The Ministry of corporate affairs (MCA) has put forward notifications in certain relaxations to be made in Companies Act, 2013. This includes, ease in acquiring shareholders’ debts, flexibility for share capitals and compliance burden to be reduced.
MCA notifies useful relaxations for startup companies: Thus, entrepreneurs are looking to set up private companies instead of foraying into other legal entities like partnerships of limited liability. At the time of incorporation, thus a minimum share capital is not the preliminary requirement any more. The MCA notification has been placed before the Parliament seeking approval.
While since the year December 2000, the minimum share capital investment for a private company was estimated at one lakh, there would be no requirement for any capital at present. On May 26, it was notified that such requirement was demoralizing for the startups. They have also got over with the burden of stamp duty presently INC 7 form which is the online application for the incorporation of companies would no longer require any mention of the share capital.
Presently young entrepreneurs are also looking to incorporate in the private organizations. Thus, companies would soon be incorporated with minuscule capital as per news reported.
June 5 notification of MCA also states the private companies to be exempt from section 43 that mentioned the type of share capital to be issued. Section 47 however, notifies voting right restrictions. The startups that would be listed as the private companies can thus structure the capital that accommodates and facilitates the investment for a Venture Capital. Exemptions from such sections would permit freedom to the start ups to issue the different sets of instruments like multi-class or preference class shares and provide for the dividend rights and differential voting facilities to the shareholders, said international legal counselors. They also mentioned this to be efficient in raising funds.
As per the notification of the Ministry of corporate affairs (MCA), the private company can also obtain deposits up to 100 per cent from the members of the free reserves and paid up capital. Such a company will not issue an order circular or create any reserve of deposit repayment.
This will be much useful for the startup companies as banks are averse to funding startups in absence of any collateral. The realization will definitely help shareholders to lend the startup businesses money. Debt, if permitted beyond a mentioned limit would have been much more useful. However this venture with be a good start to the rising businesses as this should balance high leveraged companies.
Section 67 that imposes restrictions on companies for purchase of own shares or for advancing loans will not be applicable to the private companies. These companies do not meet the criteria of being a corporate shareholder, having borrowings from banks, corporate or from private institutions. They are also not default in repayment when loan is granted. Thus these restrictive criteria would stand in the way of startup companies from reaping the full benefits. Most venture capitals would invest in private companies in such cases.
The issuing of shares would be easier as the start ups start growing. The notification of MCA also makes it evident that the private company would make the rights issue with ninety per cent of the shareholders providing the consent. ESOPs resolves to a special resolution involving the presence of at least seventy five per cent shareholders.
The board will not be required to take any sort of consent regarding borrowings, investments, undertaking or sales from shareholders thus bringing in a lot of operational ease. Private companies would not be required to file with the board resolutions, the Registrar of Companies and this would cause a reduction in the compliance cost. With these relaxations in operations, regarding the raising of funds, the private companies would be would be the most preferred for entrepreneurship in India, as per the sources.
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