Ans. The degree of control and management that an entrepreneur desires to have over business affects the choice of form of organisation.

In sole proprietorship and OPC - ownership, management and control are completely fused and therefore, an entrepreneur has complete control over his business.

In partnership - management and control of business is jointly shared by the partners and their specific rights, duties and responsibilities would be documented through incorporating various clauses in this regard in the partnership deed. They have equal voice in the management of partnership business except where they agree to divide among themselves the business responsibilities in a different manner. Even then, they are legally accountable to each other.

In a company - However, there is divergence between ownership and management, the management and control of the company business is entrusted to the Board of Directors, who are generally the elected representative of shareholders.

Thus, a person wishing to have complete and direct control of business prefers proprietary organisation rather than partnership or company. If he is prepared to share it with others, he will choose partnership. But, if the activities are large, professional managers are required to handle the day-to-day affairs and there is need for corporate structure and management, he will prefer the company form of organisation.

So, while deciding to commence a business in any form ‘X’ should just not only consider risk, return, sharing, and control over decision making but should also consider the nature of business and the funding requirement over the period of time.

Ans. The degree of control and management that an entrepreneur desires to have over business affects the choice of form of organization.

In sole proprietorship and OPC: ownership, management, and control are completely fused, and therefore, an entrepreneur has complete control over his business.

In Partnership: management and control of business is jointly shared by the partners and their specific rights, duties and responsibilities would be documented through incorporating various clauses in this regard in the partnership deed. They have equal voice in the management of partnership business except where they agree to divide among themselves the business responsibilities in a different manner. Even then, they are legally accountable to each other.

In a Company: however, there is divergence between ‘ownership and management, the management and control of the company business is entrusted to the Board, who are generally the elected representatives of shareholders.

Thus, a person wishing to have complete and direct control of business prefers proprietary organization rather than partnership or company. If he is prepared to share it with others, he will choose partnership. But, if the activities are large, professional managers are required to handle the day-to-day affairs and there is need for corporate structure and management, he will prefer the company form of organization.

Ans. The requirement of capital plays a key role in determining the most appropriate form of business organization. The relationship is explained as follows:

1. Nature and Scale of Business:

   • Businesses requiring large capital (e.g., steel plants, infrastructure projects) are better suited to be companies, particularly public companies or listed companies.

   • Businesses requiring small capital (e.g., retail shops, personal services) are more suitable for sole proprietorship or partnerships.

2. Initial Capital Requirement:

   • Sole proprietors may find it difficult to raise large capital due to limited personal financial resources.

   • Partnerships can raise more funds than sole proprietorships because of the pooled resources and combined creditworthiness of partners.

   • Companies have the highest capital-raising capacity through issue of shares, debentures, and public offerings.

3. Future Capital Needs:

   • Expansion, diversification, and modernization plans require easy access to capital, which is most conveniently fulfilled by companies.

   • Sole proprietors may struggle to raise future funds due to lack of credibility or limited security for loans.

   • Partnerships have more flexibility than sole proprietors but still face limitations compared to companies.

4. Access to External Funds:

   • Banks and financial institutions evaluate the creditworthiness of individuals in proprietorships and partnerships more strictly.

   • Companies enjoy better access to institutional finance and public investment due to limited liability and transparency in operations.

5. Transferability and Liquidity:

   • In companies, shares can be easily transferred, increasing investor confidence and capital mobility.

   • Sole proprietorships and partnerships lack this ease, reducing attractiveness for external investors.

Conclusion:

The choice of business organization is significantly influenced by capital requirements. While small businesses may thrive as proprietorships or partnerships, ventures requiring large or ongoing capital are more suited to the company form due to better fundraising capabilities and investor confidence.

Ans. The main types of business entities in India are Sole Proprietorship, Partnership, Hindu Undivided Family (HUF) Business, Limited Liability Partnership (LLP), Co-operative Societies, Branch Office and Company which may be any kind of company including One Person Company (OPC), private company, public company, Guarantee Company, subsidiary company, statutory company, insurance company or unlimited company. There can also be Association of Persons (AOP) and Body of Individuals (BOI), Corporation, Co-operative Society, Trust etc.

Broadly the following are the available modes of organizations:

Sole Proprietorship

Sole proprietorship is a form of business, wherein one person owns all the assets of the business, no legal formalities are required to create a sole proprietorship other than an appropriate licensing to conduct a business and registration of business name if it differs from that sole proprietorship. The owner reports income/ loss from this business along with is personal income tax return.

Merits:

• Easy to establish and operate.

• Sole Beneficiary of Profits.

Demerits:

• Unlimited Liability

• Higher Tax Incidence.

Partnership Firm

Partnership firms are created by drafting a partnership deed among the partners. The partnership deed is registered to make a firm. Partnership firms in India are, governed by the Indian Partnership Act, 1932.

Section 464 of the Companies Act, 2013 empowers the Central Government to prescribe maximum number of partners in a firm but the number of partners so prescribed cannot be more than 100.

The Central Government has prescribed maximum number of partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous) Rules, 2014. Thus, in effect, a partnership firm cannot have more than 50 members.

Merits:

• Easy to establish and operate.

• If the partnership agreement permits, a partnership could continue to exist if one of the partners dies.

Demerits:

• Unlimited Liability

• Possibility of conflicts.

Limited Liability Partnership (LLP)

Limited Liability Partnership is an alternate corporate business entity that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived agreement, as is the case in a partnership firm, introduced in India by way of limited Liability Partnership Act, 2008.

Merits:

• Lower registration cost.

• No requirement of compulsory Audit.

Demerits:

• Penalty for non-compliance.

• Inability to have Equity Investment.

One Person Company (OPC)

OPC means a company with only 1 person as a member. Share holder can make only 1 nominee, he shall become a shareholder in case of death / incapacity of original stakeholder.

Merits:

• Can be incorporated with minimum one director.

• Complete control

Demerits:

• Suitable only for small business.

• One-person Company can have Minimum or Maximum no. of 1 Member.

Private Company

Private company is a company which has the following characteristics:

• Shareholders right to transfer shares is restricted.

• Minimum number of 2 members in company.

• Number of shareholders is limited to 200.

• An invitation to the public to subscribe to any shares or debentures or any type of security is prohibited.

Merits:

• Separate Legal Entity

• Limited Liability

Demerits:

• In stock exchanges shares cannot be quoted.

• It restricts transferability of shares by its articles.

Public Company

A public company is a company which has the following characteristics:

• Shareholders right to transfer share; is not restricted.

• Minimum 7 members.

• An invitation to the public to subscribe to any shares or debentures or any type of security is permitted.

Merits:

• Limited Liability of shareholders.

• Unlimited source of raising funding.

Demerits:

• More statutory compliances.

• Lack of secrecy.

Hindu Undivided Family (HUF)

A Hindu family can come together and form a HUF. HUF is taxed separately from its members. One can save taxes by creating a family unit and pooling in assets to form a HUF. HUF has its own PAN and files tax returns independent of its members.

Merits:

• Members are liable to pay taxes just like other individuals.

• Two PAN cards can be created and each of them file the taxes separately.

Demerits:

• All members have equal rights on the property.

• Closing the HUF could be difficult.

Co-operative Society

A cooperative organization is an association of persons, usually of limited means, who have voluntarily joined together to achieve a common economic end through the formation of a democratically controlled organization, making equitable distributions to the capital required, and accepting a fair share of risk and benefits of the undertaking.

Merits:

• Limited Liability

• Equality in voting rights

Demerits:

• Government Control

• Mutual Disputes

Section 8 Company

Section 8 company is a company established for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object', provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members. Section 8 Companies are registered under the Companies Act, 2013.

Merits:

• Access to tax benefits

• Improved Credibility

Demerits:

• Stringent Compliances and norms

• Profit cannot be a prime objective

CASE STUDY QUESTION

R is carrying on the business of trading of readymade garments as a sole proprietor in Delhi. He wants to diversify his business by opening the branches in other cities across the country. Due to shortage of funds and other resources, he approaches his friend K, who is a Practicing Company Secretary (PCS) for seeking his advice on the form of business organisation which may be more beneficial for him. K advises him to convert his sole proprietorship form of business into a private company by involving his friends and relatives as the directors and members of the private company. He describes the characteristics of a private company under the Companies Act, 2013. K further advises R that the conversion of his existing form of business into a private company would provide him easy access to capital needed for diversifying his business.

In accordance with the advice of K, R decided to convert his sole proprietorship business into a private company with the proposed name, R Holding Pvt. Ltd. He makes an application to the Registrar of Companies (RoC), Delhi for reservation of the proposed name of the company, R Holding Pvt. Ltd. However, the proposed name is rejected by RoC, Delhi citing the common reasons for rejection of the proposed name. R makes a fresh application for reservation of the proposed new name of the company, R Cloth Trading Pvt. Ltd. and the name is reserved by RoC, Delhi. After filing the necessary e-forms and documents with RoC, Delhi, the company, R Cloth Trading Pvt. Ltd. is incorporated under the Companies Act, 2013.

K informs R about the utility of the Permanent Account Number (PAN) and accordingly, R obtains PAN in the name of the company. K also helps him in getting the GST registration in the name of the company and advises him to go for “Composition Scheme” under the GST Act, 2017. R approaches the banks for sanctioning loan for his business to enable him to open branches in the State of Uttar Pradesh. However, due to stringent loan sanctioning process of the banks, R fails to get loan from the banks for his business. R approaches K for seeking his help to arrange the required funds for the business and K helps R in getting loan for his business from, ST Finvest Ltd., a Non-Banking Financial Company (NBFC). The loan is processed quickly by ST Finvest Ltd. to R Cloth Trading Pvt. Ltd. at a very competitive rate of interest.

In view of the above, answer the following :

Ans. Characteristics of a Private Company:

• Restricts the right to transfer its shares.

• Minimum two members are required in private company.

• Limits the number of its members to two hundred.

• Prohibits any invitation to the public to subscribe for any securities of the company.

• Shareholders in the company have limited liability.

• There is no risk of takeover as transfer of shares is restricted.

• As private companies cannot raise funds from public and hence legal compliances are comparatively less.

• A private company have perpetual succession. Which means that company continue to exist even after death of owners.

Ans. Private Companies

A Private Limited company is legally recognized and generally favoured by investors.

Private Limited Company can bring significant benefits to startups. Firstly, it offers limited liability protection, shielding the personal assets of the founders from the company’s liabilities and financial risks. This provides a sense of security and encourages entrepreneurs to take calculated business risks including, a Private Limited Company enjoys a separate legal entity status, instilling credibility and trust among investors, partners, and customers. Startups often require external funding, and being a registered company enhances their chances of attracting investors and securing financial support. However, it has stricter compliance and may have a higher cost of incorporation.

Limited Liability Partnership

Whereas LLP is easier to start and manage and the process has fewer formalities. It has a lesser cost of registration as compared to a Company. LLP have its separate existence other than its partners. LLP can be started with minimum capital. The partners would have limited liability to their agreed contribution in the LLP. A LLP whose turnover does not exceed, in any financial year, forty lakh rupees, or whose contribution does not exceed twenty-five lakh rupees shall not be required to get its accounts audited.

However, the main drawback of an LLP is that if a partner wants to transfer his ownership rights, then he has to obtain the consent of all the partners. A limited liability partnership must have at least two members. If one member chooses to leave the partnership, the LLP may have to be dissolved (in case mentioned in the LLP Agreement). It is also important to note that FDI in LLP is allowed only with the prior approval of the Reserve Bank of India (RBI).

Perpetual existence of a Private Limited Company ensures the continuity of the startup’s operations, even if the founders change or new investors join. This stability is crucial for long-term planning, execution, and sustainable growth, flexibility of raising capital is another advantage for startups, Private Limited Companies can issue shares, bring in investors, and access various funding options like bank loans or venture capital, enables startups to obtain the necessary financial resources for expansion and market penetration.

Hence, the registration of a Private Limited Company provides startups with a strong legal framework, access to funding, credibility, and growth opportunities.

Ans. The Doctrine of Alter Ego is a legal principle that allows the courts to disregard the separate legal personality of a company and hold the persons behind it liable. This doctrine is applied in cases where the company is merely a facade or sham, and real control lies with certain individuals.

Important Points:

1. Meaning of Alter Ego:

   • "Alter Ego" means "the other self."

   • In corporate law, it refers to situations where a person or group controls the company so completely that the company has no separate will of its own.

2. Application of the Doctrine:

   • The doctrine is applied to make the company liable for acts done by the individuals controlling its affairs.

   • It is not applied to protect those individuals but to hold them accountable when they use the company to commit fraud or wrongful acts.

3. Legal Basis:

   • Explained in International Aircraft Trading vs. Manufacturers Trust Co.

   • The company and the controlling individuals may be considered one and the same for the purpose of liability.

4. Role of Directors and Managers:

   • Directors and key managerial personnel, who exercise control over the company’s decisions, can be seen as the “mind and will” of the company.

   • Their actions and intentions are treated as the actions of the company itself.

5. Corporate Personality Overlooked:

   • Normally, a company has a separate legal personality, but this doctrine pierces the corporate veil.

   • Courts may look beyond the company’s separate identity when justice and equity demand.

6. Purpose of the Doctrine:

   • Prevent misuse of the corporate structure.

   • Ensure that individuals cannot escape liability by hiding behind the corporate form.

Conclusion:
The Doctrine of Alter Ego allows the law to identify the real minds behind the company’s actions and hold them responsible when the company is used for fraudulent or unjust acts. It ensures fairness and accountability in corporate operations.

Small Companies

1. Whether the TP Pvt. Limited can avail the status of ‘Small Company’ ?

2. Will your answer be different if the turnover of the company is ₹1 crore ? (Dec, 19 – 5 Marks)

Ans. Section 2(85) of the Companies Act, 2013 defines a ‘small company’ as a company, other than a public company, –

1. paid-up share capital of which does not exceed ₹ 4 crore or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

2. turnover of which as per profit and loss account for the immediately preceding financial year does not exceed ₹ 40 crore or such higher amount as may be prescribed which shall not be more than ₹ 100 crore:

Provided that nothing in this clause shall apply to –

1. a holding company or a subsidiary company;

2. a company registered under section 8; or

3. a company or body corporate governed by any Special Act.

Hence, in order to avail the status of a ‘small company’, a company has to fulfill both conditions (i) and (ii) above.

1. In the given case, TP Pvt. Ltd. is a registered company under the Companies Act, 2013 with a paid-up capital of Rs.35 lakh and turnover of Rs.2.5 crore. So as per the revised criteria meets both of the criteria i.e. share capital does not exceed 4 crore rupees and turnover doesn’t exceed Rs. 40 crore . Hence, TP Pvt. Ltd. can avail the status of small company.

2. If the turnover of the company is ₹ 1 crore even then TP Pvt. Ltd. can avail the status of small company as both the conditions will be fulfilled.

Ans. As per Section 2(85) of the Companies Act 2013 read with Rule 2(1)(t) of the Companies (Specification of definitions Details) Rules, 2014, “Small Company’’ means a company, other than a public company, having—

1. paid-up share capital of which does not exceed ₹ 4 crores or such higher amount as may be prescribed which shall not be more than ₹ 10 crore ; and

2. turnover of which as per profit and loss account for the immediately preceding financial year does not exceed ₹ 40 crore or such higher amount as may be prescribed which shall not be more than ₹ 100 crore:

Provided that nothing in this clause shall apply to —

1. a holding company or a subsidiary company;

2. a company registered under section 8; or

3. a company or body corporate governed by any special Act;

In the given case, Surya Pvt. Ltd. satisfies the turnover and paid up share capital criteria to be small company, but being a subsidiary of Hima Ltd. It falls under the exclusions to the definition and hence is not a small Company.

Ans. As per Section 2(85) of the Companies Act 2013 read with Rule 2(1)(t) of the Companies (Specification of definitions Details) Rules, 2014, “Small Company’’ means a company, other than a public company, having—

1. paid-up share capital of which does not exceed ₹ 4 crores or such higher amount as may be prescribed which shall not be more than ₹ 10 crore ; and

2. turnover of which as per profit and loss account for the immediately preceding financial year does not exceed ₹ 40 crore or such higher amount as may be prescribed which shall not be more than ₹ 100 crore:

Provided that nothing in this clause shall apply to —

1. a holding company or a subsidiary company;

2. a company registered under section 8; or

3. a company or body corporate governed by any special Act;

In the given case, SDM Pvt. Ltd. satisfies the turnover and paid up share capital criteria to be small company, but being a subsidiary of K Ltd (a listed), it falls under the exclusions to the definition and hence is not a small Company.

Ans. As per Section 2(85) of the Companies Act 2013 read with Rule 2(1)(t) of the Companies (Specification of definitions Details) Rules, 2014, “Small Company’’ means a company, other than a public company, having—

1. paid-up share capital of which does not exceed ₹ 4 crores or such higher amount as may be prescribed which shall not be more than ₹ 10 crore ; and

2. turnover of which as per profit and loss account for the immediately preceding financial year does not exceed ₹ 40 crore or such higher amount as may be prescribed which shall not be more than ₹ 100 crore:

Provided that nothing in this clause shall apply to —

1. a holding company or a subsidiary company;

2. a company registered under section 8; or

3. a company or body corporate governed by any special Act;

By applying the above provision to the given problem, Pratham Food Trading Private Ltd would be a "Small Company" since it has paid up capital of ₹ 50 lakh and turnover of ₹ 1.20 crore in the last financial year 2017-18 which is within the limit prescribed under Section 2(85) of the Companies Act, 2013.

Signing of Annual Return - As per Section 92 of the Companies Act, 2013, the annual return of a private company classified as "Small Company", can be signed by a Company Secretary or by a Director of that private limited company as permitted by proviso to Section 92(1) of the Act.

In view of the above, in the given case, Company has filed its annual return for the relevant financial year signed only by one director of the company. Hence, the act of the company is in order.

A Company under Section 8 can be registered as a Small Company under the provisions of the Companies Act, 2013. (June, 19 – 4 Marks)

Ans. As per Section 2(85) of the Companies Act 2013 read with Rule 2(1)(t) of the Companies (Specification of definitions Details) Rules, 2014, “Small Company’’ means a company, other than a public company, having—

1. paid-up share capital of which does not exceed ₹ 4 crores or such higher amount as may be prescribed which shall not be more than ₹ 10 crore ; and

2. turnover of which as per profit and loss account for the immediately preceding financial year does not exceed ₹ 40 crore or such higher amount as may be prescribed which shall not be more than ₹ 100 crore:

Provided that nothing in this clause shall apply to —

1. a holding company or a subsidiary company;

2. a company registered under section 8; or

3. a company or body corporate governed by any special Act;

Accordingly, as per the above provisions, a Company registered under Section 8 cannot be treated as Small Company or a Company under Section 8 cannot be registered as Small Company.

One Person Company

Ans. According to Section 2(62) of the Companies Act, 2013, ‘One Person Company’ means a company which has only one person as a member.

Only a natural person who is an Indian citizen whether resident in India or otherwise

1. shall be eligible to incorporate a One Person Company;

2. shall be a nominee for the sole member of a One Person Company.

Explanation I - For the purposes of this rule, the term “resident in India” means a person who has stayed in India for a period of not less than 120 days during the immediately preceding financial year.

Key Provisions Applicable to One Person Company (OPC) under the Companies Act, 2013:

1. Number of Directors – Section 149(1):

   • An OPC can have more than one director on its Board.

   • However, only one member (shareholder) is allowed in an OPC.

   • Therefore, Axar can incorporate an OPC and appoint himself and his wife as directors, but only one of them can be the sole member.

2. Board Meetings – Section 173(5):

   • An OPC with more than one director must hold at least one Board Meeting in each half of the calendar year.

   • The minimum gap between two meetings should be at least 90 days.

   • If the OPC has only one director, then the provisions of:

     • Section 173 (Meetings of Board) and

     • Section 174 (Quorum)
       shall not apply.

3. Annual General Meeting (AGM) – Section 96(1):

   • OPCs are exempt from holding an Annual General Meeting.

4. Annual Return – Section 92(1):

   • The Annual Return of an OPC shall be signed by:

     • The Company Secretary, or

     • In the absence of a Company Secretary, by the Director of the company.

5. Signing of Financial Statements – Section 134(1):

   • The financial statement and Board’s Report of an OPC shall be signed by only one director.

Conclusion:
An OPC is a simplified corporate structure designed for single entrepreneurs. It allows for more than one director but restricts membership to a single person, and it enjoys several compliance relaxations under the Companies Act, 2013.

Ans. As per Rule 3 of the Companies (Incorporation) Rules, 2014, only a natural person who is an Indian citizen whether resident in India or otherwise (person who stayed in India for a period of not less than 120 days during immediately preceding financial year)-

• Shall be eligible to incorporate an OPC;

• Shall be a nominee for the sole member of an OPC.

In the given case, Mr. Raman is an Indian citizen and his stay in India during the immediately preceding financial year is 130 days which is above the requirement of 120 days. Hence, Mr. Raman is eligible to incorporate an OPC.

Further, even though Mr. Sanjay's name is mentioned in the Memorandum of Association as nominee and his stay in India during the immediately preceding financial year is more than 120 days, he is a foreign citizen and not an Indian citizen. Hence, Sanjay's name cannot be given as nominee in the Memorandum of Association as nominee.

Nidhi Companies

Ans. The characteristics of a Nidhi Company are be summarised below:

1. Object - The object of Nidhi should be cultivating the habit of thrift and savings amongst the members and receiving deposits from and lending to its members for their mutual benefits.

2. Only Members to transact with Nidhi Company - It is allowed to transact business only with its members. Hence, in case a person wishes to place deposit with a Nidhi or borrow money from a Nidhi, he must first become a member (shareholder) of the Nidhi by subscribing to 10 equity shares or shares equivalent to Rs. 100.

3. Not to issue Preference Shares - After commencement of the Companies Act, 2013, no Nidhi shall issue preference shares.

4. Allowed to operate Branches - They are allowed to open branches subject to compliance with Rule 10 of the Nidhi Rules, 2014, but do not operate on a Pan India basis.

5. Minimum PUC - They are incorporated as public companies with a minimum paid up equity share capital of ₹ 10 Lakh.

6. Loans only to members- Loans may be provided only to its members and should be fully secured.

7. Only a member can become Director - A director of a Nidhi shall be a member and shall hold office for a term upto 10 consecutive years on the Board of a Nidhi.

8. Maximum Dividend - Nidhi can declare dividend not exceeding 25% and any higher amount shall be specifically approved by the Regional Director.

9. Compliance with Prudential Norms for Revenue Recognition - Nidhi shall adhere to the prudential norms for revenue recognition and classification of assets in respect of mortgage loans or jewellery loans as provided in Rule 20 of the Nidhi Rules, 2014.

Ans. The Nidhi (Amendment) Rules, 2024* (MCA Notification No. G.S.R. 413(E) Notified on July 16, 2024).

In exercise of the powers conferred by sub-section (1) of section 406 read with subsections (1) and (2) of section 469 of the Companies Act, 2013 the Central Government notified the Nidhi (Amendment) Rules, 2024

According to the Amended Rules in the Nidhi Rules, 2014, in rule 4, in sub-rule (5,) the following proviso shall be inserted, namely:

“Provided that a company shall not use the words “Nidhi Limited” in its name unless it is declared as such under sub-section (1) of section 406 of the Act.”

Thus, A Company shall not use the words “Nidhi Limited unless it is declared by the Central Government by notification in the Official Gazette as declared to be a Nidhi or Mutual Benefit Society, as the case may be.

Ans. Benefits of incorporating a Nidhi Company are as follows:

1. Speedy Loan Disbursement Due to Proximity and Size - A Nidhi mobilizes small savings, mostly of the middle class and disburses loans to eligible borrowers. Owing to their small size and closeness to the customers, disbursement of loans is speedy. This is especially useful in case the borrower is in urgent needs of funds.

2. Secured Loans and Peer Pressure Ensure Timely Repayment - The repayment is guaranteed, as the loans are secured and due to peer pressure, borrowers ensure that loan is repaid on due dates.

3. Attractive Interest Rates on Deposits - Nidhis offer a higher rate of interest on deposits. This makes it an attractive investment opportunity for people, especially the senior citizens.

4. Experienced and Respected Board of Directors Enhance Credibility - The Board of Directors of a Nidhi normally consists of senior persons who have experience in handling finances and who are well respected in social circles. This lends credibility to the institution and instills confidence in the minds of borrowers and depositors.

Ans. According to Rule 3 of the Nidhis Rules, 2014, Net Owned Fund means the aggregate of paid up equity share capital and free reserves as reduced by accumulated losses and intangible assets appearing in the last audited balance sheet. Further, the amount representing the proceeds of issue of preference shares shall not be included for calculating Net Owned Funds.

Ans. Rule 3B of the Nidhis Rules, 2014 provides that on and after commencement of Nidhi (Amendment) Rules, 2022, public company desirous to be declared as a Nidhi shall apply, in Form NDH-4, within a period of one hundred twenty days of its incorporation for declaration as Nidhi, if it fulfils the following conditions, namely:-

1. it has not less than 200 members; and

2. it has Net Owned Funds of ₹ 20 Lakh or more.

The company shall also attach, along with Form NDH-4, the declaration with regard to fulfilment of fit and proper person criteria, as per this sub-rule, by all the promoters and directors of the company.

In case a company does not comply with the requirements mentioned above, it shall not be allowed to file Form No. SH-7 (Notice to Registrar of any alteration of share capital) and Form PAS-3 (Return of allotment).

If a company falling under rule 2 of the Nidhis Rules, 2014, contravenes any of the provisions of the rules prescribed herein, the company and every officer of the company who is in default shall be punishable with fine which may extend to five thousand rupees, and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first during which the contravention continues.

Accordingly, Shree Vishnu Permanent Fund Limited is advised.

Ans.

1. According to Rule 5 of the Nidhi Rules, 2014, every Nidhi shall within a period of one year from the date of its incorporation, ensure that it has:

   1. Not less than 200 members;

   2. Net Owned Funds of ₹ 10 Lakh or more;

   3. Unencumbered term deposits of not less than 10% of the outstanding deposits as specified in rule 14; and

   4. Ratio of Net Owned Funds to deposits of not more than 1:20.

However, the provisions of this rule shall not be applicable for the companies incorporated as Nidhi on or after the commencement of the Nidhi (Amendment) Rules, 2022.

Further, Nidhi Companies that are incorporated on or after the commencement of Nidhi (Amendment) Rules, 2022 i.e., 19th April 2022, must comply with the following requirements within 120 days of their incorporation –

• It shall have at least 200 members.

• The Net Owned Funds of the company shall be equal to Rs. 20 lakhs or more.

1. Compliances which are required to be done upto the end of first financial year of the Company.

2. Opening of branches of Mahesh Nidhi Limited. (Dec, 21 – 4 Marks)

Ans. (i) As per Rule 5(1) of the Nidhi Rules, 2014 deals with requirements for minimum number of members, net owned fund etc. It provides that every Nidhi shall, within a period of one year from the date of its incorporation, ensure that it has:

• Not less than 200 members

• Net Owned Funds of ₹ 10 Lakh or more

• Unencumbered term deposits of not less than 10% of the outstanding deposits

• Ratio of Net Owned Funds to deposits of not more than 1:20.

Thus Mahesh Nidhi Ltd. needs to ensure above requirement upto end of the first financial year of the Company.

1. Rule 10 of the Nidhi Rules, 2014 lays down conditions for opening branches by a Nidhi Company as follows:

   • A Nidhi may open branches, only if it has earned net profits after tax continuously during the preceding three financial years. A Nidhi may open up to 3 branches within the district.

   • If a Nidhi proposes to open more than three branches within the district or any branch outside the district, it shall obtain the prior permission of the Regional Director and an intimation is to be given to the Registrar about opening of every branch within thirty days of such opening.

   • Nidhi shall not open branches or collection centres or offices or deposit centres, or by whatever name called outside the State where its registered office is situated.

   • Nidhi shall not open branches or collection centres or offices or deposit centres, or by whatever name called unless financial statement and annual return (up to date) are filed with the Registrar.

1. Whether Nidhi Company can be formed as a private company ? Is there any specific law for the Nidhi Companies ?

2. Whether the approval of Reserve Bank of India (RBI) is required ?

3. Whether Nidhi is allowed to raise funds through issue of equity shares and preference shares ?

4. Whether Nidhi is allowed to carry on business other than the business of borrowing or lending in its own name ?

As a practising Company Secretary, advise with reference to the provisions of the Companies Act, 2013. (June, 19 – 4 Marks)

Ans.

1. No, as per rule 4 of the Nidhi Rules, 2014, a Nidhi Company to be incorporated under the Companies Act, 2013 shall be a public company and shall have a minimum paid up equity share capital of five lakh rupees and these Nidhi Companies are required to comply with two set of norms, one as a Public Limited Company under the provisions of Companies Act, 2013 and another under the Nidhi Rules, 2014.

2. No, RBI approval is not necessary to register the Nidhi Company, as RBI has specifically exempted this category of NBFC in India.

3. As per rule 6 of the Nidhi Rules, 2014, no Nidhi Company shall issue preference shares, debentures or any other debt instrument by any name or in any form whatsoever.

4. As per rule 6 of the Nidhi Rules, 2014, no Nidhi Company shall carry on any business other than the business of borrowing or lending in its own name

Ans. According to Rule 15 of Nidhis Rules, 2014 a Nidhi company can provide loans only to its members. The loans given by a Nidhi company to a member shall be subject to the following limits, namely:

However, where a Nidhi has not made profits continuously in the three preceding financial years, it shall not make any fresh loans exceeding 50% of the maximum amounts of loans specified in above mentioned clauses.

A member shall not be eligible for any further loan, if he has borrowed any earlier loan from the Nidhi and has defaulted in repayment of such loan.

Based on above provision, Rakesh cannot be granted 2nd loan as he has defaulted in repayment of 1st loan.

Ans. Rules relating to directors of Nidhi Company have been given in Rule 17 of Nidhi Rules 2014. As per Rule 17(5), the person to be appointed as director shall comply with requirements of Sub-section (4) of Section 152 of the Companies Act, 2013 and shall not have been disqualified from appointment as provided in Section 164 of the Companies Act, 2013.

As per Section 164(1)(d) of the Companies Act, 2013, a person shall not be eligible for appointment as a director of a company if such person has been convicted by a court of any offence, whether involving moral turpitude or otherwise, and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence.

Provided that if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be appointed as a director in any company.

Since M has been convicted of an offence involving moral turpitude and sentenced to imprisonment for a period of six months and a period of five years has not elapsed from the date of expiry of the sentence, M is not eligible for appointment as director of Alok Nidhi Ltd.

Ans. Pursuant to the provisions of Rule 6(d) of the Nidhi Rules, 2022, no Nidhi shall acquire or purchase securities of any other company or control the composition of the Board of Directors of any other company in any manner whatsoever or enter into any arrangement for the change of its management.

Therefore, Mudra Nidhi Limited cannot acquire Prakrit Private Limited either by purchase of securities or through change in management.

Ans. General Restrictions or Prohibitions

In terms of Rule 6 of the Nidhis Rules, 2014, Nidhi shall not-

1. carry on the business of chit fund, hire purchase finance, leasing finance, insurance or acquisition of securities issued by any body corporate;

2. issue preference shares, debentures or any other debt instrument by any name or in any form whatsoever;

3. open any current account with its members;

4. acquire or purchase securities of any other company or control the composition of the Board of Directors of any other company in any manner whatsoever or enter into any arrangement for the change of its management;

5. carry on any business other than the business of borrowing or lending in its own name. Nidhis which have adhered to all the provisions of these rules may provide locker facilities on rent to its members subject to the rental income from such facilities not exceeding 20% of the gross income of the Nidhi at any point of time during a financial year;

6. accept deposits from or lend to any person, other than its members;

7. pledge any of the assets lodged by its members as security;

8. take deposits from or lend money to anybody corporate;

9. enter into any partnership arrangement in its borrowing or lending activities;

10. issue or cause to be issued any advertisement in any form for soliciting deposit; It may be noted that private circulation of the details of fixed deposit Schemes among the members of the Nidhi carrying the words "for private circulation to members only" shall not be considered to be an advertisement for soliciting deposits;

11. pay any brokerage or incentive for mobilizing deposits from members or for deployment of funds or for granting loans;

12. raise loans from banks or financial institutions or any other source for the purpose of advancing loans to members of Nidhi.

Others Types of Companies

1. A Private Company has 210 members in total out of which 10 are the employees of the company. Will your answer differ, if 5 of these employees leave the employment of the company?

2. A Public Company has 150 shareholders in total of which 47 members and 2 out of 4 directors dies due to epidemic. What is the time frame allowed under the Companies Act for compliance in case of non-compliance of provisions regarding status of the Company? (June, 21 – 5 Marks)

Answer

1. Section 2(68) of the Companies Act, 2013 provides that private companies can have a maximum of 200 members (except for One Person Companies).

This number does not include present employees and former employees who were members of the company while in that employment and have continued to be members after the employment has ceased.

Moreover, where two or more persons hold one or more shares in a company jointly, they shall, be treated as a single member.

Hence, the company is within the maximum limit of 200 members.

The answer would have remained same even if 5 employees leave the employment as threshold limit of 200 persons for private company does not take into account former employees who were members of the company while in employment and continued to be member even after employment ceased.

Due to separate legal entity concept, a company limited by shares, whether private or public, is not affected by death of one of its shareholders, but the shares are transmitted to the next kin or legal heir of such deceased shareholder and the company continues to run its business as usual.

Section 149(1) of the Companies Act, 2013 requires that every public company shall have a minimum number of 3 directors.

Further, Section 161(4) of the Companies Act, 2013 states that if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by members in the immediate next General Meeting (Annual General Meeting or Extra-Ordinary General Meeting).

Therefore, in the given case of a director's death, subject to any provisions of the Articles of Association of the company, the Board is empowered to fill the resulting casual vacancy which may be filled by Board of Directors at Board meeting and which shall be subsequently approved by members in the immediate next General Meeting.

Ans. No, V4C is not a Government Company.

According to Section 2 (45) of the Companies Act, 2013, a Government Company means any company in which not less than 51% of the paid up share capital is held by—

1. The Central Government (CG) or

2. Any State Government or Governments (SG) or

3. Partly by the Central Government and partly by one or more State Governments

Thus, in determining whether a company is a Government Company or not, the percentage of its paid up share capital held by CG and/ or SG shall be considered.

In the given problem, 43% of the paid up capital of V4C Ltd is held by CG, however, 8% shares are held by Life insurance Corporation of India and the Unit Trust of India, which are public authorities and not Central Government or State Government. In view of the definition of the Government Company given u/s 2(45) of the Companies Act, 2013, the shares held by the Public institutions viz Life insurance Corporation of India and the Unit Trust of India shall not to be taken into consideration for identifying a Company as Government Company.

As CG holds 43% in V4C Ltd, therefore, it is not a Government Company.

Ans. As per Section 2(6) of the Companies Act, 2013, "associate company", in relation to another company, means a company in which that other company has a significant influence, but which is not a subsidiary company of the company having such influence and includes a joint venture company.

"Significant Influence” means control of at least 20% of total voting power, or control of or participation in business decisions under an agreement.

In the given case, Kush Ltd. controls more than 20% of the sale and disposal of the output of Luv Ltd. Thus Luv Ltd. is the associate of Kush Ltd. But Luv Ltd. neither influences the business decision of Kush Ltd. in any manner nor does it control 20% of the total share capital of Kush Ltd. Hence Kush Ltd. cannot be called an associate of Luv Ltd.

PKA India Capital Pvt. Ltd. and PKA India Tele Services Pvt. Ltd. are subsidiaries of Lord Krishna Pvt. Ltd. Referring to the provisions of the Companies Act, 2013 examine whether PKA India Pvt. Ltd. is a subsidiary of Lord Krishna Pvt. Ltd. ? Would your answer be different if Lord Krishna Pvt. Ltd. has five out of total seven directors on the Board of Directors of PKA India Pvt. Ltd. ? (June, 19 – 5 Marks)

Ans. As per Section 2(87) of the Companies Act, 2013, subsidiary company means a company in which the other company (“Holding Company”): —

1. Controls the composition of the Board of Directors; or

2. Exercises or controls more than one-half of the total voting power either at its own or together with one or more of its subsidiary companies.

The meaning of phrase “total voting power” has been defined under Section 2(89) of the Companies Act, 2013, which states that total voting power in relation to any matter means the total number of votes which may be cast in regard to that matter on a poll at a meeting of a company if all the members thereof or their proxies having a right to vote on that matter are present at the meeting and cast their votes.

The total equity share capital of PKA India Pvt. Ltd. is Rs. 1500 Lakhs and in absence of any specific condition in the problem, it may be presumed that the all equity share of PKA India Pvt. Ltd. is carrying equal voting rights.

The PKA India Capital Pvt. Ltd. holds Rs. 550 Lakhs in PKA India Pvt. Ltd. and PKA India Tele Services Pvt. Ltd. holds Rs. 250 Lakhs in PKA India Pvt. Ltd. And PKA India Capital Pvt. Ltd. and PKA India Tele Services Pvt. Ltd. both are subsidiaries of Lord Krishna Ltd

From the above, it is clear that PKA India Capital Pvt. and PKA India Tele Services Pvt. Ltd. collectively holds 800 lakhs equity share capital in PKA India Pvt. Ltd, and both of them are subsidiaries of Lord Krishna Ltd.

Thus, in view of Section 2(87)(ii) of the Companies Act, 2013, it can be said that Lord Krishna Ltd exercises or controls more than half of the total voting power in PKA India Pvt. Ltd together its subsidiaries viz. PKA India Capital Pvt. and PKA India Tele Services Pvt. Ltd. Accordingly, PKA India Pvt. Ltd shall become an indirect subsidiary of Lord Krishna Ltd.

Even if Lord Krishna Ltd would have right to appoint five directors out of total seven directors in PKA India Pvt. Ltd even then Answer would remain same for the question of Lord Krishna Ltd.'

However, under this circumstance, PKA India Pvt. Ltd., becomes direct subsidiary of Lord Krishna Ltd., as per the provisions of Section 2(87)(1) of the Companies Act, 2013 i.e. through controlling the composition of Board of Directors.

Ans. Eligibility to apply for Section 8 Company License

A person or an association of persons proposed to be registered under the Companies Act, 2013, as a limited company is eligible to be registered as Section 8 Company if it has below mentioned objectives and same should be upto the satisfaction of the Central Government:

• When the company intends to promote science, commerce, education, art, sports, research, religion, charity, social welfare, protection of the environment or alike other objectives;

• When the company intends to invest all the profits (if any) or any other income generated after incorporation in the promotion of such objects only;

• When the company does not intend to pay any dividend to its members;

• Any failure to meet the prescribed norms formulated by the Central Government may lead to the revocation of the licence of the Company on the orders of the Central Government.

As Aniket wishes to incorporate Section 8 company for the purpose of promotion of education, research and social welfare, he is advised to incorporate such section 8 company in compliance with the above stated eligibility criteria.

Ans. As per Section 8 of the Companies Act, 2013, Section 8 Company is a company that is established for promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object, provided the profits, if any, or other income is applied for promoting only the objects of the company and no dividend is paid to its members.

Section 8 of the Companies Act, 2013 provides that:

1. Where it is proved to the satisfaction of the Central Government that a person or an association of persons proposed to be registered under this Act as a limited company—

   1. has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;

   2. intends to apply its profits, if any, or other income in promoting its objects; and

   3. intends to prohibit the payment of any dividend to its members,

the Central Government may, by licence issued in such manner as may be prescribed, and on such conditions as it deems fit, allow that person or association of persons to be registered as a limited company under this section without the addition to its name of the word “Limited”, or as the case may be, the words “Private Limited”, and thereupon the Registrar shall, on application, in the prescribed form, register such person or association of persons as a company under this section.

BrightFuture Foundation can qualify as a Section 8 company while offering paid online courses, as long as all profits are applied promoting its charitable objectives and not distributed as dividends to members. The foundation should clearly outline this in its application to the Registrar of Companies to demonstrate that its commercial activities support, rather than conflict with, its non-profit mission. This compliance ensures the foundation maintains its Section 8 status and can effectively fund its charitable initiatives.

Ans. Section 4(2) of the Companies Act, 2013 read with rule 8 and 8A of the Companies (Incorporation) Rules, 2014, provides that the name:

1. shall not be identical with or resemble too nearly to the name of an existing company;

2. shall not constitute an offence under any law for the time being in force; or\

3. is not undesirable in the opinion of the Central Government.

Further, a company shall not be registered with a name which contains:

1. any word or expression which is likely to give the impression that the company is in any way connected with, or having the patronage of, the Central Government, any State Government, or any local authority, corporation or body constituted by the Central Government or any State Government under any law for the time being in force; or

2. such word or expression, as may be prescribed, unless the previous approval of the Central Government has been obtained for the use of any such word or expression.

Section 4(5)(ii) of the Companies Act, 2013 states that where after reservation of name, it is found that name was applied by furnishing wrong or incorrect information, then the reserved name shall be cancelled and the person making application shall be liable to a penalty which may extend to one lakh rupees.

Amit’s desire to make a difference was driven by a genuine desire to give back to society. After carefully researching various organizations and initiatives, he decided to visit India for two years on a business visa. During his stay, Amit sought to explore different avenues for contributing to social causes, particularly those focused on underprivileged communities in India. He also hoped to connect with individuals or organizations already making a positive impact.

It was during his visit that Amit reconnected with his childhood friend, Raghav. Unlike Amit, Raghav had stayed in India and dedicated his life to social work. Raghav was the founder of Noble Work Foundation, a non-profit organization established in 2014 and registered as a Section 8 company under the Companies Act, 2013. The foundation’s mission was to address key social issues such as education for underprivileged children, healthcare support, and empowerment programs for marginalized communities.

As Amit learned more about the foundation’s initiatives, he was deeply impressed by its impact on society. Noble Work Foundation had helped thousands of individuals through its various social welfare programs, and its mission resonated deeply with Amit’s vision of contributing to India’s development. Amit admired Raghav’s commitment to social causes and the foundation’s success in reaching out to those in need. This inspired Amit to become involved with the organization.

Amit’s desire to contribute went beyond a financial donation. He recognized the value of using his international experience, strategic planning skills, and innovative ideas to help expand the foundation’s work. Amit envisioned playing an active role in the organization by not only donating funds to support social projects but also becoming one of the directors of Noble Work Foundation. Additionally, Amit wanted to establish a branch office of Noble Work Foundation in Germany to expand the organization’s reach and create greater international awareness for its cause.

However, before moving forward with his plans, Amit realized that he would need to navigate various legal and regulatory requirements, especially given his current status as a German citizen. Noble Work Foundation, being a non-profit organization under the Indian Companies Act, was subject to specific regulations related to foreign funding and foreign directorship. Amit also wanted to explore the possibility of converting Noble Work Foundation into a private limited company to broaden its scope for raising funds and expanding its operations.

To ensure that all transactions and legal formalities were handled appropriately, Amit sought the assistance of Vijay, a practicing Company Secretary, who could provide the necessary guidance on compliance with Indian laws regarding non-profit organizations, foreign funding, and directorship.

In view of the above, answer the following :

1. What exemptions are granted to Noble Work Foundation under the Companies Act, 2013 ?

2. What are the permissible sources through which Noble Work Foundation can raise funds to sustain and grow its operations ?

3. What is the procedure for Amit to become a Director of Noble Work Foundation ?

4. What approvals and compliance are required by Noble Work Foundation to establish a branch office in Germany ?

5. What is the procedure for the conversion of Noble Work Foundation into a private limited company ? (June, 25 – 3 Marks each)

Ans. (a) Exemptions Granted to section 8 companies

• No Minimum Paid-Up Capital requirement

• General Meetings: The Annual General Meetings (AGM) for the Companies can be convened after giving notice of 14 clear days under section 101 of the Companies Act, 2013.

• Minutes of the Meeting: Recording of minutes of General Meetings, Board Meeting and other resolutions is not applicable. However, the minutes of meetings may be recorded within 30 days of conclusion of the meeting in cases where the company’s articles provide for confirmation by way of circulation of minutes.

• Audited Financial Statements: Copies of the audited financial statements and documents can be sent 14 days to the members instead of 21 days (SS-1). Furthermore, there is no requirement of Cash Flow Statement in financial statements if it’s a private company (Section 2(40))

• Directorship: The maximum limit of 15 directors and appointment of more than 15 directors by passing special resolution are not applicable to Section 8 Company. (Sec 149)

• Appointment of Independent Director: There is no requirement to appoint an independent director for Section 8 Company. (Sec 149)

• Holding of Board Meetings: The companies are required to hold one Board Meeting within six months and the requirement of as the companies to hold four board meetings annually shall not apply.

• Constitution of nomination and remuneration committee and related compliances: Section 178 of the Act is not applicable to Section 8 Company. Accordingly, Section 8 Companies are not required to have a Nomination and Remuneration Committee and a Stakeholders Relationship Committee.

• No appointment of Company Secretary: They do not have to appoint a company secretary.

• Power of Board to borrow, invest and grant loans: Matters referred to in clause (d), (e) and (f) of section 179(3) may be decided by the Board by circulation instead of at a meeting i.e. instead of requirement of resolution passed at meeting of Board of Directors, it can be decided by Board by a resolution by circulation in case of exercising power d) to borrow monies; (e) to invest the funds of the company; (f) to grant loans or give guarantee or provide security in respect of loans;

Accordingly, being a Section 8 company, the above exemptions are granted to Noble Work Foundation under the Companies Act, 2013.

(b) As per Section 8 of the Companies Act, 2013, a non-profit organization can raise funds through the following sources:

1. Donations and Grants – From individuals, corporate CSR contributions (Section 135 of the Companies Act, 2013), and foreign contributions (FCRA, 2010).

2. Government Funding – Grants from state/central governments, international agencies, or NGOs.

3. Membership Fees – Contributions from members or affiliated partners.

4. Sponsorships and Fundraising Events – Organizing social programs, workshops, or awareness campaigns.

5. Interest/Income from Investments – Earnings from legally permitted investments in fixed deposits or mutual funds (subject to Income Tax Act, 1961 regulations and the Rules thereunder).

6. Revenue from Social Enterprises – Running permitted commercial activities that support charitable objectives (profits must be reinvested in non-profit activities).

Thus, Noble Work Foundation can sustain and grow its operations through a combination of grants, CSR funds, donations, membership fees, and investment income.

(c) A person can become a director in a Section 8 company as per Sections 152 and 160 of the Companies Act, 2013, along with Rule 19 of the Companies (Incorporation) Rules, 2014.

Procedure to Appoint Amit as a Director:

1. Obtain Director Identification Number (DIN) – As per Section 153, Amit must apply for a DIN using Form DIR-3.

2. Digital Signature Certificate (DSC) – Required for e-filing with the Ministry of Corporate Affairs

(MCA).

Consent and Declaration – Amit must submit Form DIR-2 (Consent to Act as Director) and Form DIR-8 (Declaration of Non-Disqualification) under Section 164.

3. Board Resolution – The Board of Directors must pass a resolution approving his appointment.

4. Filing with ROC – The company must file Form DIR-12 with the Registrar of Companies (ROC) within 30 days of appointment.

5. Disclosure of Interest – As per Section 184, he must disclose his interest in Form MBP-1 in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding.

Check for FCRA Compliance - Amit, being a foreign national, may be treated as a “foreign source” under FCRA. If he donates or participates in management, FCRA registration or prior approval is essential.

Thus, Amit should follow the aforesaid procedure to become a Director of Noble Work Foundation.

1. The following approvals and compliance are required by Noble Work Foundation to establish a branch office in Germany:

• Establishing a branch office in Germany involves compliance with Foreign Exchange Management Act (FEMA) regulations. Prior approval from RBI is needed under FEMA regulations if funds are being remitted abroad.

• Noble Work Foundation must ensure that MOA permits foreign expansion for the establishment of overseas offices, if not then approval from the Central Government will be required for any alteration in the Memorandum of Association (MoA) or Articles of Association (AoA).

• Board Approval by passing a board resolution. And take Approval of Members in General Meeting by passing a special resolution (u/s 179 & 186).

• The foundation must also comply with local German laws regarding non-profit entities and branch registration.

Procedure for Conversion of a Section 8 Company into any other Company:

1. Holding a Board Meeting: Issue a notice (not less than 7 days) and agenda of the Board Meeting as per the provisions of section 173 of the Companies Act and Secretarial Standards-I for convening a Board Meeting to consider the proposal for converting Section 8 Company into any other Company. The main agenda for this board meeting would be:

2. To pass a board resolution to get in-principal approval of the Directors for conversion

of section 8 company into any other company.

To fix the date, time and place for holding general meeting to get approval of shareholders, by way of Special Resolution, for conversion of a section 8 company into any other company.

2. To approve notice of general meeting along with agenda and explanatory statement to be annexed to the notice of general meeting as per section 102(1) of the Companies Act, 2013. The notice of the general meeting must contain the special resolution for effecting the conversion of the section 8 Company into any other company and the required alteration in the Memorandum of Association and Articles of Association of the Company.

3. To authorize the Director or Company Secretary to issue notice of the general meeting as approved by the board.

4. To authorize the Company Secretary and if there is no Company Secretary, any one director of the company to sign, certify and file the required forms with the Registrar of Companies and to do all such acts and deeds necessary to give effect to the proposed conversion

5. To approve the draft new set of Memorandum of Association and the Articles of Association.

Issue of Notice of General Meeting: Issue Notice of the General meeting to all Members, Directors and the Auditors of the company in accordance with the provisions of Section 101 of the Companies Act, 2013 and Secretarial Standards -2. Notice shall be given at least 14 clear days before the actual date of the General Meeting. Notice shall specify the day, date, time and full address of the venue of the General Meeting and must contain a statement on the business to be transacted at such Meeting.

Holding of General Meeting: Hold the General meeting as scheduled and pass the necessary Special Resolution, to get shareholders’ approval for Conversion of Section 8 Company into any other Company along with alteration in Memorandum of Association and Articles of Association under section 14.

2. Filing of e-form MGT-14: In case of conversion of Section 8 Company into any other company special resolution is required to be passed under section 14 of the Companies Act, 2013. Accordingly, as per section 117(3)(a), a copy of special resolution is required to be filed with the concerned ROC through filing of E-form MGT-14 within 30 days of passing the special resolution in the general meeting. The following documents are required to be attached with the e-form MGT-14:

• A certified true copy of the Altered MoA.

• A certified true copy of the Altered AoA.

• Notice of General Meeting along with an explanatory statement.

• Certified true copy of Special Resolutions passed in the General Meeting along with

explanatory statement.

Filing of e-form INC-18 with the Regional Director and Registrar: An intimation along with copy of the application with annexures as filed in Form no. INC.18 with the Regional Director shall also go to the Registrar through MCA system.

4. Publication of an Advertisement: After submitting an application to the Regional Director, the Company should publish a notice in FORM INC-19 in the newspaper at least one in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the company is situated, and having a wide circulation in that district, and at least once in English language in an English newspaper having a wide circulation in that district, for the Conversion of Section 8 Company into any other Company and on the website of the company, if any. The publication in the newspaper should be done within a week from the date of submitting an application to the Regional Director.

5. Obtain No Objection Certificates (NOC): From concerned authorities (e.g., Income Tax, Charity Commissioner, etc.) If registered under FCRA, notify Ministry of Home Affairs

6. Order of Conversion by Regional Director: On receipt of the application and on being satisfied, the Regional Director shall pass the order of conversion with certain conditions, as may be required depending upon the facts and circumstances of each case. However, before imposing any conditions or rejecting the application, the Regional Director shall give a reasonable opportunity of being heard to the Company.

7. Issuance of fresh Certificate of Incorporation: On receipt of all the required documents, the Registrar of Companies will issue Fresh Certificate of Incorporation to the applicant. When the license of the Company as Section 8 Company is revoked, the Company can apply for the Conversion of its status and name with the Registrar of Companies in Form INC-20.

Accordingly, Noble Work Foundation should follow the aforesaid procedure for conversion into a private limited company.

Referring to the provisions of Rule 8 of the Companies (Incorporation) Rules, 2014, examine the validity of objection of Anil. (Dec, 24 – 3 Marks) (New Syllabus)

Ans. Rule 8 of the Companies (Incorporation) Rules, 2014 deals with Names which resemble too nearly with name of existing company.

As per Provisions under Rule 8 of the Companies (Incorporation) Rules, 2014 before granting any name, it will be examined whether name is identical with name of any other company/LLP or any other name already allowed to a company/LLP.

Similarity in Meaning:

1. Rule 8 specifies that names are undesirable if they are identical or too closely resemble existing company names. This includes names that are identical in meaning, even if they are in different languages.

2. “National” translates to “Rashtriya” and “Electricity” to “Vidyut” in Hindi. Therefore, “National Electricity Corporation Ltd.” and “Rashtriya Vidyut Nigam Ltd.” have the same meaning, making them effectively identical under the rules.

Conclusion:

Given the above points, Anil’s objection to the rejection is not valid. The Registrar of Companies is correct in rejecting the proposed name under Rule 8, as the name “National Electricity Corporation Ltd.” is considered identical to “Rashtriya Vidyut Nigam Ltd.” due to the similarity in meaning, which could lead to confusion.

Ans. Provisions of Entrenchment under the Companies Act, 2013:

1. Meaning of Entrenchment (Section 5(3)):

   • Entrenchment means including a provision in the Articles of Association (AoA) that makes alteration of certain specified clauses more difficult than a standard special resolution.

2. Purpose of Entrenchment:

   • It allows specified provisions in the Articles to be altered only under stricter conditions (e.g., 100% consent), offering protection to minority shareholders.

   • It provides certainty to investors, particularly in joint ventures or strategic partnerships.

3. Timing of Entrenchment (Section 5(4)):

   • Entrenchment provisions can be inserted:
     a) At the time of incorporation, or
     b) By amending the Articles:

     • In a private company: with consent of all members.

     • In a public company: through a special resolution.

4. Filing with the Registrar (Section 5(5)):

   • When entrenchment provisions are included or amended, the company must give notice to the Registrar of Companies (ROC).

5. Procedure for Filing (Rule 10, Companies (Incorporation) Rules, 2014):

   • At incorporation: file entrenchment provisions in SPICe+ (INC-32).

   • Post-incorporation amendment: file Form MGT-14 within 30 days from the date of entrenchment.

   • Filing must be done along with the prescribed fee under the Companies (Registration Offices and Fees) Rules, 2014.

Conclusion:
Entrenchment provisions strengthen governance by protecting critical clauses in the Articles from easy alteration and ensuring higher thresholds for change, thereby safeguarding stakeholders’ interests.

Ans. Section 6 of the Companies Act, 2013 provides that: -

1. Act to Override Inconsistent Memorandum, Articles, Agreements, or Resolutions - the provisions of the Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, or in any agreement executed by it, or in any resolution passed by the company in general meeting or by its Board of Directors, whether the same be registered, executed or passed, as the case may be, before or after the commencement of this Act; and

2. Repugnant Provisions to be Void to the Extent of Inconsistency with the Act - any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.

Provision Inconsistent with Section 6 is Ultra Vires and Invalid - In the light of above provisions, if there is a provision in the Articles empowering the Directors of the company to expel any member of the company under any of the given conditions, then such a provision shall be totally inconsistent with the provisions of Section 6 of the Companies Act, 2013. It is opposed to the fundamental principles of the company’s jurisprudence and is ultra vires of the company.

Stock Exchanges Governed by Special Acts May Include Additional Provisions in Articles - However, the Stock exchanges, registered under the provisions of the Companies Act, 2013 can carry such a provision in its Articles. The regulation of stock exchanges is mainly governed by Securities Contracts (Regulation) Act, 1956 (SCRA) and SEBI, Act, 1992 which are Special Acts. Hence, the Articles of Stock Exchange may provide for additional matters as per SCR Act, which may not be possible for inclusion in the Articles of a company, as per the provisions of the Companies Act, 2013. [Madras Stock Exchange Ltd. v. S.S.R. Rajkumar (2003)].

In view of the above stated case law, the objection of K is not valid

Ans. According to Section 12(3) of the Companies Act, 2013, the company shall —

1. paint or affix its name, and the address of its registered office, and keep the same painted or affixed, on the outside of every office or place in which its business is carried on, in a conspicuous position, in legible letters, and if the characters employed therefore are not those of the language or of one of the languages in general use in that locality, also in the characters of that language or of one of those languages;

2. have its name engraved in legible characters on its seal, if any;

3. get its name, address of its registered office and the Corporate Identity Number along with telephone number, fax number, if any, e-mail and website addresses, if any, printed in all its business letters, billheads, letter papers and in all its notices and other official publications; and

4. have its name printed on negotiable instruments such as hundies, promissory notes, bills of exchange and such other document as may be prescribed.

Website Disclosure (Rule 26, Companies (Incorporation) Rules, 2014):

• If the company has a website, it must display on the home page:

  • Name of the company

  • Registered office address

  • CIN

  • Telephone number, fax number (if any), email

  • Contact person for queries or grievances

Mention of Former Names:

If the company has changed its name in the last two years, it must mention the former name(s) along with the current name wherever its name is printed, affixed, or engraved.

One Person Company (OPC) Provision:

If the company is an OPC, the words “One Person Company” must be printed in brackets below the company name.

Language Clarification by MCA:

MCA has clarified that displaying the name in English in addition to the local language is sufficient compliance.

Penalty for Non-compliance:

For default in compliance, the company and every officer in default shall be liable to a penalty of ₹1,000 per day during which the default continues, subject to a maximum of ₹1,00,000.

Conclusion:
KC Pvt. Ltd. must ensure compliance with all the above statutory requirements to avoid penalties and maintain proper corporate governance..

Ans. The powers exercisable by a company are to be confined to the objects specified in the memorandum. While the objects are to be specified, the powers exercisable in respect of them may be express or implied and need not be specified.

Every company may necessarily possess certain powers which are implied, such as, a power to appoint and act through agents, and where it is a trading company, a power to borrow and give security for the purposes of its business, and also a power to sell. Such powers are incidental and can be inferred from the powers expressed in the memorandum. The principle underlying the exercise of such powers is that a company, in carrying on the business for which it is constituted, must be able to pursue those things which may be regarded as incidental to or consequential upon that business.

Powers which are not Implied

The following powers have been held ‘not to be implied’ and it is, therefore, prudent to include them expressly in the objects clauses:

1. Acquiring any business similar to the company’s own business;

2. Entering into an agreement with other persons or companies for carrying on business in partnership or for sharing profit, joint venture or other arrangements. Very clear powers are necessary to justify such transactions;

3. Taking shares in other companies having similar objects;

4. Taking shares of other companies where such investment authorizes the doing indirectly that which will not be intra vires if done directly;

5. Promoting other companies or helping them financially;

6. A power to sell and dispose of the whole of a company’s undertaking;

7. A power to use funds for political purposes;

8. A power to give gifts and make donations or contribution for charities not relating to the objects stated in the memorandum;

9. Acting as a surety or as a guarantor.

Therefore, in light of the above stated points, the contention of the management is not right as the clause related to power to sell and dispose of the whole of a company’s undertaking is not an implied power of Board and should be written expressly in the objects clause of the Memorandum of Association.

Ans. As per provisions of first proviso to Section 196(4) of the Companies Act 2013, a notice convening the Board or General Meeting for considering appointment of Managing Director shall include the terms and conditions of such appointment, remuneration payable and such other matters including, interest, of a Director or Directors, in such appointment, if any. Hence, the notice not containing the information about the interest of other directors in the appointment of Mr. Ashish Kothari as Managing Director by Plastocare Limited is invalid.

However, government companies are exempt from the provisions of Section 196(4) of the Companies Act, 2013. Therefore, if Plastocare Limited would have been a Government Company the notice would not be rendered invalid due to the missing information about the interest of other directors in the appointment of Mr. Ashish Kothari as Managing Director of the Company.

Ans. The Companies (Incorporation) Amendment Rules, 2020 w.e.f. 23rd February, 2020 introduced new web form SPICe+ for incorporation of the Companies replacing the old e- form SPICe.

SPICe+ is an integrated Web Form replacing the earlier version of the e-forms, the form is divided in to two parts viz.:

Various Services offered through SPICe+ are:

1. Name Reservation;

2. Incorporation;

3. DIN allotment;

4. Mandatory issue of PAN;

5. Mandatory issue of TAN;

6. Mandatory issue of EPFO registration;

7. Mandatory issue of ESIC registration;

8. Mandatory issue of Profession Tax registration (only for companies to be registered in Maharashtra, Karnataka and West Bengal);

9. Mandatory Opening of Bank Account for the Company;

10. Allotment of GSTIN (if so, applied for);

11. Allotment of Shops and Establishment Registration (Only for Delhi Location).

Hence, the above-mentioned services can be applied in case of incorporation of a Company in Karnataka.

Ans.

1. Section 192(1) of the Companies Act, 2013 provides that company shall not enter into an arrangement by which —

   1. a director of the company or its holding, subsidiary or associate company or a person connected with him acquires or is to acquire assets for consideration other than cash, from the company; or

   2. the company acquires or is to acquire assets for consideration other than cash, from such director or person so connected, unless prior approval for such arrangement is accorded by a resolution of the company in general meeting and if the director or connected person is a director of its holding company, approval under this sub-section shall also be required to be obtained by passing a resolution in general meeting of the holding company.

2. The notice for approval of the resolution by the company or holding company in general meeting shall include the particulars of the arrangement along with the value of the assets involved in such arrangement duly calculated by a registered valuer.

3. Any arrangement entered into by a company or its holding company in contravention of the provisions of this section shall be voidable at the instance of the company unless —

1. the restitution of any money or other consideration which is the subject matter of the arrangement is no longer possible and the company has been indemnified by any other person for any loss or damage caused to it; or

2. any rights are acquired bona fide for value and without notice of the contravention of the provisions of this section by any other person.

Ans. The LLP Agreement must specify the various rights and duties of the Designated Partners as may be mutually agreed by them. In the absence of such separate agreement between the partners about such rights and duties, etc., the provisions of Schedule I of the Limited Liability Partnership Act, 2008 will apply as prescribed in Section 23(4) of the said Act.

Duties of Designated Partner:

1. Devotion to Business and Acting in Best Interest of LLP - The Designated Partner shall devote their whole time and attention to the said partnership business diligently and faithfully by employing themselves in it, and carry on the business for the greatest advantage of the partnership.

2. Compliance with LLP Act and Statutory Filings - The Designated Partners shall be responsible for the doing of all acts, matters and things as are required to be done by the LLP in respect of compliance of the provisions of the Limited Liability Partnership Act, 2008, including filing of any document, return, statement and the like report etc.

3. Protection of LLP’s Property and Assets - They shall protect the property and assets of the LLP.

4. Disclosure of Information to Other Partners - Upon every reasonable request, they shall inform the other partners of all letters, writings and other things which shall come to their hands or knowledge concerning the business of the LLP.

5. Timely Payment of Personal Debts to LLP - They shall punctually pay their separate debts to the LLP.

6. Compliance with Obligations under LLP Agreement - The Designated Partners shall be responsible for the doing of all such other acts arising out of LLP Agreement.

Ans. Mandatory annual compliances for LLP

• Annual returns are filed in Form 11.

• This form is a summary of the management affairs of the LLP, such as number of partners and their names.

• Form 11 needs to be filed within 60 days of the closure of the Financial year. Hence this Annual Return should be filed on or before 30^th May every year by the LLP.

• In case the annual turnover of the LLP crosses ₹ 5 crores or the Capital contribution from Partners exceeds more than ₹ 50 Lakhs the Annual return should be accompanied by a Certificate from Practising Company Secretary.

All LLPs are required to maintain their Books of Accounts in Double Entry System. They also need to prepare a Statement of Solvency (Accounts) every year ending on 31st March. For this purpose, LLP Form 8 should be filed with the Registrar of Companies on or before 30th October every year.

Audit of Accounts - It should be noted that LLPs whose annual turnover exceeds ₹ 40 lakh or whose contribution exceeds ₹ 25 lakh are required to get their accounts audited by a qualified Chartered Accountant mandatorily.

Maintenance of book of account is mandatory for LLP, irrespective of annual turnover. In partnership there is no requirement for filing Annual Return. There is no requirement for certificate from company secretary.

Ans. A limited liability partnership (LLP) is a partnership in which some or all partners (depending on the jurisdiction) have limited liabilities. It can exhibit elements of partnerships and corporations. In an LLP, each partner is not responsible or liable for another partner's misconduct or negligence. These are the following compliances which are required to be made by LLPs:

1. Filing of Annual Return in Form 11 : This form is a summary of the management affairs of the LLP, such as number of partners and their names. Form 11 needs to be filed within 60 days of the closure of the financial year. Hence, this annual return needs to be filed on or before 30th May every year by the LLP.

In case the annual turnover of the LLP crosses Rs 5 crore or the capital contribution from partners exceed more than Rs 50 lakh, the Annual Return should be accompanied by a certificate from the Practising Company Secretary.

Filing of Statement of Accounts of Financial Statements in Form 8 : LLPs are required to maintain their books of accounts in Double Entry System and have to prepare statement of solvency every year ending on 31st March. Form 8 needs to be filed on or before 30th October of every year.

2. Filing of Income Tax Returns : Every LLP is required to close financial year on 31st March every year and is also required to file returns with the Income Tax Department.

LLPs whose annual turnover exceeds Rs 40 Iakh or whose capital contribution exceeds Rs 25 lakhs are required to get their accounts audited by a qualified Chartered Accountant mandatorily.

Last date for filing income tax return for LLPs requiring audit — 30th September of the Assessment Year ("AY"). LLPs are required to furnish report in Form 3CEB u/s 92 E of Income Tax — 30th November of the AY.

In any other case — 31st July of the AY.

Penalties:

As per LLP Act 2008, if there is any delay in filing Form 8 and Form 11 of LLP, then it will attract penalty of Rs 100 per day of default with no ceiling.

Ans. The Statement is incorrect, the Financial statements of Limited Liability Partnership are not mandatorily required to be audited by Chartered Accountant.

This is because as per Rule 24 of LLP Rules, the LLPs whose annual turnover exceeds Rs. 40 lakhs or whose Capital Contribution exceeds Rs. 25 Lakhs are required to get their accounts audited by a qualified Chartered Accountant mandatorily for each financial year.

Ans. Procedure for Changing the registered office from Kanpur (Uttar Pradesh) to NCT of Delhi

The limited liability partnership (LLP) may change its registered office from one place to another by following the procedure as laid down in the limited liability partnership agreement. Where the limited liability partnership agreement does not provide for such procedure, consent of all partners shall be required for changing the place of registered office of limited liability partnership to another place.

The following formalities are required to be complied by the LLP firm to change its registered office from one State to another State:

1. Pass resolution for change of address.

2. Consent of secured creditors is required.

3. Publication of General Notice in Newspapers Before Filing with Registrar - Publish a general notice, not less than 21 days before filing any notice with Registrar, in a daily newspaper published in English and in the principal language of the district in which the registered office of the LLP is situated and circulated in that district giving notice of change of registered office.

4. Filing of Form-15 Within 30 Days of Newspaper Publication - Notice of change of place of registered office shall be given to Registrar in Form- 15 within 30 days of publishing of general notice as prescribed under Rule 17 of the Limited Liability Partnership Rules, 2009 along with the prescribed fees.

5. Disclosure of Legal Proceedings in Notice of Change - Where there is any conviction, ruling, order or judgment of any Court, tribunal or other authority against the limited liability partnership, the particulars of such prosecutions initiated against or show cause notices received by the limited liability partnership for the alleged offences under the Limited Liability Partnership Act, 2008 shall be stated in the notice of change of place of registered office to be filed with the Registrar.

6. Procedure for Change of Registered Office from One State to Another - Where the change in place of registered office is from one state to another state, the limited liability partnership shall file the notice in Form 15 with the Registrar from where the limited liability partnership proposes to shift its registered office with a copy thereof for the information to the Registrar under whose jurisdiction the registered office is proposed to be shifted.

7. Filing of LLP Form 3 with Supplementary LLP Agreement - The LLP Form 3 is required to be filed for “Information with regard to limited liability partnership agreement and changes” along with the supplementary agreement as attachment.

Accordingly, ABC LLP is advised to follow the abovementioned procedure.

Ans. Procedure for Change of Name under LLP Act, 2008:

1. Reason for Name Change:

   • The LLP may voluntarily change its name for business purposes or may be directed by the Central Government if the name is considered undesirable or identical to another existing entity.

2. Penalty for Non-compliance with Government Directions:

   • Failure to comply with a direction from the Central Government to change the name:

     • LLP: Fine of ₹10,000 to ₹5,00,000

     • Designated Partners: Fine of ₹10,000 to ₹1,00,000

3. Name Application to MCA:

   • Apply to the Ministry of Corporate Affairs (MCA) for name reservation.

   • The application may include up to six proposed names in order of preference.

   • Ensure the names follow LLP naming guidelines and are not identical or similar to any existing LLP name.

   • Name availability can be checked on the MCA portal.

4. Documents Required with Application:

   • Consent of all partners (certified copy)

   • Existing LLP Agreement

   • Trademark certificate, if any (or trademark registration copy)

5. Filing Form LLP-5:

   • After name approval, file Form LLP-5 (Notice of change in name) with the Registrar within 30 days of approval.

6. Approval by Registrar:

   • The Registrar of Companies (ROC) will scrutinize the application and may approve or reject it.

7. Issuance of New Certificate:

   • Upon approval, the ROC issues a new certificate of registration.

   • The new name becomes effective from the date mentioned in the certificate.

8. Supplementary LLP Agreement:

   • After receiving the new name certificate, the partners must execute a supplementary agreement reflecting changes in the LLP Agreement due to the name change.

Conclusion:
XYZ Trading LLP must follow the above step-by-step procedure and ensure timely filing and compliance with the Registrar's and LLP Act provisions to successfully change its name to PQR Solutions LLP.

Ans.

1. This given case is similar to a decided case law i.e. Sozin Flora Pharma LLP vs. State of Himachal Pradesh & Another.

2. The facts of the case are as follows:
   In 2005, the petitioner was registered as a partnership firm in the name and style of M/S Sozin Flora Pharma, under the provisions of the Indian Partnership Act, 1932. In 2016 the firm was converted into LLP with the name M/S Sozin Flora Pharma LLP and the same was registered.

3. However, the Department of State Revenue asked the LLP to pay stamp duty and registration charges for transferring the assets of the erstwhile partnership firm to the LLP.

4. The petitioner [LLP] explained that upon conversion into LLP the vesting of property of the firm in the LLP is automatic and therefore it is not liable to pay stamp duty and registration charges.

5. On behalf of the State, it was contended that the LLP is a separate distinct entity from that of its partners and hence the conversion amounts to change of legal rights.

6. The Hon'ble Court made reference to Section 58 of the Limited Liability Partnership Act, 2008 and held that the transfer and vestment of property of a partnership firm in favour of a converted LLP is statutory and is by Operation of law; the legal entity is not changed after conversion, only the identity of the petitioner firm as a legal entity undergoes a change and the order of the Revenue Department was quashed and set aside.

7. Hence, stamp duty and registration charges cannot be levied upon transferring the assets of the erstwhile partnership firm to LLP.

8. Hence, the contention of the Department of State Revenue is not valid.

1. Is dividend distribution tax applicable on LLP?

2. Is LLP subjected to audit? State the reason.

3. Is LLP eligible to raise loan from ABC Ltd., a foreign bank?

4. State Offences & Penalties for non-filing of financial statements under the LLP Act, 2008. (Dec, 19 – 4 Marks)

Ans.

1. For the purpose of income tax, LLP is treated at par with partnership. A LLP is not subject to Dividend Distribution Tax (DDT).

2. The accounts of LLP shall be audited in accordance with Rule 24 of the Limited Liability Partnership Rules, 2009. The audit is required only in those cases where the turnover exceeds ₹ 40 lakh and where the contribution exceeds ₹ 25 lakh. Hence, in the given case since, both the criteria has been fulfilled, it requires to conduct audit.

3. Limitation in External Commercial Borrowings (ECB): LLP’s are not allowed to raise ECB. Hence, it cannot avail commercial loans from its foreign partners, FII’s, foreign banks and any financial institution located outside India. Hence, Aryan & Aarav LLP cannot raise loan from ABC Ltd., a foreign bank.

4. Offences and penalties: Limited Liability Partnership Act, 2008 provides that for non-compliance on procedural matters such as delay in filing e-forms, one has to pay default fees for every day for which the default continuous. Such default fees would be payable at the rate of rupee one hundred per day after the expiry of the date of filing up to a period of 300 days. The offence can result in either (i) through payment of fine or (ii) through payment of fine as well as imprisonment of the offender.

They have decided to start their own software development business. They aim to provide innovative software solutions to various businesses while fostering a culture of creativity and collaboration within their organization. As they embark on their entrepreneurial journey, they encounter various challenges and opportunities along the way.

A and B need to decide on the legal structure for their business. They are considering forming a Limited Liability Partnership (LLP) to protect their personal assets and enjoy tax benefits. They get the name, “Technical Solutions LLP” reserved by the jurisdictional Registrar. After filing the prescribed e-form, FiLLiP along with the required documents attached thereto, “Technical Solutions LLP” is registered.

“Technical Solutions LLP” requires initial capital to cover the startup costs, such as office space, equipment, and hiring employees. By leveraging a combination of personal resources, support from friends and family, investments from angel investors, crowdfunding, and strategic partnerships, A and B secure the necessary startup funds for “Technical Solutions LLP.” A and B gather the necessary documents for GST registration of “Technical Solutions LLP”. After filling the GST registration application form on the GST portal and uploading the required documents as specified in the application form, the GST Registration Certificate of “Technical Solutions LLP” is received electronically through the GST portal.

With a growing demand for its services, “Technical Solutions LLP” embarked on a phase of aggressive expansion, opening new offices in strategic locations and investing in infrastructure and technology upgrades. It introduced innovative solutions leveraging emerging technologies such as Artificial Intelligence (AI), blockchain, and cloud computing to stay ahead of the competition. Recognizing the need for additional capital to fuel its ambitious growth plans, A and B deliberated on the possibility of converting the LLP into a private limited company to raise capital, enhance visibility, and facilitate future expansion.

After careful consideration and thorough preparation, “Technical Solutions LLP” has initiated the process of converting into a private limited company, adhering to regulatory requirements and compliance standards. The name approval for the company, “Technical Solutions Pvt. Ltd.” has been received from the Registrar of Companies. After filing the required form along with the necessary documents, the company, Technical Solutions Pvt. Ltd. is incorporated under the Companies Act, 2013 by taking over the business of “Tech Solutions LLP”. In view of the above, answer the following :

1. Write down the benefits of Limited Liability Partnership (LLP) being considered by A and B while deciding the legal structure for their business.

2. Describe the documents that are required to be attached with the prescribed e-form FiLLiP for getting registration of “Technical Solutions LLP”.

3. What are the key considerations for “Technical Solutions LLP” when seeking investments from angel investors to finance its operations ?

4. What documents are required to be uploaded by A and B with the GST registration application form on the GST portal for GST registration of “Technical Solutions LLP” ?

5. Describe the conditions required to be fulfilled for conversion of LLP “Technical Solution LLP” into a private limited company. “Technical Solutions Pvt. Ltd.”

(June, 24 – 3 Marks each) (New Syllabus)

Ans.

The given benefits of LLP can be considered by A and B while deciding the legal structure for their business:

Dual benefits: Limited Liability Partnership is an alternate corporate business entity that provides the benefits of limited liability of a company but allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm, introduced in India by way of Limited Liability Partnership Act, 2008.

Cost effective: LLP is relatively a cheaper approach to incorporate as compared to a Private Limited Company and requires fewer compliances; its main improvement over General Partnership is that it limits the liabilities of its partners to their contributions to the business and offers each partner protection from negligence, misdeeds or incompetence of the other partners.

Suitable for Non-Scalable Businesses: If one is running a business that is unlikely to require equity funding, one may register an LLP as it combines several benefits of the private limited company and general partnership. It has limited liability, like a private limited company, and has a simpler structure, like a general partnership.

Fewer Compliances: The Ministry of Corporate Affairs (MCA) has given some concessions to the LLP. For example, an audit needs to be performed only if in any financial year the turnover is greater than Rs. 40 lakhs or whose contribution is more than Rs. 25 lakhs. Furthermore, whereas all structural changes need to be communicated to the RoC in the case of private limited companies, the requirement is minimal for LLPs.

Number of Partners: There is no limit to the number of partners there may be in a LLP. If one is building a large advertising agency, for example, one need not worry about any cap on the number of partners.

(b)

Section 11(2) of the LLP Act,2008 governs the requirement of incorporation document. Filing of incorporation documents in LLP Portal:

Once the LLP reserves its name, LLP must file its incorporation in web-based form FiLLip (Form for Incorporation of Limited Liability Partnership) with ROC.

Following documents are required to be attached along with the prescribed e-form FiLLip for getting registration of “Technical Solutions LLP”:

• Proof of Identity of Partners

• Residential proof of Partners

• Passport Size photograph of Partners

• Proof of Address of Registered office of LLP

• Subscription sheet signed by the promoters

• Digital Signature Certificate

• Latest Utility bill of registered office (not later than 2 months)

• NOC of owner of registered office, if taken on rent / lease

• Notice of Consent & Appointment of Designated Partners with their personal details

• Detail of LLP(s) and/ or company(s) in which partner/ designated partner is a director/ partner.

(c)

The key considerations for “Technical Solution LLP” when seeking investments from angel investors to finance its operations are as follows:

Angel investors are usually individuals or a group of industry professionals who are willing to fund the venture in return for an equity stake. As regulation 19F of SEBI (Alternative Investment Funds) Regulations, 2012, SEBI has made the following restrictions applicable to angel funds investing in an Indian company:

1. Angel funds shall invest in startups which:

   1. are not promoted or sponsored by or related to an industrial group whose group turnover exceeds ₹ 300 crore; and

   2. are not companies with family connection with any of the angel investors who are investing in the company.

2. Investment by an angel fund in any venture capital undertaking shall not be less than ₹ 25 Lacs and shall not exceed ₹ 10 Crores.

3. Investment by an angel fund in the venture capital undertaking shall be locked-in for a period of 1 year.

4. Angel funds shall not invest in associates.

5. Angel funds shall not invest more than 25% of the total investments under all its schemes in one venture capital undertaking:

Provided that the compliance to this sub-regulation shall be ensured by the Angel Fund at the end of its tenure.

An angel fund may also invest in the securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and the Board from time to time.

(d)

The following documents are required to be uploaded by A and B with GST registration application form on the GST portal for GST registration of “Technical Solution LLP:

1. Copy of Certificate of Incorporation of LLP& LLP Agreement

2. Permanent Account Number (PAN) of LLP

3. Consent / Resolution by designated partners for obtaining GST Registration

4. Declaration / Authorization to Authorized Signatory

5. Bank Account Details: Scanned copy of a cancelled cheque containing name of the Business entity, Bank Account No., MICR, IFSC and Branch details.

6. Photos of all Partners

7. PAN Card / Aadhar Card of all Partners

(e)

Following conditions are to be fulfilled for conversion of LLP “Technical Solution LLP” into a private

limited Company “Technical Solutions Pvt ltd”:

• All the partners should have approved the conversion of LLP.

• The LLP should have complied with all the required returns and compliances.

• Publication related to such conversion of LLP into a Private Company, in at least two newspapers, one in English Language and another in any vernacular language newspaper of the place of registered office.

• The Limited Liability Partnership must have at least two partners who are required for incorporation of a Private Limited company.

• There should be no open charges for or against the Company.

What are the protections provided to Priya for reporting misconduct under Section 31(1) of the LLP Act, 2008? (Dec, 24 – 3 Marks) (New Syllabus)

Ans. Section 31(1) of the Limited Liability Partnership Act, 2008 states that:

1. the Court or Tribunal may reduce or waive any penalty leviable against any partner or employee of a limited liability partnership, if it is satisfied that:

   1. such partner or employee of a limited liability partnership has provided useful information during investigation of such limited liability partnership; or

   2. when any information given by any partner or employee (whether or not during investigation) leads to limited liability partnership or any partner or employee of such limited liability partnership being convicted under this Act or any other Act.

2. No partner or employee of any limited liability partnership may be discharged, demoted, suspended, threatened, harassed or in any other manner discriminated against the terms and conditions of his limited liability partnership or employment merely because of his providing information or causing information to be provided pursuant to sub-section (1).

The aforesaid protections are provided under Section 31(1) of the LLP Act, 2008 to Priya for reporting misconduct.

Ans. After the incorporation, the designated partners must enter into an LLP agreement in the prescribed format. It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same need to be filed in e-form 3 within 30 days of incorporation along with the Certificate of incorporation as LLP form ROC but in order to avoid any dispute between the partners as to the terms & conditions of the agreement the same can be filed afterwards. The contents of the limited liability partnership agreement are as follows:

1. Name and Registered Office of LLP

2. Business Objectives and Scope of Operations (e.g., computer hardware and peripherals)

3. Details of Partners

   • Contribution (monetary or otherwise)

   • Profit-sharing ratios

   • Designated vs. ordinary partners

4. Capital Contribution

   • Initial contributions

   • Manner of additional contributions

5. Duties and Rights of Partners

   • Roles, powers, and restrictions

6. Decision-making & Meetings

   • Voting rights

   • Quorum and resolution mechanisms

7. Banking and Accounting

   • Maintenance of accounts and audit provisions (if required)

8. Remuneration/Compensation

   • For services rendered by partners

9. Admission, Retirement & Expulsion of Partners

10. Dispute Resolution

    • Arbitration clause or other modes

11. Winding Up and Dissolution

12. Indemnity and Liability Clauses

13. Miscellaneous

Accordingly, Divakar and Raina are advised on the aforesaid contents that should be included in the LLP agreement.

Ans. A Limited Liability Partnership (LLP) Firm combines the simplicity of a partnership firm with the advantage of limited liability as available in the case of a company. Before the passing of the Limited Liability Partnership Act in 2008, a foreign company intending to participate in tender or some other project in consortium with an Indian company had only the option of setting up a company (whether private or public) as a Special Purpose Vehicle (SPV). The disadvantage was that winding up such a company is difficult.

LLP as an SPV has the advantage of being easy to wind up after the purpose is over and the liability of the partner is limited. Key advantages of using an LLP as an SPV as compared to a company are as follows:

1. Low Cost of Incorporation- Low cost of incorporation of an LLP;

2. Flexible Management Rules - Flexibility of rules of management and governance based on Agreement between the contracting Partners;

3. Separation of Ownership and Management - Partners can be companies while management is by Designated Partners who are individuals. By this, there is divorce between ownership and management;

4. Low annual maintenance cost;

5. No Mandatory Audit Initially - There may not be any necessity of getting the accounts audited before the project takes off;

6. Tax Efficiency – No DDT - An LLP firm does not have to pay Dividend Distribution Tax (DDT) on share of profits transferred to the Partners, which makes it tax efficient;

7. Easy Voluntary Winding Up - Voluntary winding of an LLP firm which has no creditors is very easy and can be done without intervention of any court or tribunal;

8. FDI Allowed in Select Sectors Only - Investment in LLP Firms is permitted only in sectors in which 100% FDI is permitted through automatic route without any performance linked conditions.

Both company and LLP are suitable mode of SPV. However, in view of the above, it is advisable to use any of the two LLPs that are in the group instead of the companies, to register as an SPV.

1. Registration

2. Member’s liability

3. No. of members required

4. Taxation

5. Legal Status (June, 19 – 5 Marks)

Ans. Following are the Business Form-wise Features/Benefits or Drawbacks for the Parameters required by Harishchander:

Ans. A start up company is an entrepreneurial venture which is typically an emerging, fast growing business that aims to solve an unmet need by developing a viable business model around an innovative product, service, processor a platform. A startup is usually a company designed to effectively develop and validate a scalable business model.

The Government of India has announced "Startup India" initiative for creating a conducive environment for startups in India. Various ministries of the Government of India have initiated a number of activities for the purpose.

To bring uniformity in the identified enterprises, an entity shall be considered as a "startup"

1. Upto 10 years from the date of its incorporation / registration

2. If its turnover for any of the financial years has not exceeded ₹ 100 crore and

3. It is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

Any such entity formed by splitting up or reconstruction of a business already in existence shall not be considered as "startup".

Ans. The stages of a startup lifecycle are clearly demarcated owing not only to the promulgation of clarity but also to the exponential growth rate of the startup ecosystem. Each stage presents a new set off challenges and hurdles for entrepreneurs, elucidating the imperativeness of its understanding. Largely, the startup lifecycle is segregated into 4 stages.

Stage 1: Ideation and Development

The first stage of the startup lifecycle is ideation. It is categorized by the importance of testing feasibility of the products/service offered. It is at this stage that garnering a variety of opinions to further assess a business model takes precedence. Testing the potential viability of an entrepreneurs’ business can help answer larger questions about government aid, regulations and other aiding factors as the business inches to the next stage.

Stage 2: Validation

Once on entrepreneur has evaluated feasibility of the idea and has highlighted broad scale business strategies, it is important to validate the product or services offered. The process involves defining goals, developing a value proposition and validating the same through customer feedback. This stage of a startup exudes high relevance as it drives the understanding of potential outcomes. Moreover, it highlights the features as considered in the ideation stage by giving the entrepreneur viability proof through testing.

Stage 3: Early Traction

It is at the Early Traction stage that a set of target customers may test efficacy of the product/ service offered validation of a product can portray definitive results to the outside world, a stage that may present its own set of challenges and visibly express revenue and cash flow. It may be helpful to iterate that a market for this product is created and developed at this stage.

The customer retention rate confirms the early traction of the company and its product. Startup acquires more customers by actively seeking funds from crowd funding agencies, angel investors or networks, incubators and seed grants from Government.

Stage 4: Growth/Exit

In the fourth stage of the startup lifecycle, the company has attained true economic health, has sufficient size and product-market penetration to ensure economic success, and earns average or above-average profits. The company can stay at this stage indefinitely, provided environmental changes do not hinder its market niche or ineffective management reduce its competitive abilities. At this stage, the company may choose to scale up or expand its market through mergers and acquisitions or preparing for an Initial Public Offering (IPO). Depending upon the strategy followed, some of the companies are successfully able to sustain the growth stage, rapidly scaling up their business to achieve valuation of more than $1 billion and become unicorns. These businesses offer ideal business for other startup across sectors and encourage them to scale up.

Ans. The recognition of the startups in India is regulated vide notification G.S.R. 127(E) issued by the Department for Promotion of Industry and Internal Trade (DPIIT) dated 19th February, 2019. The entity shall be considered as a Startup:

1. Upto a period of 10 years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.

2. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded ₹ 100 crore rupees.

3. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

The process of recognition of an eligible entity as startup shall be as under:

1. A Startup shall make an online application over the mobile app or portal set-up by the DPIIT.

2. The application shall be accompanied by — (a) a copy of Certificate of Incorporation or Registration, as the case may be, and (b) a write-up about the nature of business highlighting how it is working towards innovation, development or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation.

The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit, —

1. recognise the eligible entity as Startup; or

2. reject the application by providing reasons.

Ans. Start-up India is a government initiative aimed at fostering entrepreneurship and promoting innovation in India. Some of the benefits available to startups under the Start-up India program include:

1. Simplified Compliance: Startups are provided with a simplified regulatory framework, reducing the regulatory burden and allowing them to focus more on their core business activities.

2. Tax Exemption: Eligible startups can avail themselves of income tax exemption for a specified period, typically the first three consecutive years out of their first ten years of operation.

3. Self-Certification: Startups can self-certify compliance with labor and environmental laws for up to three years, reducing regulatory hassle.

4. Faster Patent Examination: Startups can expedite the patent application process through fast-track examination, reducing the time and cost involved in securing patents.

5. Access to Funding: Startups can avail themselves of various funding schemes and incentives

provided by the government and other agencies to facilitate access to finance.

Intellectual Property Rights Support: Startups can receive support for filing and prosecuting patents, trademarks, and designs through government schemes.

6. Startup India Hub: Startups have access to an online platform, the Startup India Hub, which provides resources, networking opportunities, and mentorship support.

7. Government Procurement: Startups are given preference in government procurement, allowing them to access a significant market and gain visibility.

8. Incubation Support: Startups can benefit from incubators and accelerators supported by the government, providing infrastructure, mentorship, and networking opportunities.

9. Innovation and Research Support: Startups can access government grants and schemes aimed at promoting innovation, research, and development activities.

These benefits are aimed at creating a conducive environment for startups to thrive and contribute to economic growth and job creation in India. XYX Solutions Pvt Ltd is advised accordingly.

Ans. Issue of Sweat Equity Shares by Start-up Companies

As per proviso to Rule 8 of the Companies (Share Capital and Debentures) Rules, 2014, a start-up company as defined in notification number G.S.R. 127(E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India, may issue sweat equity shares not exceeding 50% of its paid-up share capital upto 10 years from the date of its incorporation or registration.

So, Radha Furnishing Private Limited a Start-up Company can issue sweat equity shares after considering above mentioned provisions.

Ans. Yes, the view of the CFO is correct.

As per the provisions of Companies (Acceptance of Deposit) Rules, 2014, an amount of ₹ 25 lakhs or more received by a Start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding 10 years from the date of issue) in a single tranche, from a person shall not be treated as a deposit.

Further, as per the exemption notification dated June 05, 2015, issued by the Ministry of Corporate Affairs, the provisions of clauses (a) to (e) of Section 73 of the Act shall not apply to a start-up company for 10 years from the date of incorporation.

In view of the said provision, the view of the CFO that the amount of ₹ 25 lakh received from an investor, by way of Note convertible into equity after 3 years but before 5 years is not a deposit, is correct.

In light of above statement, define the term ‘unicorn’. Is a start-up different from

Entrepreneurship? Answer. (June, 24 – 3 Marks) (New Syllabus)

Ans.

• A unicorn is a term used to indicate a privately held startup company with a valuation of over $1 billion.

• For a unicorn, the journey starts from the growth stage, they are disruptors which start out in an incredibly unique way to solve everybody's problem.

• The reasons these startups become so successful is because all of their solutions fill a specific need in a new and different way.

• The Indian startup ecosystem has developed dynamically in recent times.

• Two decades back, there were only few active investors and limited number of support organisations, such as incubators and accelerators.

• However, in the past decade there has been a significant increase in both investment activity and infrastructure facilities to provide the much-needed impetus to the expansion of the unicorn tribe.

• The primary distinction between the startup and entrepreneurship is that an entrepreneur refers to all business ventures, new or old.

• It includes small businesses, partnerships, firms, sole-proprietorship and corporations which can be based on a new idea or on an existing idea.

• On the other hand, a startup is a newly merged business venture started by individual founders to meet a market gap.

• Startups mostly mean new businesses that are solving market’s problems with unique ideas.

Ans. The following are the unconventional modes of financing options for Start-ups which are becoming popular in India:

Crowd Funding

1. Definition and Concept:

   • This is a recent phenomenon being practiced for getting seed funding through small amounts collected from a large number of people (crowd), usually through the internet.

   • There are now companies in India that specialize in Crowd Funding.

2. Mechanism:

   • The entrepreneur showcases his idea before a large group of people to convince them of its utility and success.

   • The entrepreneur needs to upload on a portal his profile and presentation, including:

     • The business idea

     • Its impact

     • The rewards and returns for investors

     • Supporting images and videos of the project

3. SEBI’s Consultation Paper (2014):

   • SEBI rolled out a “Consultation Paper on Crowd Funding in India” proposing a framework to allow start-ups and SMEs to raise early-stage capital in small sums from a broad investor base.

   • The paper defined Crowd Funding as solicitation of funds (small amount) from multiple investors through web-based platforms or social networking sites for a specific project, business venture, or social cause.

4. Current Regulatory Status:

SEBI has not issued any regulation regarding Crowd Funding as of now.

Incubators

Role of Incubators in Startup Ecosystem

• These set-ups precede the seed funding stage and help the entrepreneur develop a business idea or make a prototype.

• They provide resources and services in exchange for an equity stake ranging from 2–10%.

• Incubators offer:

  • Office space

  • Administrative support

  • Legal compliances

  • Management training

  • Mentoring

  • Access to industry experts

  • Access to funding through angel investors or venture capitalists (VCs)

• These are usually government-supported institutes like:

  • IIMs or IITs

  • Technical institutes

  • Private business incubators run by industry veterans or companies

• The incubation period can be 2–3 years and admission is rigorous.

• Top incubator options in India include:

  • IIM-Bangalore NSRCEL

  • Microsoft Accelerator

  • IIT Kanpur SIIC

  • Sri Ram College of Commerce (SRCC)

Ans. Crowd Funding

Definition and Concept:

• This is a recent phenomenon being practiced for getting seed funding through small amounts collected from a large number of people (crowd), usually through the internet.

• There are now companies in India that specialize in Crowd Funding.

5. Mechanism:

   • The entrepreneur showcases his idea before a large group of people to convince them of its utility and success.

   • The entrepreneur needs to upload on a portal his profile and presentation, including:

     • The business idea

     • Its impact

     • The rewards and returns for investors

     • Supporting images and videos of the project

6. SEBI’s Consultation Paper (2014):

   • SEBI rolled out a “Consultation Paper on Crowd Funding in India” proposing a framework to allow start-ups and SMEs to raise early-stage capital in small sums from a broad investor base.

   • The paper defined Crowd Funding as solicitation of funds (small amount) from multiple investors through web-based platforms or social networking sites for a specific project, business venture, or social cause.

7. Current Regulatory Status:

   • SEBI has not issued any regulation regarding Crowd Funding as of now.

Ans. Start-ups are usually equity financed/funded by way of a venture capital/ private equity investors and/or angel investors.

Venture Capitalist/Private Equity

Venture capital ("VC") / Private Equity ("PE") is often the first large investment a start-up can expect to receive. Convertible instruments are usually the preferred option and most commonly used securities for VC/PE investment which includes compulsory convertible preference shares and compulsory convertible debentures. The investor and start-up will normally enter into a non-binding offer based on the preliminary valuation of the start-up usually followed with a financial, legal and technical due diligence on the start-up as required by the investors. Due diligence will help the investors to finalize the representation and warranties and also to identify conditions precedent to the completion of investments and conditions subsequent in the aforesaid transaction documents.

Angel Investors

Angel investors are usually individuals or a group of industry professionals who are willing to fund the venture in return for an equity stake. Under the SEBI (Alternative Investment Funds) Regulations, 2012 which was subsequently amended in 2021, SEBI has made the following restrictions applicable to angel funds investing in an Indian company:

1. Angel funds shall invest in startups which:

   1. are not promoted or sponsored by or related to an industrial group whose group turnover exceeds ₹ 300 crore; and

   2. are not companies with family connection with any of the angel investors who are investing in the company.

2. Investment by an angel fund in any venture capital undertaking shall not be less than ₹ 25 Lakhs and shall not exceed ₹ 10 Crores.

3. Investment by an angel fund in the venture capital undertaking shall be locked-in for a period of 1 year.

Ans. Once a startup is recognized by the Department for Promotion of Industry and Internal Trade (DPIIT), it may apply for tax exemption under Section 56(2)(viib) of the Income Tax Act, commonly known as the Angel Tax exemption. The eligibility criteria are as follows:

Eligibility Criteria for Angel Tax Exemption:

1. The startup must be recognized by DPIIT as a Startup under the Startup India initiativfe.

2. The startup should be registered as a Private Limited Company or a Limited Liability Partnership (LLP) under the Companies Act, 2013 or LLP Act, 2008.

3. Paid-up share capital: aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of shares, if any, does not exceed, twenty-five crore rupees:

4. Age of the Startup: The entity should not be older than 10 years from the date of incorporation.

5. Turnover Limit: The startup’s annual turnover should not exceed `100 crore in any financial

year since its incorporation.

Nature of Investment: The exemption applies only to investments made by resident investors, including angel investors, HNIs, and venture capital funds.

6. Utilization of Funds: The funds received must be used for genuine business purposes and not for speculative or investment activities like purchasing shares, real estate, or lending, jewellery other than that held by the Startup as stock-in-trade in the ordinary course of business.

Ans. It is not an exaggeration to say that Government provides numerous benefits to start-ups in order to promote economic growth. Some of the key benefits offered are as under:

1. Simple process : Anyone interested in setting up a start-up can fill up a simple form on website or mobile app launched by Government of India and upload certain documents online.

2. Reduction in cost : The government also provides lists of facilitators of patents and trademarks. They provide high quality intellectual property rights services including fast examination of patents at lower fees. The government will bear all the facilitator fees and the startups have to bear only statutory fees. Consequently, start-ups may avail around 80% reduction in cost of filing the patents.

3. Easy access to funds : Rs 10000 crore fund (generally called as Fund of Funds) is set up by government to provide funds to the startups as venture capital. The government is also giving guarantee to the lenders to encourage banks and other financial institutions for providing venture capital. Rs 1,285 crore has been committed towards startups since the launch of the Rs 10,000-crore fund in January 2016. It is also projected that “When the fund of funds completes its fund-raising, the corpus will touch almost Rs 14,000 crore.

4. Tax holiday for 3 years : Startups will be exempted from income tax for 3 years, provided they get a certification from Inter Ministerial Board (IMB).

5. Apply for tenders : Startups can apply for government tenders. They are exempted from the "prior experience / turnover" criteria applicable for normal companies while responding to government tenders.

6. R&D facilities : Around Seven new research parks are in schedule to set up to provide facilities to startups in the R&D sector.

7. No time consuming compliances : Various compliances have been simplified for startups to save time and money. Startups shall be allowed to self-certify compliance with 9 labour and 3 environmental laws.

8. Tax saving for investors : People investing their capital gains in the venture funds set up by government will get exemption from capital gains. This will help startups to attract more investors. There are certain other tax exemptions available for start-ups.

9. Choose your investor : The startups will have an option to choose between the Venture Capital, giving them the liberty to choose their investors.

10. Easy exit : In case of exit, a start-up can close its business within 90 days from the date of application of winding up.

11. Meet other entrepreneurs : Government has proposed to hold 2 startup fests annually both nationally and internationally to enable the various stakeholders of a startup to interact and share business ideas. This will provide huge networking opportunities

Therefore, Amar is advised to establish an incubator set up in the space of IT, software development, cloud computing or hardware/software maintenance in order to get the maximum benefits.

Ans. SEED CAPITAL

1. Meaning of Seed Capital:

   • Seed capital refers to the initial capital used at the time of starting a business.

   • It is usually provided by the founders, friends, or family members.

   • It is also known as seed funding, which is required to support a nascent startup.

2. Purpose and Usage:

   • The capital is used for market research, product development, and other initial operations.

   • It helps in exploring the business idea and converting it into a viable product or service.

3. Importance in Startup Ecosystem:

   • Seed funding allows the founder to validate the business idea before attracting larger investors like venture capitalists.

   • A well-utilized seed capital ensures a smooth transition to the advanced stages of business growth.

4. Risks and Considerations:

   • Seed funding is a risky investment, so many investors adopt a wait and watch approach.

   • Founders should use seed capital carefully as it may result in dilution of ownership.

5. Compliance and Advantages:

   • The paperwork and legal formalities involved are relatively less than in later funding rounds.

   • Legal fees are also comparatively low.

   • Interest rates are generally low, and operational restrictions are minimal since the business is still developing.

Conclusion:
J should understand that seed capital is the foundation funding essential to convert an innovative idea into a business venture. Careful planning and utilization of seed funding will help attract future investments and ensure long-term growth.

Ans. Realising the action items of the Startup India Action Plan, the Government is implementing flagship Schemes under Startup India initiative namely, Fund of Funds for Startups (FFS), Startup India Seed Fund Scheme (SISFS) and Credit Guarantee Scheme for Startups (CGSS) to support startups at various stages of their business cycle to enable startups to graduate to a level where they are able to raise investments or seek loans.

Startup India Seed Fund Scheme (SISFS): The Startup India Seed Fund Scheme has been approved for the period of 4 years starting from 2021-22 with a corpus of Rs. 945 crore. The Scheme aims to provide financial assistance to startups for proof of concept, prototype development, product trials, market entry and commercialization. The Scheme is implemented from 1stApril 2021. The Experts Advisory Committee (EAC), under SISFS, is responsible for the overall execution and monitoring of SISFS. The EAC evaluates and selects incubators for allocation of funds under the Scheme. As per provisions of the Scheme, the selected incubators shortlist startups based on parameters outlined in Scheme guidelines.

Credit Guarantee Scheme for Startups (CGSS): The Government has established the Credit Guarantee Scheme for Startups for providing credit guarantees to loans extended to DPIIT recognized startups by Scheduled Commercial Banks, Non-Banking Financial Companies (NBFCs) and Venture Debt Funds (VDFs) under SEBI registered Alternative Investment Funds. CGSS is aimed at providing credit guarantee up to a specified limit against loans extended by Member Institutions (MIs) to finance eligible borrowers viz. DPIIT recognised startups. CGSS is operationalized by the National Credit Guarantee Trustee Company Limited (NCGTC).

Ans. To,

The Board of Directors

TKM Ltd.

Note on Incubators as mode of financing

Incubators are organisations set-up with the specific goal of assisting entrepreneurs with building and launching their startups. Not only do incubators offer a high number of value added services (office space, utilities, admin & legal assistance, etc.), they often also make grants/ debt/ equity investments.

Atal Incubation Centres (AICs) is an initiative of the Atal Innovation Mission (AIM), NITI Aayog to foster innovation and entrepreneurial spirit while creating a supportive ecosystem for start-ups and entrepreneurs in India. Each AIC is supported with a grant of up to INR 10 crores over a period of 5 years. Since 2016, AIM has established 68 Atal Incubation Centres across 18 states and 3 UTs which have supported more than 2700 startups.

Incubators set-ups precede the seed funding stage and help the entrepreneur develop a business idea or make a prototype by providing resources and services in exchange for an equity stake. Incubators offer office space, administrative support, legal compliances, management training, mentoring and access to industry experts as well as to funding through angel investors or VCs. The incubation period can be 2-3 years and admission is rigorous.

(Name)

(Designation)

Ans.

To,

The Board of Directors

Global Pen and Plastic Limited

Start-Up as defined vide Notification No. G.S.R. 127 (E), dated 19th February 2019 by DPIIT as:

An entity shall be considered as a Start-up:

1. Upto a period of ten years from the date of incorporation/ registration, if it is incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.

2. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs 100 crore.

3. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

Provided that an entity formed by splitting up or reconstruction of an existing business shall not be considered a ’Startup’.

An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/registration or if its turnover for any previous year exceeds one hundred crore rupees.

In the given case, since the entity being a Public Limited Company hence cannot be treated as a Start Up.

(Name)

(Designation)

Explain the role of Micro, Small, and Medium Enterprises (MSMEs) like GreenTech Innovations in economic development and community empowerment. (Dec, 24 – 3 Marks) (New Syllabus)

Ans:

• MSME Sector as a Vibrant and Dynamic Part of Indian Economy - Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and

dynamic sector of the Indian economy over the last five decades.

• Role of MSMEs in Employment Generation and Regional Development - MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth.

• Complementary Role of MSMEs to Large Industries - MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country.

• Enactment of MSMED Act, 2006 - The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is specified.

• Objective of the Act to Address Policy Issues and Investment Limits - The Act was notified to address policy issues affecting MSMESs as well as the coverage and investment ceiling of the sector.

• Facilitation of Development and Competitiveness of MSMEs - The Act seeks to facilitate the development of these enterprises as also enhance their competitiveness.

Thus, micro, small, and medium enterprises (MSMEs) like GreenTech Innovations play an important role as explained above in economic development and community empowerment.

Ans. The Central Government vide Notification S.0. 1702(E) dated 01.06.2020 notifies the criteria for classification of Micro, Small and Medium Enterprises. Under the new definition, there will be no more distinction between Manufacturing and Service MSMEs.

An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely: --

AB Handicrafts is advised accordingly.

Plant and Machinery ₹115 lakh

(including second hand machinery of

₹ 25 Lakh and pollution control equipment of ₹ 20 lakh)

Land and Building ₹ 100 lakh

Turnover ₹ 600 lakh

(including export turnover of ₹ 150 lakh)

Explain with details whether ABC Pvt. Ltd. comes under Micro or Small or Medium Enterprise category as per the new definition of MSME vide Press Release dated 13th May, 2020 of Ministry of Finance. (June, 23 – 5 Marks)

Ans. An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely: --

1. a Micro enterprise, where the investment in plant and machinery or equipment does not exceed ₹ 1 crore and turnover does not exceed ₹ 5 crore;

2. a Small enterprise, where the investment in plant and machinery or equipment does not exceed ₹ 10 crore and turnover does not exceed ₹ 50 crore; and

3. a Medium enterprise, where the investment in plant and machinery or equipment does not exceed ₹ 50 crore and turnover does not exceed ₹ 250 crore.

Definition and Scope of MSME

• MSME includes all establishments engaged either in manufacturing or rendering services.

• Trading activities only are not included under MSME.

Meaning of "Plant and Machinery or Equipment"

• The expression shall have the same meaning as in the Income Tax Rules, 1962 under the Income Tax Act, 1961.

• It shall include all tangible assets, excluding:

  • Land and building

  • Furniture and fittings

Valuation of Plant and Machinery or Equipment

• The purchase (invoice) value, whether new or second-hand, shall be considered.

• GST shall be excluded from the value.

• Valuation shall be on a self-disclosure basis if the enterprise is new and has no Income Tax Return (ITR).

Exclusions in Investment Calculation

• As per Explanation I to sub-section (1) of Section 7 of the MSME Development Act, 2006, the following costs shall be excluded from investment in plant and machinery:

  • Pollution control equipment

  • Research and development

  • Industrial safety devices

  • Other notified items

Exports Exclusion in Turnover

• Exports of goods or services or both shall be excluded while calculating the turnover of an enterprise.

• This applies for the purpose of classification as micro, small, or medium enterprise.

In the given situation, the investment in plant and machinery or equipment is ₹ 95 lakh (₹ 115 lakh - ₹ 20 lakh) and the turnover is ₹ 450 lakh (₹ 600 lakh - ₹ 150 lakh). Therefore, ABC Pvt. Ltd. comes under the category of Micro Enterprise as per the new definition of MSME.

Ans. Benefits extended to MSEs having valid registration:

1. Issue of the Tender Sets free of cost.

2. Exemption from payment of Earnest Money Deposit (EMD).

3. In tender participating MSEs quoting price within price band of L1+15% shall also be allowed to supply a portion up to 25% of requirement by bringing down their price to L1 Price, where L1 is non MSEs.

4. Consortia facility for Tender Marketing.

Every Central Ministries/Departments/PSUs shall set an annual goal of minimum 25% of the total annual purchases of the products or services produced or rendered by MSEs. Out of annual requirement of 25% procurement from MSEs, 4% is earmarked for units owned by Schedule Caste /Schedule Tribes and 3% is earmarked for the units owned by Women entrepreneurs. SPRS registered units are integral part of the supply chain to Government

Answer 4(a)

Under the new definition, there will be no more distinction between Manufacturing and Service MSMEs.

XYZ Pvt. Ltd. can be categorised as a Small Enterprise as its investment is up to Rs. 10 crore and turnover is less than Rs. 50 crore.

Even if it is a service provider the Category will not change.

Ans. Government of India notified certain criteria for classifying the enterprises as micro, small and medium enterprises and specifies the form and procedure for filing the memorandum (hereafter in this notification to be known as “Udyam Registration”, with effect from the 1st day of July, 2020, namely:--

An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely: --

1. a micro enterprise, where the investment in plant and machinery or equipment does not exceed ₹ 1 crore and turnover does not exceed ₹ 5 crore;

2. a small enterprise, where the investment in plant and machinery or equipment does not exceed ₹ 10 crore and turnover does not exceed ₹ 50 crore; and

3. a medium enterprise, where the investment in plant and machinery or equipment does not exceed ₹ 50 crore and turnover does not exceed ₹ 250 crore rupees.

Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof.

On registration, an enterprise (referred to as “Udyam” in the Udyam Registration portal) will be assigned a permanent identity number to be known as “‘Udyam Registration Number”.

An e-certificate, namely, “Udyam Registration Certificate” shall be issued on completion of the registration process.

Accordingly, UV Ltd. is advised the aforesaid criteria for making application for Udyam Registration Certificate under MSMED Act, 2006.

Ans. Udyam Registration

Any person who intends to establish a micro, small or medium enterprise may file Udyam Registration online in the Udyam Registration portal, based on self-declaration with no requirement to upload documents, papers, certificates or proof. On registration, an enterprise (referred to as “Udyam” in the Udyam Registration portal) will be assigned a permanent identity number to be known as “‘Udyam Registration Number”. An e- certificate, namely, “Udyam Registration Certificate” shall be issued on completion of the registration process.

Ans. Section 5 of MSMED Act, 2006 states about the main functions of the board which are as follows:

1. To examine the factors affecting the promotion and development of micro, small and medium enterprises and review the policies and programmes of the Central Government in regard to facilitating the promotion and development and enhancing the competitiveness of such enterprises.

2. To make recommendations on matters relating to promotion and development of micro, small and medium enterprises or on any other matter referred to it by the Central Government which, in the opinion of that Government, is necessary or expedient for facilitating the promotion and development and enhancing the competitiveness of the micro, small and medium enterprises.

3. To advise the Central Government on the use of the Fund or Funds constituted under section 12 of MSMED Act, 2006.

Ans. Various Schemes for MSMEs

Ans. The main objective of National SC-ST Hub Scheme is to provide professional support to Scheduled Caste and Scheduled Tribe Entrepreneurs to fulfil the obligations under the Central Government Public Procurement Policy for Micro and Small Enterprises Order 2012, adopt applicable business practices and leverage the Stand-Up India initiatives.

The scheme is applicable to aspiring and existing SC/ST Entrepreneurs.

₹ 8.00 crores and turnover of ₹ 45.00 crores approaches you to seek your advice on Micro & Small Enterprises Cluster Development Programme (MSE-CDP) Scheme of the Government of India for MSMEs. Draft a brief note on MSE-CDP Scheme. (Dec, 23 - 3 marks) (New Syllabus)

Ans. To,

M/s Appliances,

Note on Micro & Small Enterprises Cluster Development Programme (MSE-CDP) Scheme

This scheme is formulated to support the sustainability and growth of MSEs by addressing common issues such as improvement of technology, skills & quality, market access, etc. and to create/upgrade infrastructural facilities in the new/ existing Industrial Areas/Clusters of MSEs. Its main objectives are:

• To set up Common Facility Centers (for testing, training centre, raw material depot, effluent treatment, complementing production processes, etc).

• Promotion of green & sustainable manufacturing technology for the clusters.

The scheme is applicable to the existing entrepreneurs (in form of a SPV). The key benefits of the scheme are Creation of Common Facility Centers including Plug & Play Facilities and Support for Infrastructure Development Projects including Flatted Factory Complexes.

(Name)

(Designation)

Explain the role of Micro, Small, and Medium Enterprises (MSMEs) like GreenTech Innovations in economic development and community empowerment. (Dec, 24 – 3 Marks)

Ans.

• Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and

dynamic sector of the Indian economy over the last five decades.

• MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth.

• MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country.

• The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is specified.

• The Act was notified to address policy issues affecting MSMESs as well as the coverage and investment ceiling of the sector.

• The Act seeks to facilitate the development of these enterprises as also enhance their competitiveness.

Prepare a note on above statement. (June, 24 – 3 Marks) (New Syllabus)

Ans. Entrepreneurship and Skill Development Programme (ESDP) Scheme

Objective of the Scheme

• Aims at promoting new enterprises,

• Focuses on capacity building of existing MSMEs,

• Seeks to inculcate entrepreneurial culture in the country.

Target Beneficiaries

• Applicable to all aspiring and existing entrepreneurs.

• Facilitates entrepreneurship/self-employment awareness and motivation among:

  • SC/ST

  • Women

  • Differently abled persons

  • Ex-servicemen

  • Below Poverty Line (BPL) individuals

Focus Areas for Entrepreneurship & Skill Training

• Agro-based products

• Hosiery

• Food & fruit processing industries

• Carpet weaving

• Mechanical engineering workshop/machine shop

• Heat treatment, electroplating

• Basic/advanced welding, fabrication, sheet metal work

• Basic/advanced carpentry

• Glass and ceramics industries

Management Capacity Building for Existing Entrepreneurs
Training provided in:

• Industrial Management

• Human Resource Management

• Marketing & Export Management (including documentation & procedures)

• Materials & Financial/Working Capital Management

• Information Technology & Digital Marketing

• Quality Management, QMS, ISO 9000, EMS

• WTO & IPR Awareness

• Supply Chain, Retail & Logistics Management

Conclusion:

• The scheme widens the base of entrepreneurship by promoting:

  • Development

  • Achievement motivation

  • Entrepreneurial skills

• Ultimately aims to boost entrepreneurial activity across diverse sections of society.

Can Ramanlal convert his OPC into a private limited company in order to meet these eligibility requirements? What steps should he follow to make the conversion? (June, 25 – 3 Marks)

Ans. Yes, Ramanlal can convert his One Person Company (OPC) into a private limited company, subject to the provisions of the Companies Act, 2013. The conversion can be either voluntary or mandatory (if the OPC meets prescribed thresholds).

Procedure for Conversion of OPC to Private Limited Company:

1. Holding a Board Meeting and passing a Board Resolution: Pass a resolution approving the conversion of OPC into a private limited company and authorizing the necessary actions.

2. Increase the Number of Directors and Members: Since a private limited company requires a minimum of two members and two directors, Ramanlal must appoint an additional director and induct at least one more shareholder.

3. Alteration of Memorandum and Articles of Association (MOA & AOA):

   1. Modify the MOA & AOA to reflect the change in company structure.

   2. Remove OPC-related clauses and comply with private company regulations.

4. Obtain No Objection Certificate (NOC): If the company has any creditors or other stakeholders, an NOC may be required for conversion.

5. Holding of General Meeting: Hold the General Meeting and pass the necessary Special resolution.

6. File Necessary Forms with the Registrar of Companies (ROC):

   1. Form MGT-14: After the General Meeting and passing the special resolution.

   2. Form INC-6 (Application for conversion of OPC to Private Limited Company).

   3. Attach required documents such as the altered MOA & AOA, list of proposed directors and shareholders, board resolution, and NOC (if applicable).

7. Approval from ROC: Upon verification of documents, the ROC will approve the conversion and issue a fresh Certificate of Incorporation.

8. Update Business Registrations and Licenses: Inform relevant authorities and update registrations, such as GST, PAN, and bank accounts, to reflect the new company status.

9. After conversion, comply with the applicable requirements of a private company under the Act.

What types of forms along with attachments are required to be filed with Registrar of Companies, Ministry of Corporate Affairs for conversion of Private Company into OPC. (June, 24 – 3 Marks) (New Syllabus)

Ans. In order to convert Private Company into (One Person Company) OPC after calling the Board Meeting,Meeting of Shareholders/Members and passing of the necessary resolution, following forms are required to be filed: -

1. Filing of e-form MGT-14: In case of conversion of Company into One Person Company Special resolution is required to be passed under section 14 of the Companies Act, 2013. Accordingly, as per section 117(3) (a), a copy of special resolution is required to be filed with concerned ROC through filing of E-form MGT-14 within 30 days of passing special resolution in the general meeting.

Following documents are required to be attached with e-form MGT-14:

1. Notice of general meeting along with copy of explanatory statement under section 102;

2. Certified true copy of special resolution;

3. Altered memorandum of association;

4. Altered articles of association;

5. Certified true copy of board resolution may be attached as an optional attachment.

Filing of e-form INC-6: The company shall file an application in e-Form No.INC-6 for its conversion into One Person Company alongwith fees as provided in the Companies (Registration Offices and Fees) Rules, 2014 by attaching the following details or documents, namely: -

1. altered e-MOA and e-AOQA;

2. copy of NOC of every creditor with the application for conversion;

3. affidavit of directors confirming that all the members of the company have given their consent for conversion.

4. Affidavit

5. Certified true copy of minutes, list of creditors and list of members.

6. Copy of NOC of every creditor

7. Consent of the nominee in Form No. INC-3 along with all enclosures

8. Copy of PAN card of the nominee and member.

9. Proof of identity of the nominee and member.

10. Residential proof of the nominee and member.

Any other information can be provided as an optional attachment(s).

3. Issuance of New Certificate of Incorporation: On approval of Form MGT-14 and Form INC- 6, the Registrar will issue a fresh Certificate of Incorporation with the Changed name to the applicant company or the Conversion of Company into OPC.

1. Provisions regarding notice of general meeting

2. Whether company required to obtain ‘No Objection Certificate’.

3. Types of e-forms required to be filed with ROC for such conversion

4. Penalty for contravention of provisions with respect to conversion. (June, 21 – 4 Marks)

Ans. Legal Provisions related to Conversion of Private Company into One Person Company are given in Section 18 of the Companies Act, 2013 read with Rule 7 of the Companies (Incorporation) Rules, 2014 which are as under:

A private company other than a company registered under section 8 of the Companies Act, 2013 having paid up share capital of ₹ 4 crore or less and average annual turnover during the relevant period of ₹ 40 crore or less may convert itself into one person company by passing a special resolution in the general meeting.

Or

A private company other than a company registered under section 8 of the Companies Act, 2013 may convert itself into one person company by passing a special resolution in the general meeting.

1. NOTICE OF GENERAL MEETING:

Section 101 of the Companies Act 2013 provides that company shall issue notice of General Meeting in writing to below mentioned persons at least 21 days before the actual date of the General Meeting:

• every member of the company, legal representative of any deceased member or the assignee of an insolvent member;

• the auditor or auditors of the company; and

• every director of the company.

Notice of a meeting shall specify the place, date, day and the hour of the meeting and shall contain a statement of the business to be transacted at such meeting.

1. As per Rule 7(2) of the Companies (Incorporation) Rules, 2014, before passing such special resolution in the Extra-Ordinary General meeting (EGM) to get approval of shareholders for Conversion of Private Company into One Person Company (OPC), the Company shall obtain No Objection Certificate in writing from existing members and creditors.

2. ROC FORM FILING

E- Form MGT.14 - Copy of the special resolution is required to be filed with concerned ROC through filing of form MGT. 14 within 30 days of passing Special Resolution in the EGM.

E-Form INC.6 - An Application for conversion of a Private Company into a OPC is required to be filed in e-Form INC.6 to the concerned Registrar of Companies, with all the necessary annexures and with prescribed fees.

PENALTY – As per Rule 7A of the Companies (Incorporation) Rules, 2014, if a One Person Company (OPC) or any officer of such company contravenes the provisions with respect to conversion, the OPC or any other Officer of such company shall be punishable with fine which may extend to Rs. 5,000/- and with a further fine which may extend to Rs. 500/- per day after first offence, during which such contravention continues.

Ans. According to Section 18 read with Rule 7A of the Companies (Incorporation) Rules, 2014, if a One Person Company (OPC) or any officer of such company contravenes any of the provisions of the Companies (Incorporation) Rules, 2014, the OPC or any other officer of such company shall be punishable with fine which may extend to ₹ 5,000/- and with a further fine which may extend to ₹ 500/- for every day after the first offence, during which such contravention continues.

As Section 18 of the Companies Act, 2013 does not prescribe any penal provision for contravention of this section. Hence, the provisions of Section 450 of the Companies Act, 2013 related to punishment where no specific penalty or punishment is provided may be applicable in case of conversion of Private Company into One Person Company.

Ans. Pre-conditions to be examined for conversion of a public company into a private company are as under:

1. members to be reduced below 200 (presently 220)

2. public deposits to be repaid in full (presently 5 crores)

3. shareholders deposits/loan should not exceed 100% of paid-up capital and free reserves and share premium (presently 3 crores) subject to fulfilment of all conditions provided in MCA notification dated 13th June, 2017.

In this case, the company has a paid up capital of Rs.1crore and free reserves of Rs.1 crore i.e total of Rs.2 crore which is the maximum limit of exempted deposit from shareholder for private limited company. Hence, Rs.1 crore needs to be repaid to shareholders before conversion.

According to section 13 and 14 of the Companies Act, 2013 read with rule 33 and rule 41 of the Companies (Incorporation) Rules, 2014, a public company can be converted into the private company only after obtaining its shareholders’ approval by way of passing a special resolution in general meeting.

Apart from this, the other important procedures to be complied are:

• Calling of Board meeting

• General meeting

• Advertisement in newspaper

• Filing of copy of special resolution with the ROC

• Filing of application for conversion with RD

• Order of RD approving the conversion

• Filing of order of RD with ROC

• Certificate from ROC

Applicable provisions

1. Section 13: For alteration in Memorandum of Association of the Company

2. Section 14: For alteration in Article of Association of the Company.

3. Rule 41 of Companies (Incorporation) Rules, 2014: Approval of Regional Director for conversion of Public Companies into Private Companies.

Ans. As LLP has already got the name approved and have secured the DIN and DSC requirement now LLP needs to file Form URC 1 for Conversion of LLP into Private Limited Company.

Filing Form no. URC -1

As per Rule 3 of the Companies (Authorised to Registered) Rules, 2014, for the purposes of section 366(2) of the Companies Act, 2013, the provision of Chapter II of the Act relating to incorporation of company and matters incidental thereto shall be applicable mutatis mutandis for such registration:

Provided that there shall be two or more members for the purposes of registration of a company under this sub-rule.

Provided further that a company with less than seven members shall register as a private company. A company shall attach and provide the required documents and information to the Registrar along with Form No. URC. 1 in the following manner, namely:-

1. a list showing the names, addresses, and occupations of all persons named therein as partners with details of shares held by them respectively, showing separately shares allotted for consideration in cash and for consideration other than cash along-with the source of consideration and distinguishing, in cases where the shares are numbered, each share by its number, who on a day, not being more than six clear days before the day of seeking registration, were partners of the Limited Liability Partnership or firm as the case may be;

2. a list showing the particulars of persons proposed as the first directors of the company, alongwith Director Identification Number (DIN), passport number, if any, with expiry date, residential addresses and their interests in other firm or body corporate along with their consent to act as directors of the company;

3. in case of a firm, deed of partnership, bye-laws or other instrument constituting or regulating the firm and in case the deed of partnership was revised at any time in the past, copies of the principal and all subsequent deeds including the latest deed, along with the certificate of the registration issued by the Registrar of Firms, in case the firm is registered;

4. written consent or No Objection Certificate from all the secured creditors of the applicant;

5. written consent, from the majority of members whether present in person or by proxy at a general meeting, agreeing for such registration;

6. an undertaking that the proposed directors shall comply with the requirements of the Indian Stamp Act, 1899 (2 of 1899) as applicable;

7. a copy of the latest income tax return of the Limited Liability Partnership or firm, as the case may be.

Ans. Following conditions are to be fulfilled for conversion of LLP “Technical Solution LLP” into a private limited Company “Technical Solutions Pvt ltd”:

• All the partners should have approved the conversion of LLP.

• The LLP should have complied with all the required returns and compliances.

• Publication related to such conversion of LLP into a Private Company, in at least two newspapers, one in English Language and another in any vernacular language newspaper of the place of registered office.

• The Limited Liability Partnership must have at least two partners who are required for incorporation of a Private Limited company.

• There should be no open charges for or against the Company.

Ans. Once the company gets converted into private limited company, it needs to intimate and inform the authorities, persons as required by law. Following are the major compliances that needs to be followed by the company after conversion into a private limited company:

• Arrange new rubber stamps and/or common seal (if keeping) with the new name, and all the stationary in the new name of the Company.

• Arrange printing of fresh copies of Altered Memorandum of Association and Articles of Association with new Certificate of Incorporation.

• Paint the new name of the Company outside every office, building etc. along with former name so changed.

• Get the new name printed on its business letters, letter heads, Bill heads, Invoice Forms, Receipt Forms and all other official publications along with former name so changed.

• Inform about the conversion of the Company to all concerned persons/ government authorities.

• Intimate all the Banks where Company is operating Bank Accounts about its conversion and file necessary applications and documents with regard to change in the name of Account holder.

• Make application to Income Tax Department for new Permanent Account Number (PAN) and Tax Deduction and Collection Account Number (TAN).

Ans. One of the first decisions that is faced by an entrepreneur is how the business should be structured. All businesses must adopt some legal configuration that defines the rights and liabilities of participants in the business's ownership, control, personal liability, life span and financial structure. This decision will have long term implications, so he has to select the form of ownership that is right for him.

In making a choice, he (in our case, Ankur) should take into account the followings:

• His vision regarding the size and nature of business;

• The level of control he wishes to have;

• The level of structure", he is willing to deal with;

• The business's vulnerability to litigation;

• Tax implications of the different organizational structures; Expected profit or loss of the business;

• Whether or not, he will need to re-invest earnings into the business; and His need for access to cash out of the business for himself.

Hindu Undivided Family

Ans. Joint Hindu Family Business

Nature of Joint Hindu Family Business

• The Joint Hindu Family Business is a distinct form of organization peculiar to India.

• Joint Hindu Family Business is created by the operation of law.

• It does not have any separate and distinct legal entity from that of its members.

Governing Laws

• The laws that govern Hindu Undivided Families (HUFs) are not codified.

• They are read along with the Hindu Succession Act, 1956 and the Income Tax Act, 1961.

• The business of Joint Hindu Family is controlled under the Hindu Law instead of the Partnership Act, 2008.

Membership

• The membership in this form of business organization can be acquired only:

  • By birth, or

  • By marriage to a male person who is already a member of the Joint Hindu Family.

Composite Family

• “When two or more families agree to live and work together, throw their resources and labour with joint stock and share profits and the losses together, then this family is known as a composite family.”

Schools of Hindu Law

• There are two schools of Hindu Law:

  • Dayabhaga, which is prevalent in Bengal and Assam, and

  • Mitakshara, which is prevalent in the rest of the country.

• According to Mitakshara law, there is a son’s right by birth in the property of the joint family.

• It means, when a son is born in the family, he acquires an interest in the property jointly held by the family.

Management and Liability

• The business of the Joint Hindu Family is controlled and managed by one person who is called the ‘Karta’ or ‘Manager’.

• The Karta or Manager works in consultation with other members of the family, but ultimately, he has a final say.

• The liability of the Karta is unlimited, while the liability of other members is limited to their shares in the business.

Ans. Key points in creation of HUF

Key Points in creation of HUF and format of Deed for creation of HUF

• Under the Income Tax Act, an HUF is a separate entity for the purpose of income tax return.

• The same tax slabs are applicable to HUF as to individual assessee.

• One cannot transfer your own assets/money into HUF.

• If one has ancestral property and earning some income from this property, then it is better to transfer this asset to HUF and save tax up to exemption limit applicable to individual.

• One can transfer the money received on sale of ancestral property /assets into your HUF.

• The income from property of HUF can be further invested in instruments such as shares, mutual funds, etc. and will be assessed under HUF.

• Existence of property or multiple members is not a pre-requisite to create HUF. A family which does not own any property may still have the character of Hindu joint family. This jointness is understood in terms of faith and food. This is because a Hindu is born as a member of the joint family.

• Any gifts received by the members of HUF (birthday, marriage, etc.) can be treated as assets of HUF.

• The HUF is taxable as separate person under income tax hence one can save tax from basic exemption of Rs. 2.5 lakh. HUF will also gain from the tax slab structure of computing income tax.

• Apart from basic exemption of Rs. 2.50 lakh, section 80C deduction up to Rs. 1.50 lakh is also available.

Sole Proprietorship

Ans. A sole proprietor generally suffers from the following limitations:

1. Limitation of management skills: A sole proprietor may not be able to manage the business efficiently as he is not likely to have necessary skills regarding all aspects of the business. This poses difficulties in the growth of business also.

2. Limitation of resources: The sole proprietor of a business is generally at a disadvantage in raising sufficient capital. His own capital may be limited and his personal assets may also be insufficient for raising loans against their security. This reduces the scope of business growth.

3. Unlimited liability: The sole proprietor is personally liable for all business obligations. For payment of business debts, his personal property can also be used if the business assets are insufficient.

4. Lack of continuity: A sole proprietor organisation suffers from lack of continuity. If the proprietor is ill, this may cause temporary closure of business. If he dies, the business may be permanently closed.

5. Selling the business is a challenge: Generally, entrepreneurs do not want to consider the possibility of selling their businesses. But as the owner, it is practical to contemplate passing the baton.

Selling a sole proprietorship business is challenging. If the business is significantly profitable, selling it would trigger high capital gains tax. Also, selling off a sole proprietorship business means selling the debts as well. New start-ups might have more debts than profits. This often makes it difficult to predict profits for potential buyers.

Risk in decision-making: One of the significant disadvantages of a sole proprietorship that several people do not consider is the risk of making wrong decisions.

As mentioned earlier, the final decision of every business function depends on the owner. In a sole proprietorship business, there is nobody to assist in decision-making. So, the risk of errors in decisions is high in sole proprietorships.

No economies of scale: Large-scale business organizations enjoy large-scale economies as well. That means they can produce more in lesser overhead costs per product.

From the above account of the merits and limitations, it becomes clear that it is only personal services like repair work, tailoring etc. small factories, retail shops and professional activities which can be set up as sole proprietary organizations. In India, this form of organization is quite popular and accounts for the largest number of business units

Societies

Ans. According to Section 20 of the Societies Registration Act, 1860, societies can be formed for the following purposes:

1. Charitable societies,

2. the military orphan funds or societies established at the several presidencies of India,

3. societies established for the promotion of science, literature, or the fine arts for instruction, the diffusion of useful knowledge,

4. The diffusion of political education,

5. the foundation or maintenance of libraries or reading-rooms for general use among the members or open to the public,

6. public museums and galleries of paintings and other works of art, collections of natural history, mechanical and philosophical inventions, instruments, or designs.

Besides these purposes, the respective State Governments may provide for any other objects by their legislations.

What would be the consequences if the society is not registered under the Societies Registration Act, 1860? (June, 25 – 3 Marks)

Ans. If the society is not registered under the Societies Registration Act, 1860, the following major implications arise:

1. No Separate Legal Identity – The society cannot own property, enter contracts, or sue/be sued in its own name.

2. Inability to Open a Bank Account – The society cannot open a bank account in its name, leading to financial transparency issues.

3. Challenges in Property Ownership – Property must be held in individual names, increasing the risk of disputes.

4. No Perpetual Succession – The society lacks statutory recognition, making governance

unstable when members change.

Ineligibility for Government Grants & Benefits – The society cannot receive government aid, tax exemptions, or financial support.

5. Personal Liability for Members – Members may be personally liable for any legal or financial obligations of the society.

While registration involves recurring compliance and expenses, it provides legal protection, operational clarity, and collective rights. If the society remains unregistered, members may face significant legal and operational challenges in managing the property and resolving disputes. Therefore, registration is generally advisable for long-term stability and legal protection.

Multi-State Cooperative Societies

Or

Or

Mohan has completed MBA in dairy farming and is keen in uniting farmers in Rajasthan by forming a Multi-State Co-operative Society. Brief Mohan on the documentary requirements for formation of Multi State Co-operative Society and the Authority with whom the application needs to be filed. (June, 22 – 4 Marks)

Ans. An application in Form-1 (under sub-rule (1) of rule 3 of the Multi-State Cooperative Societies Rules, 2002) should be filed with the Central Registrar of Cooperative Societies, New Delhi along with the following enclosures:

1. A certificate from the bank stating credit balance there in favour of the proposed multi-state co-operative society.

2. A scheme explaining how the proposed multi-state co-operative society has reasonable prospects of becoming a viable unit.

3. Four copies of bye-laws in original.

4. Proposed area of operation for registration shall initially be permitted for two contagious States only.

5. List of at least 50 members from each State. The list has to be submitted in the format annexed with the Multi-State Cooperative Societies Act, 2002 (MSCS Act, 2002) along with the copies of ID proofs of the members duly attested by Chief Promoter.

6. Certified copies of the resolutions passed by the proposed society along with the certified copy of the resolution of the promoters which shall specify the name and address of one of the applicant(s) to whom the Central Registrar may address correspondence under the rules before registration and dispatch or hand over of registration documents.

7. Contact number and e-mail address of the Chief Promoter or Society on cover page.

For societies having objects related to thrift and credit and for multi-purpose societies following additional documents are required to be submitted along with documents mentioned above:

1. No Objection Certificate from the Registrar of Cooperative Societies of the States/ UT where the area of operation of the society is proposed to be confined.

2. A certificate to the effect that the credentials of the Chief Promoter/Promoters have been verified by the Registrar of Co-operative Societies of the State where the head office is proposed to be located.

All documents to be submitted in original with the signatures of the Chief Promoter/ Promoters on each page.

Ans. Advantages of Multi-State Cooperative Society (MSCS):

1. Affordable Credit to the Poor - MSCS provides loans at reasonable rates of interest to the poor. This benefits them, as they do not have to go to financiers who lend at high interest rates.

2. Pan-India Operational Reach - MSCS can function pan India as they can start branches in different districts and states.

3. Low Regulatory and Compliance Burden - As regulatory requirements of filing, etc. is minimal, MSCS have low compliance costs.

4. Member-Owned and Member-Centric Structure - A Multi State Co-operative Credit Society belongs to its members, who are at the same time the owners and the customers of their Society. This creates a sense of belonging and ownership among the members.

Partnership

Ans. According to the nature of agreement among partners, there can be three types of partnership as follows:

1. Partnership at will : Such as partnership exists on the will of the partners i.e., it can be bought to an end whenever any partner gives notice of his intention to do so.

2. Particular partnership : A particular partnership is formed for undertaking a particular venture. It comes to an end automatically with the completion of the venture.

3. Partnership for a fixed duration : Such partnership is for a fixed period of time.

Ans. PARTNERSHIP DEED

Partnership deed, also known as a partnership agreement, is a document that outlines in detail the rights and responsibilities of all parties to a business operation. It has the force of law and is designed to guide the partners in the conduct of the business. It is helpful in preventing disputes and disagreements over the role of each partner in the business and the benefits which are due to them.

The key ingredients of a Partnership Deed are given below:

1. Definitions and vital information-The partnership deed normally carries the name of the business, the address of its principal place of business and a short summary of the nature of business the partners intend to operate.

2. Partnership duration - The Deed must mention the firm’s establishment date and the deal period.

3. Investment-The deed gives important financial details of the partnership, such as the amount of capital to be invested by each partner, the Profit /Loss sharing of each partner , the salaries to be paid to each partner and the method of distributing the business income. The partnership deed also documents the accepted method of raising additional capital, if necessary how loan funds may be raised and rate of interest if any, applicable on the loans.

4. Accounting-The partnership deed provides for the accepted method of accounting for the cash flow, profit and loss, and assets and liabilities of the business; it also defines the fiscal year to be used in accounting statements and how these statements will be distributed among the partners and other shareholders

5. Duties, powers and obligations of the partners-The duties , powers and obligations of each partner may also be spelt out in the Partnership Deed. The Deed may also provide designate a partner as the Managing Partner, who will be responsible for day to day management and conduct of the business.

6. Profit & loss ratio - Profit/Loss ratio to be accrued to and be borne by the Partners.

7. Withdrawals-The document must also provide for actions to be taken in case of the voluntary withdrawal or death of a partner. In such a case, accounts will have to be drawn up to ascertain the assets, liabilities and the entitlement of each partner (including the outgoing partner)

8. Expulsion-If a partner is proving to be a hindrance or detriment to the business, or loses legal rights in a bankruptcy or other court action, the other partners must have a method of modifying the partnership rights of or expelling him.

9. Banking and Partnership Funds - The funds held in the firm’s name will be placed in a bank account designated by the Partners.

10. Borrowings - A written consent of all the partners will be required for taking loans from banks, financial institutions, or any third parties for the firm’s financial requirements.

11. Dissolution-The partnership deed should also describe the methods by which the partnership and business will be dissolved, if desired, and how the accounts among the partners would be settled at the termination of the business.

12. Arbitration-As in all business contracts, a partnership deed must provide for the means of arbitration of disputes. The main goal of the deed is to avoid expensive litigation over details that have not been fully worked out in the signed agreement.

Ans. Section 33 of the India Partnership Act, 1932, lays down certain conditions for expulsion for Partners of the Firm. In view of this, Ashok and Paramvir cannot expel Vir from their Firm without satisfying certain conditions. The essential conditions before expulsion to be satisfied are:

1. The power of expulsion must have existed in a contract between the partners,

2. The power has been exercised by a majority of the partners, and

3. It has been exercised in good faith. The test of good faith includes:

That the expulsion must be in the interest of the partnership,

1. That the partner to be expelled is served with a notice, and

2. That the partner has been given an opportunity of being heard.

Accordingly, if Ashok and Paramvir must satisfy the above conditions and follow the procedures, then only they may expel Vir from the Firm.

Ans. As per Section 30 of the Partnership Act, 1932, a minor cannot become a full-fledged partner in a partnership firm. However, a minor can be admitted only for the benefits of the partnership, with the consent of all existing partners.

In this case, B can introduce his minor son into the partnership for benefits, but only with A’s consent. The minor will be entitled to a share in the firm’s profits but will not be personally liable for any losses incurred by the firm.

Thus, B can introduce his minor son into the partnership for the benefits, but only if A agrees, and subject to the conditions outlined in the Partnership Act, 1932.

After attaining majority: [Section 30(5)]

Once the minor attains majority:

At any time within 6 months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm: Provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said 6 months.

Trust

Ans. Difference between Public Trust and Private Trust

1. Identification of Beneficiaries - Identification of the beneficiaries of the Trust is a simple way to differentiate between a public and a private trust. If the beneficiaries make up a large or substantial body of public, then the trust in question is public. A public trust exists "for the purpose of its objects, the members of an uncertain and fluctuating body, and is managed by a board of trustee. If, however, the beneficiaries are a narrow and specific group such as the employees of a company, then the trust is private.

2. Nature of Beneficiary Interest - In a Public Trust, the interest is vested in an uncertain and fluctuating body. They are the general public or class thereof. In a Private Trust, beneficiaries are definite and ascertained individuals. (Supreme Court in Deoki Nandan v. Murlidhar 1957 AIR 133 1956 SCR 756)

3. Scope and Domain - Their domains are different: public trusts have larger and wider domain whereas private trusts have limited and narrow domain.

A trust for the benefit of employees of a company however numerous would not be considered as public charitable.

For example, an industrialist who creates a trust for the benefit of his 5,000 people, their spouses and children is considered private because who the beneficiaries are known.

While a public trust is set up for what is called 'uncertain and fluctuating body of persons, it is possible to create a sectarian or communal trust as a public charitable trust. There are trusts which are only for specific religious communities. However, such trusts may not be tax- exempt.

Ans. In accordance with Section 366 of the Companies Act, 2013 read with Rule 3 of the Companies (Authorised to Registered) Rules, 2014, the following documents are required in case an application is made by a trust for registration as a company limited by guarantee under section 8 of the Companies Act, 2013-

1. List of Current Trustees with Proof - a list showing the names, addresses and occupations of all persons, who on a day, not being more than six clear days before the day of seeking registration, were trustees of the trust with proof thereof;

2. Details of Proposed First Directors - a list showing the particulars of persons proposed as the first directors of the company, along with DIN, passport number, if any, with expiry date, residential addresses and their interests in other firm or body corporate along with their consent to act as directors of the company;

3. Certified Copy of Trust Registration and Deed - a certified copy of the certificate of registration of the trust and the trust deed;

4. NOC from Secured Creditors - No Objection Certificate from secured creditor along with charge holder, if applicable;

5. Company Objects and Member Declarations - details of the objects of the company along with a declaration from all the members that the restrictions and prohibitions as mentioned in clause (b) and clause (c) of sub-section (1) of section 8 of the Companies Act, 2013 shall be complied.

6. Undertaking by Trustees for Dissolution of Trust - An undertaking from all the trustees providing that in the event of registration as a company under Part I of Chapter XXI of the Companies Act, 2013, necessary documents or papers shall be submitted to the registering or other authority with which the company was earlier registered, for its dissolution.

7. Verification of Company Details by Proposed Directors - The list of members and directors and any other particulars relating to the company which are required to be delivered to the Registrar shall be duly verified by the declaration of any two or more proposed directors.

Accordingly, KPS Trust is advised to submit the above-mentioned documents for registration as a company limited by guarantee under Section 8 of the Companies Act, 2013.

Ans. Trust is defined in section 3 of the Indian Trust Act, 1882 as “an obligation annexed to the ownership of property and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another or of another and the owner. In other words, it is simply a transfer of property by one person (the settlor/author of the trust) to another (the “trustee”) who manages that property for the benefit of someone else (the “beneficiary”). The settlor must legally transfer ownership of the assets to the trustee of the trust.

Thus, the settlor, trustee, beneficiary, the trust property, beneficial interest and instrument of trust are the constituents of The Green Future Trust defined as follows:

“author of the trust”: the person who reposes or declares the confidence is called the “author of the trust”:

“trustee”: the person who accepts the confidence is called the “trustee”:

“beneficiary”: the person for whose benefit the confidence is accepted is called the “beneficiary”: “

trust-property”: the subject-matter of the trust is called “trust-property” or “trust-money”:

“beneficial interest”: the “beneficial interest” or “interest” of the beneficiary is his right against the trustee as owner of the trust-property; and

“instrument of trust”:- the instrument, if any, by which the trust is declared is called the “instrument of trust”:

Ans.

Ans. As per RBI Notification No. DNBS.2/CGM (CSM)-2003, dated April 23, 2003, Asset Reconstruction Company (ARC) performs the following functions:

1. Acquisition of financial assets

2. Change or takeover of management / sale or lease of business of the borrower

3. Rescheduling of debt

4. Enforcement of security interest

5. Settlement of dues payable by the borrower

Benefits of incorporating an ARC are as under:

How does RARC contribute to improving the financial health of banks? (Dec, 24 – 3 Marks) (New Syllabus)

Ans. RARC being an Asset Reconstruction Company contributes to improving the financial health of banks in the following manner.

• Relieving Banks from NPA Burden - As the cash realization activity from defaulting borrowers is a lengthy and cumbersome procedure, relieving banks of the burden of NPAs will allow them to focus better on managing the core business including providing new business opportunities for the ARC.

• Restoring Confidence and Balance Sheet Cleanup - The transfer should help restore depositor and investor confidence by ensuring the lender’s financial health. The banks use it as a method to hive off the bad loans from their balance sheet. ARCs can maximize recovery value while minimizing costs.

• Expertise in Loan Resolution and Legal Reform Catalyst - Expertise in Loan Resolution and Legal Reform Catalyst - ARCs also help in building industry expertise in loan resolution and restructuring management, besides serving as a catalyst for important legal reforms in bankruptcy procedures and loan collection.

• Development of Capital Markets - ARCs play an important role in developing capital markets through secondary asset instruments.

Ans. The procedure for registration of Asset Reconstruction Company (ARC) is given below:

• Incorporation under Companies Act, 2013 - Firstly, a company has to be incorporated under the Companies Act, 2013. The company may be a private company or a public company.

• Registration with RBI - Secondly, after incorporation, the company has to register itself with the Reserve Bank of India (RBI). Asset Reconstruction Companies are governed by the Asset Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 issued by the Reserve Bank of India as amended from time to time.

• Application for Registration under SARFAESI Act - Every ARC shall apply for registration in the form of application hosted on the RBI website and obtain a certificate of registration from the Bank as provided under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).

• Submission of Application to RBI - The ARC seeking registration from the RBI shall submit their application in the format as specified, duly filled in with all the relevant annexures/ supporting documents to the Chief General Manager-in- Charge, Department of Regulation, Central Office, Reserve Bank of India;

• Permitted Activities after Registration - An ARC, which has obtained a certificate of registration issued by the Bank under Section 3 of the SARFAESI Act, can undertake both securitization and asset reconstruction activities.

• Commencement of Business Timeline - An ARC shall commence business within 6 months from the date of grant of Certificate of Registration by RBI. However, on the application by the ARC, RBI may grant extension for further period not exceeding 12 months from the date of grant of Certificate of Registration.

• Exemption from Certain RBI Act Provisions - Provisions of section 45 -1A, 45-IB and 45-IC of Reserve Bank of India Act, 1934 shall not apply to non- banking financial company, which is an ARC registered with the Bank under Section 3 of the SARFAESI Act.

NBFC

Ans. A Non-Banking Financial Company (NBFC) engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business etc. The privileges available to the NBFC are listed below:

1. Competitive Interest Rates - Rate of interest is one of the main aspects of all types of loans. NBFC are having interest rates either equal to bank lending rates or at times even lower to bank rates.

2. Quick processing - At banks, it is very important that the applicant should fulfil the eligibility criteria but NBFC are lenient in this aspect. This makes loan approval easier, smother process and quicker.

3. Less Rules and Regulations - As NBFC are incorporated under the Companies Act, (though regulated by the Reserve Bank of India), the rules and regulations for lending are not as stringent as banks. This helps borrowers to get loans easily.

4. Last Resort of Borrowing - NBFCs are the largest propellants of ushering finance into the country. They are the last resorts of borrowing. Further, Agility is a key feature for NBFCs as it sets the banks apart.

5. Caters Customer needs - Another major advantage of NBFCs is the ground level understanding of their customer's profile and the need for their credit, which gives them an edge, as their ability to customize their products according to client needs.

6. Loan available for Individuals with Poor Credit Rating - Loans will be offered to individuals with low credit score by NBFCs but most of the time the interest rates for such borrowers will be higher than market rates.

7. Broder customer base & enhance customer trust on NBFC ultimately increase brand value of the NBFC.

Ans. The advice to Mr. Rakesh on the various categories of NBFCs would be as follows:

Types of NBFC License

Before applying for NBFC License, the type and category of NBFC license must first be determined. The following are the categories of NBFC Companies:

Asset Finance Company (AFC): An Asset Finance Company is a company which is a financial institution carrying on as its principal business the financing of physical assets such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines.

Investment Company: An Investment Company is any company which is a financial institution carrying on as its principal business the acquisition of securities (shares / bonds / other financial securities).

Loan Company: Loan Company is any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.

Infrastructure Finance Company: Infrastructure Finance Company is a non banking finance company that deploys at least 75% of its total assets in infrastructure loans, has a minimum Net Owned Funds of Rs 300 crore, maintains a minimum credit rating of "A" or equivalent with a Capital to Risk Asset Ratio of 15%

Systemically Important Core Investment Company: Systemically Important Core Investment Company is an NBFC with an asset size of over 100 crore, accepts public funds, and is involved in the business or acquisition of shares and securities subject to the fulfillment certain conditions.

Infrastructure Debt Fund: Infrastructure Debt Fund is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. Infrastructure

Debt Funds raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies can sponsor such companies.

NBFC — Micro Finance Institution : Micro Finance Institution is a non-deposit taking NBFC that is engaged in micro finance activities.

NBFC Factor : NBFC Factor is a non deposit taking NBFC engaged in the principal business of factoring.

Further while considering the question, as to which category of NBFC would suit him for applying the licenses, Mr. Rakesh could be advised as below:

Looking into the features of various NBFCs, ‘Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI)’ will suit Mr. Rakesh as this is for carrying business of providing micro finance in the rural areas.

Ans. Infrastructure Debt Fund

1. Definition and Objective
   Infrastructure Debt Fund - Non-Banking Financial Company (IDF-NBFC) is a type of NBFC established to facilitate the flow of long-term debt into infrastructure projects.

2. Resource Mobilization
   IDF-NBFCs raise funds through the issue of Rupee or Dollar denominated bonds with a minimum maturity of 5 years.

3. Eligibility to Sponsor IDF-NBFCs
   Only Infrastructure Finance Companies (IFCs) are eligible to sponsor IDF-NBFCs.

4. Investment Participation
   IDFs are investment vehicles that can be sponsored by commercial banks and NBFCs, allowing domestic and offshore institutional investors—especially insurance and pension funds—to invest via units and bonds issued by the IDFs.

5. Function of IDFs
   IDFs primarily refinance existing debt of infrastructure companies, thereby enabling banks to free up capital and lend to new infrastructure projects.

6. Eligible Projects for IDF-NBFCs
   IDF-NBFCs can take over loans for infrastructure projects developed under the Public Private Partnership (PPP) model that have completed at least one year of successful commercial operations.

7. Tripartite Agreement Requirement
   The loan takeover process must be backed by a Tripartite Agreement among the IDF, the Concessionaire (project implementer), and the Project Authority, ensuring compulsory buyout with termination payment in case of default by the Concessionaire.

Ans. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND- SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions: -

1. Minimum 90% Investment in Group Companies - It holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;

2. Minimum 60% Equity Investment in Group Companies - Its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;

3. Restriction on Trading of Investments - It does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

4. Restriction on Other Financial Activities - It does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI Act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies;

5. Its asset size is Rs. 100 crore or above; and

6. It accepts public funds.

or

Ans. Grounds for Cancellation of Certificate of Registration for Non-Banking Financial Company

Conditions for Cancellation

(i) Ceases to carry on the business of a non-banking financial institution in India;

(ii) Fails to comply with any condition subject to which the certificate of registration was issued;

(iii) Fails to fulfill conditions referred to in clauses (d) to (g) of sub-section (4);

(iv) Fails to:

1. Comply with any direction issued by the Bank under this Chapter;

2. Maintain accounts as required by law or Bank's direction;

3. Submit or offer for inspection its books of account and relevant documents upon demand by Bank's inspecting authority;

(v) Has been prohibited from accepting deposits by an order made by the Bank under this Chapter, and such order has been in force for at least 3 months.

Procedures for Cancellation

Differentiate between ‘Asset Finance Company’ and ‘Infrastructure Finance Company’. (June, 23 – 4 Marks)

Ans. Difference between Asset Finance Company and Infrastructure Finance Company

1. Asset Finance Company (AFC) - An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipment, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.

2. Infrastructure Finance Company (IFC)- IFC is a non- banking finance company-

   1. which deploys at least 75 per cent of its total assets in infrastructure loans,

   2. has a minimum Net Owned Funds of 300 crore,

   3. has a minimum credit rating of 'A' or equivalent, and

   4. has a CRAR of 15% with Tier I capital at 10%.

Ans. Infrastructure Finance Company

Yes, the proposed Infrastructure Finance Company is a non-banking finance company that

1. deploys at least 75% of its total assets in infrastructure loans

2. has a minimum net-owned funds of ₹ 300 crore

3. maintains a minimum credit rating of ‘A’ or equivalent

4. and has a capital to risk assets ratio (CRAR) of 15% It requires registration with the Reserve Bank of India.

Net Owned Fund Formula

1. The aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the housing finance institution after deducting therefrom -

   1. accumulated balance of loss;

   2. deferred revenue expenditure, and

   3. other intangible assets; and

2. further reduced by the amounts representing –

   1. investments of such institution in shares of-

      • its subsidiaries;

      • companies in the same group;

      • all other housing finance institutions which are companies; and

   2. the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with,-

      • subsidiaries of such company; and

      • Companies in the same group, to the extent such amount exceeds 10% of (a) above;

Ans. Calculating Net Owned Funds as per RBI Definition

• Basis for Computation of Net Owned Fund (NOF) - The NOF should be computed on the basis of last audited Balance Sheet and any capital raised after the Balance Sheet date should not be accounted for while computing NOF

• Components and Deductions for Calculating NOF - Net owned Fund will consist of paid-up equity capital, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of assets but not reserves created by revaluation of assets. From the aggregate of items will be deducted accumulated loss balance and book value of intangible assets, if any, to arrive at owned funds. Further, investments in shares of other NBFCs and in shares, debentures of subsidiaries and group companies in excess of ten percent of the owned fund mentioned above will be deducted to arrive at the Net Owned Fund.

Net owned funds

Ans. Eligibility Criteria for Obtaining Housing Finance Company Registration: Based on the provisions of section 29A of the National Housing Bank Act 1987, no Housing Finance Company shall start to carry out its operations of providing housing loans unless the same had met all the accompanying guidelines.

• Net Owned Funds: It shall be noted that the Net owned fund of a Housing Finance Company must be at least as the Reserve Bank may, by notification, specify from time to time. Therefore, an applicant needs to satisfy the requirements of net worth for obtaining Housing Finance Company Registration.

• Must be registered under the Companies Act 2013: The said Company requires to satisfy the requirements of a private limited company under the provisions of the Companies Act 2013 or the Companies Act, 1956.

• Housing Finance Activities as Object Clause: It is the last but the most important requirement of all that the objects of this type of company must mention for financing housing loans and other commercial complexes. Besides providing finance, the said company must also have the predictions of earning.

The management and operations of the company must act in good faith and in the interest of the public and other consumers. That means they need to work in the interests of the public.

Advise the company on the minimum NOF required for HFC registration and whether the company can seek an exemption from the National Housing Bank (NHB) regarding this requirement. (June, 25 – 3 Marks)

Ans. Minimum NOF Requirement for HFC Registration:

As per the National Housing Bank (NHB) regulations, an entity seeking registration as an HFC must comply with the minimum Net Owned Fund (NOF) requirement. A Housing Finance Company (HFC) is required to maintain a minimum Net Owned Fund (NOF) of ₹ 20 crore (after RBI’s Notification dated October 2021) to be eligible for registration. Since ABC Housing Finance Ltd. currently has an NOF of ₹ 18 crore, it does not fulfill the regulatory threshold of ₹ 20 crore and must infuse additional capital before applying for registration.

Seeking Exemption from NHB:

Under the existing regulatory framework, the National Housing Bank (NHB) does not grant any exemption or relaxation regarding the minimum NOF requirement.

Self help group

Ans. NABARD has defined microfinance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and urban areas provided to customers to meet their financial needs; with only qualification that (1) transactions value is small and (2) customers are poor.”

1. Need for Microfinance among Low-Income Individuals - Microfinance provides financial services to those whose income is small and unstable. These people are in need of credit facilities for several reasons, some of which are listed below:

   1. their needs are small and arise suddenly.

   2. the institutional providers of finance, namely, the banks demand collateral security which they cannot provide.

   3. most of the time, they are in urgent need of funds to meet their consumption demands, for example, to meet expenses related to education, illness, funerals, weddings for which it is difficult to obtain institution finance.

   4. For purpose of investment in income generating activities.

2. Role of Self Help Groups (SHGs) in Microfinance - Concept of Self Help Groups (SHGs) is the most exciting discovery in the context of microfinance. The Indian microfinance scene is dominated by SHGs and their linkage with banks. This has helped in empowerment of women and eradication of poverty among people with low income.

3. Options for Fund Generation under Microfinance - Microfinance provides a greater menu of options whereby the small loan can be garnered not just from the external sources but also through self-mobilization, by way of saving and sale of assets.

4. Absence of Physical Collateral Requirement - The biggest flexibility in the case of microfinance is the lack of any physical collateral, even in case of loan from the bank.

Payment Banks

Ans. Thereafter, RBI approved a Scheme by which the payment bank may be transferred to any Public Sector Undertaking (PSU).

A leading PSU in financial sector is interested to acquire the business of OTM Financial Services Limited. Before making any offer, the Management of the Bank requires the check points to be considered as other terms and condition for running the business of payment bank. Prepare a note.

The other terms and conditions for running the business of payment bank are as follows:

• To be registered as a public limited company under the Companies Act, 2013.

• Payment Banks cannot form subsidiaries.

• For the first 5 years, the promoters stake to remain at 40% at minimum.

• Foreign shareholding will be allowed in these banks as per extant FDI norms.

• The voting rights will be regulated as per provisions of The Banking Regulation Act 1949. [Voting rights are restricted at 10% for any one share holder. RBI has the discretion to raise this to 26% on merits.].

• If there is any acquisition of more than 5% shares this will require prior RBI approval.

• The majority of the bank’s board of directors should consist of independent directors, appointed according to RBI guidelines.

• The bank should be fully networked from the beginning. (Initially, the deposits will be capped at ₹ 1,00,000 per customer, but later it may be raised on the basis of performance of the bank.)

• No lending activity is permitted. Bank can accept utility bills.

• A quarter of its branches should be in unbanked rural areas.

Ans. The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households, migrant labour workforce in secured technology-driven environment.

Key issues which requires compliance by an applicant company are summarised below:

• The banks will be registered as public limited company under the Companies Act, 2013

• Payment Banks cannot form subsidiaries.

• For the first five years, the promoters stake to remain at 40% at minimum.

• Foreign shareholding will be allowed in these banks as per extant FDI norms.

• The voting rights will be regulated as per provisions of The Banking Regulation Act 1949. [Voting rights are restricted at 10% for any one share holder. RBI has the discretion to raise this to 26% on merits.].

• If there is any acquisition of more than 5% shares this will require prior RBI approval.

• The majority of the bank’s board of directors should consist of independent directors, appointed according to RBI guidelines.

• The bank should be fully networked from the beginning. l Initially, the deposits will be capped at Rs. 1,00,000 per customer, but later it may be raised on the basis of performance of the bank.

• No lending activity is permitted. Bank can accept utility bills.

• A quarter of its branches should be in unbanked rural areas.

Ans. Payment Banks

1. Concept and Objective of Payment Banks
   Payment Banks are a new model of banks conceptualized by the Reserve Bank of India (RBI) to enhance the reach of financial services in remote and underserved areas.

2. Regulatory Framework
   Payment Banks are regulated by the RBI. Guidelines for Licensing were issued on November 27, 2014, and Operating Guidelines on October 6, 2016.

3. Incorporation and Licensing
   Payment Banks must be registered as public limited companies under the Companies Act. They must apply to RBI in Form III under Section 22 of the Banking Regulation Act, 1949 to commence operations.

4. Deposit Acceptance Limits
   These banks can accept deposits up to ₹1 lakh per customer (which may be revised). They can offer interest on deposits and operate both savings and current accounts.

5. Permitted Services
   Payment Banks can offer services like ATM cards, debit cards, internet banking, mobile banking, third-party transfers, and remittance services.

6. Prohibited Activities
   These banks are not allowed to grant loans or issue credit cards.

7. Target Segment and Purpose
   The primary aim is to provide accessible financial services to small businesses, low-income households, and migrant workers using secure and technology-driven platforms.

8. Digital Onboarding
   Customers can open accounts instantly through mobile apps using Aadhaar and KYC verification.

9. Regulatory Authority
   Payment Banks are under the regulatory supervision of the Reserve Bank of India.

1. Application for license

2. Minimum capital requirement

3. Voting rights of shareholders

4. Services that can be undertaken by the bank. (Dec, 18 – 4 Marks)

Ans. Easy Finance Ltd. may enter into banking business via payment bank and criteria for the same has been discussed below:-

Compliances for a "Payment Bank"

1. Application for license : Easy Finance Ltd desiring to commence banking business is required to file an application with Reserve Bank of India in Form III under section 22 of the Banking Regulation Act, 1949 for a license to commence banking business.

2. Minimum capital requirement : Minimum capital requirement is Rs 100 crore. For the first five years, the stake of the promoter should remain at least 40%.

3. Voting rights of shareholders : Voting rights will be regulated by the Banking Regulation Act, 1949. The voting right of any shareholder is capped at 10% which can be raised to 26% by RBI. Any acquisition of more than 5% will require approval from RBI.

4. Services that can be undertaken by bank : Payment banks can provide services like ATM cards, debit cards, net banking, third party transfers and mobile banking and offer remittance services. These banks can not grant loans or issue credit cards.

Mudra Yojna

Ans. Procedure for loan

Ans. Eligibility Criteria for Mudra Loan

For obtaining loan under Pradhan Mantri Mudra Yojana, the basic criteria of age should be 18 years old. Loan under the scheme of the Pradhan Mantri Mudra Bank Loan will be available if and only if it is for commercial and business purposes and not for personal purposes. The loan can be availed in any of the following business categories:

Business Categories with maximum allowed loan sum are as under:

Shishu : Allowed loans up to Rs. 50,000

Kishore : Allowed loans up to Rs. 5 lakh

Tarun : Allowed loans upto Rs. 10 lakh

Those eligible to borrow from MUDRA bank are:

• Small manufacturing unit

• Shopkeepers

• Fruit and vegetable

• Vendors

• Artisans

Accordingly, Raman can avail the MUDRA Loan for carrying on the business of fruits and vegetable vendor.

Chit Fund

What are the restrictions imposed by the RBI on chit fund companies like Chitra Chit Fund Company? (Dec, 24 – 3 Marks) (New Syllabus)

Ans. Following are the restrictions imposed by RBI on chit fund business:

• Chit Business by Registered Company Only - Chit fund business can be conducted only by a (to be awarded registered company.

• Restriction on Family and Partnership Firms - Running of Chit business by family on overall and partnership firms are restricted.

• Mandatory State-wise Registration - Chit companies must register with the Registrar of Chit Company in every state, furnishing full particulars about their chit company.

• Maximum Bid Discount Limit - The maximum discount that could be taken in a bid was restricted to 30% of the total chit amount. However, in 2001, the same has been enhanced to 40% (in the case of a chit for ₹ 1 lakh, not more than ₹ 40,000/- can be the bid amount).

• Disclosure of Chit and Subscriber Details to RBI - Details of each and every chit must be furnished to the Reserve Bank of India along with the personal particulars of the subscribers.

• One Month’s Chit Amount to be Deposited with RBI - It is mandatory to keep one month’s chit amount of all the subscribers/members with the Reserve Bank of India till the end of a particular chit.

The aforesaid restrictions have been imposed by the RBI on chit fund businesses like Chitra Chit Fund Company.

Ans. Essential components of a Joint Venture (JV) Agreement

In India, there is no legally prescribed format of a Joint Venture Agreement. However, in actual practice, the Agreement contains the following components:

1. Description (Nature of the Agreement)

2. Parties (full description of the parties to the Agreement)

3. Recitals (states the situation as it existed prior to the execution of this Agreement; It is also used to convey the intention of the parties)

4. Operative Part (defines the rules for the future; typically consists of name and constitution of the new entity being set up, equity investments, rules relating to loans by either party, activities to be undertaken, role of each party, constitution of the Board, names of the Chairman and Managing Director and their powers, duties, etc. matters to be decided by consensus, managerial remuneration, milestones to be reached and plan of action)

5. Legal aspects:

1. Amendments of the JV Agreement

2. Duration of the JV

3. Termination

4. Dispute resolution by amicable consultation and/or Arbitration mechanism/Alternate form of Dispute Resolution.

5. Courts of particular State (in India) or Country (where the JV partner is foreign entity) that will have the jurisdiction in the event of dispute

6. Confidentiality and Non-Disclosure Agreement

7. Non-compete clause

8. Indemnification

9. Procedure for execution.

Ans. The key characteristics of Contractual Joint Venture are:

1. Common Business Intention
   Two or more parties come together with a shared goal of running a business venture.

2. Contribution of Resources
   Each party contributes inputs such as money, materials, or expertise.

3. Shared Control
   Both parties exercise a certain degree of control over the operations and management of the venture.

4. Long-Term Relationship
   The arrangement is not limited to a single transaction but is intended for a relatively longer duration.

5. No Separate Legal Entity Required
   A contractual joint venture is suitable when creating a separate legal entity is unnecessary or not feasible.

6. No Shared Ownership
   The parties do not share ownership of a separate business entity, but both exercise control over the joint operations.

7. Use in Specific Project Situations
   Ideal for narrow tasks, limited-duration activities, or when foreign ownership is restricted by local laws.

8. Contract-Based Relationship
   The joint venture is governed by a detailed contract or agreement outlining the roles, responsibilities, and rights of each party.

9. Negotiated Operational Terms
   The operations of the joint venture are based on mutual negotiations, reflected in the formal joint venture agreement.

10. Supplementary Agreements
    Additional agreements such as licensing, technical services, know-how, or franchise agreements may be annexed to the main JV agreement.

11. Example – Franchise Arrangement
    A franchisee relationship is a practical example of a contractual joint venture.

Ans. The key characteristics of equity-based joint ventures are as following:

1. There is an agreement to either create a new entity or for one of the parties to join into ownership of an existing entity

2. Shared Ownership by the parties involved

3. Shared management of the jointly owned entity

4. Shared responsibilities regarding capital investment and other financing arrangements.

5. Shared profits and losses according to the Joint Venture Agreement.

Renewable Power ltd is advised accordingly.

Ans. Every equity based joint venture gives birth to a new entity. Government of India permits certain type of entities. Different types of entities that can be formed are summed up below:

1. Company — A limited liability company is the most preferred structure for joint venture entities in India. Government also encourages investment being in the form of equity capital of a company incorporated in India. Companies in India are mainly of two types — private limited and public limited. After the coming into force of Companies Amendment Act, 2015 there is no minimum share capital prescribed either for private limited company or public limited company.

The shareholders may be foreign citizens or foreign companies. Companies Act 2013 makes it mandatory that at least one director of every company is resident of India.

Limited Liability Partnership (LLP) Firm — LLP Firm structure is regulated in India by The Limited Liability Partnership Act, 2008. Foreign investment in LLP Firms was not permitted before November 2015. Government of India has now allowed foreign investments in LLP firms subject to certain restrictions. LLP Firms are partnership firms with limited liability of partners. An LLP Firm combines the convenience of a partnership firm with the limited liability feature earlier found only in a company. An LLP Firm needs minimum two partners, It also requires minimum two Designated Partners out of which at least one should be resident of India. The two partners can also be appointed as Designated Partners. There is no requirement of minimum capital contribution to incorporate an LLP Firm.

2. Venture Capital Fund — A duly registered Foreign Venture Capital Investor is allowed to contribute up to 100% in Indian Venture Capital Undertakings /Venture Capital Funds /other companies.

3. Trusts — A foreign company is not allowed to use Trust as a form of a joint venture entity in India. Investment Vehicle — SEBI has introduced regulations for some funds like Real Estate Investments Trusts, Infrastructure Investment Funds, Alternative Investment Funds. Such funds are now permitted to receive foreign investment from a person resident outside India.

4. Other Entities — Foreign companies are not allowed to use any structures other than those mentioned above for the purpose of equity based Joint venture entities.

To sum up, it can be concluded that the most acceptable and convenient forms of equity based joint venture in India are a limited liability company and a limited liability Partnership Firm (LLP).

Ans. Following are the differences Between Equity-Based Joint Venture and Contractual Joint Venture

Ans. Restriction under FDI Policy of Government of India

Typically, any non-resident entity can set up an equity based joint venture in India. However, some entities face restrictions under FDI Policy of Government of India. The restrictions are as follows:

1. FDI Restrictions for Entities from Land Border Countries - A Citizen or entity land border from India as per FDI Policy 2020 can invest only after the approval of the Government of India. Entity invest in defense, space, atomic energy and sectors prohibited for foreign investment.

2. Investment by NRIs and Citizens of Nepal and Bhutan - NRI residents in Nepal and Bhutan as well as citizens of Nepal and Bhutan can invest on repatriation basis subject to investment coming in free foreign exchange (USD or EURO) through normal banking channels.

3. Investment by Foreign Institutional Investors (FIIs) - A Foreign Institutional Investor (FII) can invest only under the Portfolio Investment Scheme with certain limits.

4. Investment by Foreign Venture Capital Investors (FVCIs) - A Foreign Venture Capital Investor (FVCI) duly registered in India may contribute up to 100% of the capital of an Indian Company under the automatic route and may also set up a domestic asset management company to manage the fund. Such investments are subject to the relevant RBI Rules and Regulations and FDI policy including sectoral caps, etc. SEBI registered FVCIs are also allowed to invest under the FDI Scheme, as non-resident entities, in other companies.

Therefore, Global Education cannot invest in defence, space, atomic energy and sectors prohibited in India. However, it can invest in other sectors i.e. in above case, it is education sector but with prior approval of central government.

Ans. Some of the key issues which must be kept in mind while drafting and finalizing the JV agreement are as follows which are indicative and not exhaustive:

1. The business of the new company/LLP;

2. Manner and extent to which resources (financial, manpower, technology, etc) will be brought in;

3. Provisions relating to allotment and transfer of shares;

4. Constitution of the Board of Directors/Designated Partners;

5. Manner in which decision making will take place (majority vote or consensus);

6. Decision regarding the Chairman and Managing Director of the entity; their rights, duties and responsibilities;

7. Persons responsible for managing finances, marketing, production, etc.;

8. Dividend distribution policy;

9. Term of office of the nominated directors, the manner of their appointment and changes among them;

10. Valuation of the company at the time of separation;

11. Dispute resolution mechanism.

Therefore, Global Infra Ltd, has to keep in mind the above points while drafting the Joint Venture Agreement.

Ans. Essential Features of a Shareholders’ Agreement (SHA)

Some of the key issues that must be kept in mind while drafting the SHA are summarised below:

1. The business of the new company/LLP;

2. Manner and extent to which resources (financial, manpower, technology, etc) will be

brought in;

Provisions relating to allotment and transfer of shares;

3. Constitution of the Board of Directors/Designated Partners;

4. Manner in which decision making will take place (majority vote or consensus);

5. Decision regarding the Chairman and Managing Director of the entity; their rights, duties and responsibilities;

6. Persons responsible for managing finances, marketing, production, etc.;

7. Dividend distribution policy;

8. Term of office of the nominated directors, the manner of their appointment and changes

among them;

Valuation of the company at the time of separation;

10. Dispute resolution mechanism.

The above examples are indicative and are not exhaustive.

Accordingly, SPM Ltd. and BRB Ltd. are advised on the key issues that must be kept in mind while drafting the Shareholder’s Shareholders’ Agreement (SHA) and ensure that the SHA aligns with the Articles of Association (AoA) of BNPM Ltd.

Special Purpose Vehicle

Ans. Purpose of Special Purpose Vehicle

Yes, this is true that Special Purpose Vehicle (SPV) or Special Purpose Entities (SPE) are generally formed for special purpose as stated below:

Purpose of Special Purpose Vehicle

• To make highly leveraged or speculative investments - The main purpose of a Special Purpose Vehicle is to allow the parent company to make highly leveraged or speculative investments without endangering the entire company. If the SPV goes bankrupt, it will not affect the parent company.

• To raise funds from the market - SPVs are mostly formed to raise funds from the market or when Government Regulations specify creation of a separate vehicle for carrying out any specified activity.

• To implement large-scale projects and operations - SPVs are created by a parent company to implement large-scale projects and operations of an SPV are legally limited to specific assets.

• For Securitisation Purpose - SPVs are also formed by banks and financial institution for Securitisation. The total assets of banks or financial institution mainly comprise of loans and receivables along with their future cash flow to a separate entity, which may be formed for a specific purpose. The SPV is allowed to raise debt which will be backed by these receivables and their future cash flows. The difference between the incomes received from these receivables and cost of servicing that debt will be profit/earning of the SPV. By securitization through SPV the risk involved in this activity is separated from the general business of the bank.

• Indirect acquisition of assets - SPVs can be used for acquiring assets indirectly for the purpose of tax saving. In this method, the sponsor takes the assets on lease from its SPV. Expenses incurred as rent, is allowed as a deduction to sponsor for income tax purpose. On the other hand, the SPV acquires the asset through raising debt, the interest on which is a deductible expense for tax purpose. This way the same asset can be used to claim deduction by both, which results in saving of tax.

• To get easy finance and various approvals in case of SPVs by Government - Government also forms SPVs for special projects. Purpose behind formation of SPV is to get easy finance and various approvals from State and Central Government at many levels and on completion of projects, it provides easy exit route for Government.

The promoters can avail numerous benefits by incorporating a Special Purpose Vehicle. (June, 19 – 4 Marks) or

Explain any five benefits of forming a Special Purpose Vehicle (SPV). (June, 23 – 4 Marks) or

What are the main advantages of using a Special Purpose Vehicle (SPV)? (June, 25 – 3 Marks)

Ans. Benefits of Special Purpose Vehicle (SPV):

1. Ownership of Assets — An SPV allows the ownership of a single asset often by multiple parties and allows for ease of transfer between parties.

2. Minimum Statutory Requirement — Depending on the choice of jurisdiction, it is relatively cheap and easy to set up an SPV.

3. Clarity of documentation — It is easy to limit certain activities or to prohibit unauthorised transactions within the SPV documentation.

4. Tax benefits — SPVs are often used to make a transaction tax efficient by choosing the most favorable tax residence for the vehicle. SPVs are method of financial engineering schemes which have as their main goal, the avoidance of tax.

5. Legal protection — By structuring the SPV appropriately, the sponsor may limit legal liability in the event that the underlying project fails.

6. Accounting Reasons — Debts raised & losses incurred through SPV are not reflected in the balance sheet of the sponsor so it reflects a pleasant picture and enhances the debt raising ability of the sponsor.

7. Separation of Risk: The key advantage is that it helps in separating the risk and freeing up the capital. As a result, the SPV and the sponsoring company are protected against risks like insolvency, which may arise during the course of operation.

8. Securitization of assets: The SPV also allows securitization of assets without disturbing the managerial relationship. Under the arrangement, any predictable income stream generated by secured assets can be securitized.

Foreign Collaboration

Ans. The main intention/ prime goal or objective of foreign collaboration is to:

• Improve the financial growth of the collaborating entities.

• Occupy a major market share for the collaborating entities.

• Reduce the higher operating cost of a non-resident entity.

• Make an optimum and effective use of resources available in the resident entity's country.

• Generate employment in the resident entity's country.

Ans. FOREIGN COMPANIES

As per section 2(42), “Foreign company” means any company or body corporate incorporated outside India which —

1. has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

2. conducts any business activity in India in any other manner.

The following documents are required to be filed by MN Ltd., a foreign company with the concerned Registrar of Companies within 30 days of establishment of place of business in India under the provisions of the Section 380 of the Companies Act, 2013:

• Certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company and, if the instrument is not in the English language, a certified translation thereof in the English language;

• Full address of the registered or principal office of the company;

• List of the directors and secretary of the company containing such particulars as prescribed;

• Name and address or the names and addresses of one or more persons resident in India authorised to accept on behalf of the company service of process and any notices or other documents required to be served on the company;

• Full address of the office of the company in India which is deemed to be its principal place of business in India;

• Particulars of opening and closing of a place of business in India on earlier occasion or occasions;

• Declaration that none of the directors of the company or the authorised representative in India has ever been convicted or debarred from formation of companies and management in India or abroad; and

• Any other information as may be prescribed.

Ans. As per Section 2(42) of the Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which-

1. has a place of business in India whether by itself or through an agent, physically or through electronic mode; and

2. conducts any business activity in India in any other manner.

The Companies (Specification of Definitions Details) Rules, 2014 defines the term ‘electronic mode’ in the context of a foreign company under Rule 2(h). The same is also defined under Rule 2 (1)(c) of the Companies (Registration of Foreign Companies) Rules, 2014.

The definition of electronic mode encompasses all electronic based transactions, whether main server is installed in India or not, including, but not limited to- business to business and business to consumer transactions, data interchange and other digital supply transactions, offering to accept/inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India, financial settlements, web based marketing, advisory and transactional services, database services and products, supply chain management.

It further includes all online services and all related data communication services, whether conducted by e-mail, mobile devices, cloud computing, social media, data transmission or otherwise.

Hence, Melta LLC is treated as Foreign Company, even though it has no place of business in India, but it is conducting its online business through electronic mode in India.

1. has a share transfer office in Kanpur

2. Directors of the company frequently stayed in a hotel in Noida and Mumbai for looking after matters of business, the company does not have any physical office or property in India

As a practising Company Secretary, advise under the provisions of the Companies Act, 2013, whether the company will be treated as having place of business in India ? (June, 19 – 5 Marks)

Ans. As per Section 2(42) of the Companies Act, 2013, ‘Foreign Company’ means any company or body incorporated outside India which —

1. has a place of business in India whether by itself or through an agent physically or through electronic mode; and

2. conducts any business activity in India in any other manner

As per Section 386(c) of the Companies Act, 2013, for the purpose of Chapter XXII, which provides the provision for foreign companies, states that the expression “place of business” includes a share transfer or registration office.

The similar was held in the case of Tovarishestvo Manufacture Liudivg Rabenek, Re (1944). In the case, the court was of the opinion that where representative of a Company incorporated outside the country, frequently stayed in a hotel in England for looking after the matter of the business, then it would be assumed that the company had a place of business in England. In certain other cases also, it was held that mere holding of property cannot tantamount to having a place of business in India.

Accordingly, applying the above proposition in the given case, it would be advisable to the Actavis Ireland Ltd., a Pharma Firm, incorporated in Ireland, that it has —

1. A share transfer office in Kanpur which constitutes a place of business in India and

2. Its Directors frequently stayed in a hotel in Noida and Mumbai for looking after matter of business. Though the Company does not have any physical office or property in India, it would be treated as having a place of business in India.

What are the critical steps and activities involved in establishing an additional branch office in India for foreign entities like Global Tech Solutions ? (Dec, 24 – 3 Marks) (New Syllabus)

Ans. Foreign company must apply for approval from the Reserve Bank of India (RBI) under provisions of the Foreign Exchange Management Act (FEMA), 1999 to open a branch office in India.

If the foreign entity wishes to establish a branch office in more than one location in India, it must register the branch, or seek approval from the RBI for each of the location separately. The RBI approval is also necessary for each activity the branch office intends to undertake in India.

The procedures for registration require a foreign company to deposit the following set of forms:

• FNC form duly signed by authorised representative (AR);

• Information about the parent company along with its certificate of incorporation attested by a Notary Public or the Indian Embassy in the country of registration;

• The incorporation documents of the branch office to be established in India;

• Proof of registered office;

• Note on location or proposed activity;

• The latest audited balance sheet of the applicant entity;

• Board resolution to open a branch office;

• KYC of the authorized signatory; and

• Information about the local representatives of the parent company in the branch office.

Accordingly, Global Tech Solutions must adhere to the aforesaid regulatory guidelines set by the Reserve Bank of India (RBI) to establish an additional branch office in India.

Does this establishment require prior approval from the RBI ? (June, 25 – 3 Marks)

Ans. As per the provisions of the Reserve Bank of India (RBI), RBI approval is required for setting up a

Branch Office, Project Office or Liaison Office in India in the following cases:

1. The applicant is a citizen of or is registered/incorporated in Pakistan;

2. The applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau and the application is for opening a BO/LO/PO in Jammu and Kashmir, North East region and Andaman and Nicobar Islands;

3. The principal business of the applicant falls in the four sectors namely Defense, Telecom, Private Security and Information and Broadcasting;

4. The applicant is a Non-Government Organization (NGO), Non-Profit Organization, Body/Agency/Department of a foreign government.

Based on the above, TelecomGlobal Ltd., a UK-based company planning to establish a Project Office (PO) in the Andaman and Nicobar Islands for its telecom business, falls under the category where RBI approval is mandatory.

Ans. Checklist for BO/LO/PO

Ans. The process for Closure of Project office in India opened by foreign entity is described as follows: The Requests for closure of the Project Office (PO) and allowing the remittance of winding up proceeds of PO may be submitted to the designated AD Category – I bank by the BO/ LO/ PO or their nodal office, as the case may be.

The application for winding up may be submitted along with the following documents:

1. Copy of the Reserve Bank’s/AD Category-I bank’s approval for establishing the PO.

2. Auditor’s certificate:

   1. indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant and indicating the manner of disposal of assets;

   2. confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc. of the office have been either fully met or adequately provided for; and

   3. confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India.

3. Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending against the BO / LO/ PO and there is no legal impediment to the remittance.

4. A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the BO /LO in India, wherever applicable.

5. The designated AD Category - I banks have to ensure that the BO / LO/ PO had filed their respective AACs.

6. Any other document/s, specified by Reserve Bank of India / AD Category- I bank while granting approval.

1. Copy of the Reserve Bank’s/AD Category-I bank’s approval for establishing the BO/ LO/ PO.

2. Auditor’s certificate:

   1. indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant and indicating the manner of disposal of assets;

   2. confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc. of the office have been either fully met or adequately provided for; and

   3. confirming that no income accruing from sources outside India (including proceeds of

exports) has remained unrepatriated to India.

Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending against the BO / LO/ PO and there is no legal impediment to the remittance.

3. A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the BO /LO in India, wherever applicable.

4. The designated AD Category - I bank has to ensure that the BO / LO/ PO had filed their respective AACs.

5. Any other document/s, specified by the Reserve Bank of India / AD Category- I bank while granting approval.

Remittance of winding up proceeds:

A designated AD Category-I bank may allow remittance of winding-up proceeds in respect of offices of banks and insurance companies, after obtaining copies of permission of closure from the sectoral regulators along with the documents mentioned above.

Accordingly, Moonlight Inc., a USA-incorporated company, is advised.

Ans. Parameters of setting up of Project Office in India by Foreign Company

Ans. Permitted activities for a branch office in India of a person resident outside India under the Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016

1. Export/import of goods;

2. Rendering professional or consultancy services (other than practice of legal profession in any matter);

3. Carrying out research work in which the parent company is engaged;

4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company;

5. Representing the parent company in India and acting as buying/ selling agent in India;

6. Rendering services in Information Technology and development of software in India;

7. Rendering technical support to the products supplied by parent/group companies;

8. Representing a foreign airline/shipping company.

Accordingly, S&T Corp. is advised.

Ans - The process for foreign companies to register their place of business in India has been updated under the Companies (Registration of Foreign Companies) Amendment Rules, 2024 (MCA Notification No. GSR 491(E) Dated August 12 2024).

Key modifications include:

1. Centralized Filing: The term “registrar” has been replaced with “Registrar, Central Registration Centre,” indicating a shift toward centralized handling of registration documents.

2. Form FC-1 Submission: Foreign companies are now required to submit registration documents in Form FC-1 directly to the Registrar, Central Registration Centre.

3. Timeline: The 30-day deadline for filing Form FC-1 after establishing a place of business in India remains the same.

4. Supporting Documents: The requirement for an attested copy of RBI approval under FEMA (if applicable) or a declaration stating no approval is needed continues to apply.

The Companies (Registration of foreign Companies) Amendment rules 2024 Amendment Rules, 2024, initiate a qualitative shift in India’s involvement in cross-border mergers, potentially enriching the framework and benefiting companies, particularly those with subsidiaries in foreign territories.

Ans. Following are the Technological Aspects that should be considered before choosing a business location outside India:

• Intellectual property protection: create, maintain and extract IP at the location or provision thereof from on overall another location to the nation with free entry and egress.

• Power, communication, telecom - availability, quality and cost issues like infrastructure, geography, time zone, political considerations/conditions, safety of investments, economic policy and stability of the country, culture and language have a critical bearing on the strategy for globalization. Value systems and institutions are also becoming increasingly important from a long term perspective, in order to have the support of stakeholders. Ultimately, any chosen business strategy has to be executed within the parameters of legal and regulatory compliances. At the same time, it is necessary to factor in global tax costs and plan to the possible extent within the framework of law.

Ans. The Accounting and Corporate Regulatory Authority (ACRA) is the national regulator of business, public accountants and corporate service providers in Singapore.

1. Incorporation is done through Bizfile+, an electronic filing system.

The process starts with new company name application. The application for approval and reservation of a company name is to be submitted online at bizfile.gov.sg. An application fee of SGD 15 is payable for each approved company name. Once the application is submitted, the applicant can select to either pay the fee and continue with the incorporation later, or to immediately proceed to incorporation application.

Name application can be approved within a few minutes from payment if the name is available. However, it may take between 14 working days to 2 months if the application needs to be referred to another agency for approval or review. The lodger can proceed to register the business immediately after the name application is approved.

Once a name has been approved, it will be reserved for 120 days.

As of 2 June 2017, every newly incorporated business receives a free copy of its Business Profile upon the successful filling up of the incorporation forms and paying the incorporation fee.

The processing time is about 15 minutes from the time of successful submission of all documents and all information, and the registration fee payable is SGD 300. The ACRA will issue a notice of incorporation via electronic mail to the law firm or professional firm engaged for the purposes of incorporation upon the successful incorporation of the company together with the registration number of the company.

ABC Ltd is advised accordingly.

Ans. Following are the Indian entity as per the Foreign Exchange Management Act, 1999 and Rules and Regulation made thereunder:

• a Company defined under the Companies Act, 2013 or

• a Body Corporate incorporated by any law for the time being in force or

• a Limited Liability Partnership formed under the Limited Liability Partnership Act, 2008 or

• a Partnership Firm registered under the Indian Partnership Act, 1932.

Choice of business locations outside India involves consideration of many factors. (June, 19 – 4 Marks)

Ans. Geographical Location of the business

• Infrastructure (ports, airports, storage, specific storage types – such as cold-storage, secure storage)

• Access (transportation of goods, materials and personnel)

• Relevance to supply-chain: raw material sourcing, processing, despatch of finished produce

• Availability of talent pool for productions (labour), services and management

• Risks: The outbreak of COVID-19 highlights the pitfalls of global interdependency and the challenge for global governance. Epidemics and pandemics do not just come and go, they impact the economy and society as well. One should consider threats to the organization due to pandemic and other risks such as earthquake, tsunami etc.

Economic Aspects

• Ease of doing business: entering, establishing, restructuring and closing the business, visa availability

• Cost of doing business: return on investment computations vis-à-vis comparable locations

• Laws relating to labour and Quality of labour force; availability of labour force; unemployment rate; labour unions; attitudes towards work and labour turnover; motivation of workers and work force management

• Laws relating to taxation: investment allowances, subsidies, distribution of profits, repatriation of profits, withholding taxes, existence of double-taxation avoidance agreements, information sharing requirements such as FATCA, TRC, etc.

• Incentives: Local, regional, and/or state economic development incentives available to help the company lower project costs. Incentives should never drive site selection decisions, but they are important to ensure the economic feasibility of the project.

Political Aspects

• Friendly country, MFN status

• Long-standing and established legislative precedents with companies going through regulatory recourse

• Their relations with nearing countries and neighbours and your country

• Regulatory environment: Impact of local, regional, and state governmental regulations on business and project. Critical issues such as building plan approvals, environmental permits, utility connection approvals, and waste disposal permits can have a significant financial and timing impact on a company’s project.

Social Aspects

• Trade bodies, interaction between commercial entities of both nations

• Expatriate-friendliness of the nation for relocating key employee personnel.

Technological Aspects

Intellectual property protection: create, maintain and extract IP at the location or provision thereof from another location to the nation with free entry and egress.

Power, communication, telecom – availability, quality and cost issues like infrastructure, geography, time zone, political considerations/conditions, safety of investments, economic policy and stability of the country, culture and language have a critical bearing on the strategy for globalization. Value systems and institutions are also becoming increasingly important from a long term perspective, in order to have the support of stakeholders. Ultimately, any chosen business strategy has to be executed within the parameters of legal and regulatory compliances. At the same time, it is necessary to factor in global tax costs and plan to the possible extent within the framework of law.