be invested for setting up a company in India.

This in turn provides ease of business to young, budding entrepreneurs in the country in terms of funding requirements and initial cost of capital.

The Curious Case Of Loans From Shareholders

Pursuant to the provisions of Companies Act, 2013 (“Act”) no Company is allowed to take a loan from its shareholders as it will be considered as a “Deposit”, and accordingly all the compliances pertaining to deposits will need to be complied with.

However, in case of a Private Limited Company, which is a closely held company with a minimum of two shareholders, leverage is provided in terms of taking loans from its shareholders up to the limit of one hundred percent of its aggregate of paid-up share capital and free reserves, and the same would not constitute as a Deposit.

This benefit has been provided keeping in view that in case of Private Limited Companies, shares are mostly held by promoters and tare the primary (if not the only) source of funding for such companies.

Thus, a Private Limited Company may easily borrow loans from its shareholders without having to undertake the compliance(s) pertaining to Deposits.

Funding Made Easy For Companies

Further, another benefit which has been extended to Private Limited Companies is in terms of borrowing from banks and financial institutions from time to time, in order to meet the various funding requirements of the company.

In this regard, a Private Limited Company may borrow up to any limit from the banks and other lending institutions without any prior approval of its shareholders, so as to meet its funding requirements from time to time.

The Attendance Of Directors In Meetings

Going forward, since in due adherence with the provisions of the Act, no interested Director is allowed to attend and participate in the meeting wherein any matter pertaining to his interest is being discussed and approved.

However, the Ministry has extended benefit to Private Limited Companies in a way that since in such Companies, there is a minimum strength of Board of Directors, which is mostly two Directors.

Further quorum for any validly convened meeting in a Private Limited Company is two Directors. Therefore, to avoid any inconvenience in the smooth flow of business, even an interested Director after making disclosure of his interest can participate as well as vote in the matters wherein his interest arises.

We understand that foreign entities setting up business in India mostly comprise foreign shareholders residing outside India, therefore any General Meeting(s) of shareholders convened from time to time may be held outside India also so as to ensure the availability of shareholders for the said Meetings.

Moreover, there has also been a significant reduction in the number of forms required to be filed with the Ministry by a Private Company under the provisions of the Act, thereby enabling cost efficacy and further ease of compliance.

Thus, on drawing a comparative analysis of the compliance(s) required to be undertaken by the Company in the light of the exemptions provided by the Ministry, a greater ease of compliance and flexibility is provided to Private Limited Companies in their day to day operations and activities.

Written By

Shatakshi Pandey

Shatakshi serves as an executive in Coinmen’s Corporate Secretarial Services team.

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