The Nand & Jeet Khemka Foundation

A+ A A-

Establishing Business Presence Operational Matters

This chapter deals with operational aspects of establishing business presence, and lists various Acts that a social entrepreneur needs to know and comply with. There are specific laws in different States and that needs to be looked into as well. Acquiring licenses, submitting documents, getting clearances and such requirements are elaborated in this chapter.

1. Briefly describe the Legal and Regulatory Compliance Matrix in India.
2. What are the various employment-related registrations, permits and licenses required?
3. What are the tax-related registrations that must be obtained?
4. Are there any other licenses that are to be obtained?
5. Are there any other clearances/approvals required under the local/state laws?
6. Does the government provide any support schemes for a new business?
7. Are there any restrictions on purchasing/leasing immovable property in India?
8. What are the considerations to be kept in mind when obtaining insurance?
9. What are the various registers and records that are required to be maintained?
10. What are the various returns and reports that are to be filed annually?
11. What is the difference between Special and Ordinary Resolutions?
12. Is it mandatory for a Director to obtain a Director Identification number?
13. What are the statutory requirements with respect to the Directors?
14. How are the first directors appointed?
15. What is the procedure to be followed for appointment of directors thereafter?
16. How does one appoint one of the directors as a managing director?
17. Can an Indian Company have foreign directors?
18. What are the duties and responsibilities of the Directors?
19. What are the liabilities of the Director of the company?
20. Are there any requirements in relation to the frequency and mode of holding board meetings?
21. What is a statutory meeting?
22. What are the requirements with respect to shareholder meetings?
23. What are the anti-corruption laws applicable in India?
24. Which authorities are required to disclose information under the Right to Information Act, 2005?
25. Who can file an application under the Right to Information Act?
26. When can the public authority be exempted from the obligation to disclose the requested information?

  • 1. Briefly describe the Legal and Regulatory Compliance Matrix in India.

India follows the common law system. The basic framework of the Indian legal system is provided in the Constitution of India (‘Constitution’).  The Constitution confers legislative powers on the Parliament (central) and State legislative bodies.  The Constitution also demarcates the subjects on which the Centre and the State can legislate and even provides for a concurrent list of subjects on which both the Centre and State can legislate. Separate legislations have been enacted both by the Central and State Governments for regulation of different entities, for example:  

  • Companies are broadly governed by the central legislation Companies Act, which is proposed to be replaced shortly.
  • Partnerships and LLPs are governed under the Partnership Act, and The LLP Act, respectively.
  • There is no central legislation for Public Trusts, but there are some State specific legislations for public trusts. The Trusts Act governs private trusts.
  • The Societies Act, in addition to the state specific legislations, governs societies.

Besides the aforesaid legislations, there are number of legislations which regulate the management, and functioning of the entities, such as,

  • Industry specific legislations, the Insurance Act, 1938,
  • Labor protective legislations, for example Contract Labor (Regulation and Abolition) Act, 1970, the Minimum Wages Act, 1948, the Factories Act, 1948, and
  • Environmental protection laws, for example the Environment (Protection) Act, 1986, the Air (Prevention and Control of Pollution) Act, 1981, the Water (Prevention and Control of Pollution) Act, 1974 and the Public Insurance Liability Act, 1991.

Amongst the important regulators, the Securities and Exchange Board of India (‘SEBI’), Insurance Regulatory Development Authority (‘IRDA’) and the RBI  are the key regulators in India. However, in certain situations, the powers and functions of these authorities are not mutually exclusive, leaving the stakeholders responsible to more than one authority at times

Back to Top

  • 2. What are the various employment-related registrations, permits and licenses required?

The prominent labour law legislations under which registration/license is required to be obtained are:

  • Employees State Insurance Act, 1948 (“ESI Act”);
  • Employees Provident Fund and Miscellaneous Provisions Act, 1952 (“EPF Act”);
  • Contract Labour (Regulation and Abolition) Act, 1970 (“CLRA Act”);
  • Trade Union’s Act, 1926;
  • Factories Act, 1948 (“Factories Act”);
  • Equal Remuneration Act, 1976;
  • Minimum Wages Act, 1948;
  • Payment of Wages Act, 1936;
  • Maternity Benefit Act, 1961; and
  • The Shops and Establishment Acts of the relevant States.

(Please note that the aforesaid list is not exhaustive and is only illustrative)
Some of the aforementioned legislations however, do not apply to employees who earn a salary that exceeds certain threshold limit. Therefore, depending on the applicability of these legislations, registration/license may be obtained. 

Back to Top

  • 3. What are the tax-related registrations that must be obtained?

Typically, the tax-related registrations that would be required by an entity would be:

  • Income Tax registration – Permanent Account Number and Tax Deduction Account Number;
  • Value Added Tax /Central Sales Tax registration;
  • Service Tax registration;
  • Professional Tax registration; and
  • Central Excise Registration, if engaged in manufacturing activities.

Furthermore, a charitable trust or institution needs to additionally obtain registrations under Section 12A and 80G of the IT Act, if it intends to avail income tax exemptions.

Back to Top

  • 4. Are there any other licenses that are to be obtained?

Firstly, the company may also have to apply to the Directorate General of Foreign Trade for the issue of Importer Exporter Code, if it wants to import/export goods. Further, clearances under the environmental protection legislations may be required depending on the nature of the activities of the establishment. The requirements for other registrations depend on the nature and type of activity proposed to be carried on and the location of the industry.
There are several industry-specific licenses, for instance:

  • license from the Department of Telecommunications for telecom (basic and cellular) operating companies; 
  • license from the IRDA  for insurance companies;
  • registration with the SEBI for mutual funds and venture capital funds;
  • registration under Money Lenders legislations of various States, where the money lending activity is being undertaken;
  • prospecting license from the State Governments for the purpose of undertaking exploring, locating or proving mineral deposits under the Mines and Minerals (Development and Regulation) Act, 1957

(Please note that the aforesaid list is not exhaustive and depending upon the nature of activities, there may be additional or specific license requirements.)

Back to Top

  • 5. Are there any other clearances/approvals required under the local/state laws?

The entity may also require clearances from local authorities like the District Industries Centre, the Fire Brigade Department, the District Town Planner, the Municipal Authorities, and District Collector etc., with respect to owning and using land/premises or for conducting businesses. For instance, an entity undertaking certain specified trades, such as baking, casting metals, in the local limit of Greater Hyderabad Municipal Corporation is required to obtain trade licenses under Greater Hyderabad Municipal Corporation Act, 1955. In certain cases, the municipal authorities have been granted authority to implement certain responsibilities, such as the responsibility of managing solid wastes vests with the municipalities under the Municipal Solid Wastes (Management and Handling) Rules, 2000.

Back to Top

  • 6. Does the government provide any support schemes for a new business?

The Central Government has introduced several incentives and concessions for companies engaged in certain industries. For instance, under Section 80JJA of the IT Act, income from the business of collecting and processing biodegradable waste is tax exempted for a period of five (5) consecutive assessment year’s beginning with the assessment year relevant to the previous year in which such business commences. There is 100 per cent deduction of income for an undertaking deriving profits from the business of operating and maintaining a hospital in an area, (which is not excluded under Section 80-IB (11C) of the IT Act), for a period of five (5) consecutive assessment years. Undertakings engaged in generation of powers are also eligible for tax exemption under Section 80-IA of the IT Act, subject to fulfilling certain conditions prescribed under the IT Act. Under section 80-IC ,100% deduction is allowed for profits and gains from certain undertakings in North-Eastern States for 10 consecutive assessments for the profits from undertakings set up in North-Eastern States. Further, if the unit is located in Free Trade Zones (‘FTZ’), Special Economic Zone (‘SEZ’), 100 per cent Export Oriented Unit (‘EOU’), it becomes entitled to avail various indirect tax incentives. In addition, there are certain fiscal incentive schemes geared towards export promotion. 
Furthermore, several state governments also provide heavy incentives to encourage investments in their states. Apart from tax incentives, they also provide subsidies, rebates on cost of land, stamp duties etc.

Back to Top

  • 7. Are there any restrictions on purchasing/leasing immovable property in India?

There is no restriction on the purchase/lease of immovable property by a resident Indian. The transfer of immovable property is governed by the Transfer of Property Act, 1882. Furthermore, a lease deed for a period exceeding one (1) year and a sale deed will have to be registered under the Registration Act, 1908, along with payment of appropriate stamp duty, in the absence of which, the deed will not be admissible as evidence of the sale/lease. Please note that in Andhra Pradesh, leases of immovable property irrespective of the time period of lease has to be compulsorily registered. There are certain restrictions with respect to acquisition of agricultural land and these vary from state to state. For instance, a company (except a sugar factory) cannot hold agricultural land in Karnataka, but is permitted to do so in Andhra Pradesh.
Foreign companies, who have the requisite permission to open an branch or project office or place of business in India (excluding liaison offices), are allowed to acquire an immovable property in India, only where it is necessary or incidental to carrying on such activity. A declaration in the prescribed form is required to be filed with the RBI within ninety (90) days from the date of such acquisition.
A person of Indian origin or a person resident outside India, who is a citizen of India, is permitted to acquire any immovable property, other than agricultural/plantation/firm house. There are, however, no restrictions on acquiring immovable property by way of a lease in India by a person resident outside India where the lease period does not exceed five (5) years.

Back to Top

  • 8. What are the considerations to be kept in mind when obtaining insurance?

In India, obtaining insurance by employers has been made mandatory under certain statutes, such as Employee State Insurance Act, 1948,  Motor Vehicles Act, 1988 and Public Liability Insurance Act, 1991 to name a few. The Payment of Gratuity Act, 1975 also requires an employer to obtain insurance (however, the provision has not yet been notified by the appropriate Government, State of Andhra Pradesh being an exception). Besides the statutory insurances, an entrepreneur should also obtain various other insurances to protect his/her business from unforeseeable risks. Adequate insurance also helps in attracting and retaining good talents, such as the Directors’ and Officers’ Liability Insurance. The selection of the right insurance policy should not be entirely driven by the cost factor, but the extent of the coverage and protection from insurable risks should also be given their due weightage.

Back to Top

  • 9. What are the various registers and records that are required to be maintained?

Various registers and records have been prescribed under different legislations, which may be applicable to an entity. For instance, a Society registered in Andhra Pradesh under the AP Societies Act is required to maintain a register of members, register of mortgages and charges. Further, the society is required to file with the Registrar of Societies, a register showing the names, addresses and occupations of the persons, who are members of the committee.
Under the Companies Act, a company is required to maintain certain statutory registers, including, Register of Members; Register of Debentures; Register of Directors, Register of Directors Shareholdings; Register of Directors and the Companies and Firms in which Directors are interested; Register of Charges; and Register for Inter-Corporate Loans, Investment and Guarantee. The different rules promulgated under the Companies Act also prescribe maintenance of certain registers. The records to be maintained by a company under the Companies Act include the minutes of the board meetings, committee meetings and of proceedings of general meetings, books of accounts and other cost records, copies of annual returns etc.
Different registers are prescribed under various other laws, such as Factories Act, CLRA Act, Minimum Wages Act, 1948 (“MW Act”), read with the rules and regulations promulgated there under. However, establishments falling under the ambit of the Labour Laws (Exemption from Furnishing Returns and Maintaining Registers by Certain Establishments) Act, 1988 (“Exemption From Returns Act”), are exempted from maintaining registers under certain specified legislations, such as Factories Act, CLRA Act, MW Act, to name a few, provided the establishment furnishes the specified returns under the Exemption From Returns Act. It is to be noted that Exemption From Returns Act applies to small and very small establishments (employing less than 9- 10 persons).
Under the Companies Act, a company is required to maintain its books of account, together with the vouchers relevant to any entry in such books of account for a minimum period of eight (8) years immediately preceding the current year. Further, under the rules promulgated under the Companies Act, a company is required to maintain:

  • Its register of members and index of members permanently;
  • Register of debenture holders and index of debenture-holders for a period of fifteen (15) years from the redemption of debentures; and
  • Copies of all annual returns prepared under sections 159 and 160 and copies of all certificates and documents required to be annexed thereto under section 160 and 161 of the Companies Act, for a period of eight (8) years from the date of filing with the RoC. Further, under the IT Act, the time limit for issuing notices for assessment or reassessments, unless the income chargeable to tax which has escaped assessment exceeds Rs. 1,00,000 (Rupees One Lakh only), for that year, is four (4) years and is a maximum of six (6) years in case there is a failure on the part of the assesse to fully and truly disclose material facts necessary for his assessment. Hence, the books of accounts of a company need to be maintained for at least seven (7) financial years.

The indirect tax legislations also require that records such as invoices, credit registers, details of stocks etc. to be maintained.

Back to Top

  • 10. What are the various returns and reports that are to be filed annually?

Companies are faced with stringent reporting requirements, especially public companies. The companies are required to file the annual return, balance sheet, profit and loss account, the auditor and director’s report and compliance certificate, if the paid up capital is more than ‘Rs.10,00,000 (Rupees Ten Lakhs only)’, but less than â€˜Rs. 5,00,00,000 (Rupees Five Crore only)’ then a compliance certificate is also required to be filed along with the director’s report annually. In addition to this, a) return on allotment, b) a list of Directors, c) a notice of the creation of charge on its assets and of an increase in its nominal share capital, d) copies of notices for shareholder meetings and e) certain shareholder resolutions must also be filed. Listed companies are additionally required to file reports and notices with the stock exchanges on which their shares have been listed to comply with the requirements of the respective listing agreements, including their quarterly shareholding patterns. A society registered under the AP Societies Act would also be required to file annually the names and addresses of the Managing Committee and officers entrusted with the management of the society with the concerned registrar.
Irrespective of the nature of the entity, filing of an annual return is mandated under the IT Act, if the income of such entity during the previous year exceeded the maximum amount, which is not chargeable to income-tax. From July 9, 2010 onwards, a company is required to file income tax return electronically in Form No.ITR-6 with digital signature. Different returns or information are also mandated under various labour laws, such as ESI Act, Factories Act, MW Act, Payment of Bonus Act, 1965, Payment of Wages Act, 1936. Various statutes also require filing of monthly returns (ESI Act, EPF Act), quarterly (Employees Exchange (Compulsory Notification of Vacancies) Act, 1959), or half-yearly (ESI Act, Factories Act).

Back to Top

  • 11. What is the difference between Special and Ordinary Resolutions?

An Ordinary Resolution is passed when the eligible members voting in favour of the resolution exceeds votes cast against the resolution, that is a 51% majority is required to pass an ordinary resolution at a shareholders’ meeting. A Special Resolution on the other hand, requires that the votes cast in favour of the resolution are more than three times the votes cast against the resolution by eligible members, that is 76% majority is required to pass a special resolution at a shareholders’ meeting.  Under the Companies Act, certain matters mandatorily require a special resolution, such as alteration of memorandum or articles, reduction of capital, merger, amalgamation or restructuring, voluntary winding up, etc. However, private companies are exempted in relation to certain matters from passing special resolution, such as, issuance of new shares, starting a new business as mentioned under the ‘Other Objects’ clause of the Memorandum of Association, making any loan or guarantee for a sum exceeding higher than the 60 per cent of the paid-up share capital and free reserves or 100 per cent of the free reserves. There may be certain additions made to this list through the articles of association. In all other cases, an ordinary resolution will suffice.

Back to Top

  • 12. Is it mandatory for a Director to obtain a Director Identification number?

Yes, under the Companies Act, it is mandatory for a person who intends to be appointed as a director to obtain a Director Identification Number (‘DIN’). An application for the same must be made to the Ministry of Corporate Affairs.

Back to Top

  • 13. What are the statutory requirements with respect to the Directors?

A public company must have a minimum of three (3) and a private company must have a minimum of two (2) directors. Only individuals can be appointed as directors and additionally, they must have a DIN. A person can be a director of not more than 15 companies. Further, the individuals should not be disqualified under the Companies Act or the articles of the private company, from becoming a director. If required by the articles, a director may also need to hold certain qualification shares to be appointed as directors. Additional requirements as applicable for a person to be appointed as a managing director or a whole-time Director of a public company or a private company, which is a subsidiary of a public company, such as minimum and maximum age and residency criteria, is provided under Schedule XIII of the Companies Act.

Back to Top

  • 14. How are the first directors appointed?

The promoters of the company usually appoint the first directors and the names of such directors are normally mentioned in the articles of association of the company. However, if this has not been done, subscribers of the memorandum who are individuals are deemed to be the directors of the company, until the directors are duly appointed.

Back to Top

  • 15. What is the procedure to be followed for appointment of directors thereafter?

For a public company, one-third of the directors liable for retiring by rotation have to retire from office at every Annual General Meeting (‘AGM’). The vacancy may be filled by re-appointing the retiring director or appointing another person. In the latter case, a notice of at least fourteen (14) days is required to be given to the company of the person proposed to be appointed as a director, accompanied by a deposit of Rs.500 and the written consent of the person proposed. All members are required to be intimated of the candidature of the person by giving a notice of at least seven (7) days and at the general meeting, the person may be appointed as a director by passing an ordinary resolution. Appointment of an additional director or an alternate director or filling of a casual vacancy, however, does not require approval from the shareholders and the board is competent to appoint such directors during a board meeting, if so authorized by the articles of the company. In case of a private company, which is not a subsidiary of a public company, its articles of association will govern appointment of a director.

Back to Top

  • 16. How does one appoint one of the directors as a managing director?

The appointment of a Managing Director (‘MD’), of a public company or a private company, which is a subsidiary of a public company, can be done at a meeting of the board, subject to the approval of the members in a general meeting by passing of a general resolution. However, for public companies, a special resolution passed at the general meeting is required or Central Government approval if the MD is less than twenty five (25) years of age, or more than seventy (70) years of age. If the person being appointed as a MD is already the MD or a manager of any other company, including a private company, which is not a subsidiary of a public company, such appointment needs to be unanimously passed by a resolution of the board of directors. A MD of a company has to be a resident of India unless otherwise permitted by the Central Government.

Back to Top

  • 17. Can an Indian Company have foreign directors?

There is no restriction in an Indian company appointing foreign directors in its Board. However, prior approval from the Central Government would be required if the foreign national is appointed as a full-time/executive director of a public company or a private company which is a subsidiary of a public company, and which is not located in the Special Economic Zone, if his period of stay in India, prior to being appointed as a full-time director, is less than twelve (12) months. However, such prior approval is not required for private companies. No such requirement is applicable if the foreign national is appointed only as a non-executive director. It may be noted that under the applicable visa policies of India, a foreign non-executive director is required to obtain a Business Visa for the purpose of attending the board meetings in India. An executive foreign director would be required to obtain Employment Visa for executing contracts or projects in India. The Business Visa and Employment Visa have been discussed in more details in Chapter V of this Handbook.

Back to Top

  • 18. What are the duties and responsibilities of the Directors?

The Director is under a fiduciary duty towards the company and is thus, expected to act with reasonable diligence in the best interests of the company. In certain circumstances, the directors are required to extend their duty of care to the shareholders (such as misapplication of the funds or property) and other third parties (including creditors and employees). Furthermore, there are several statutory duties prescribed under the Companies Act, which inter alia include, attending Board meetings, disclosing any conflicting interest, ensuring that there is no misstatement in the prospectus, signing the copy of the annual return, holding AGMs and calling Extraordinary General Meetings (‘EGM’) and acting in accordance with the articles of association of the company. Certain environment protection statutes also impose obligations on companies (and their directors where offence has been committed with the consent of or is attributable to any neglect on his/her part) to consider and prevent environmentally harmful activities.

Back to Top

  • 19. What are the liabilities of the Director of the company?

A Director, who commits a breach, may be liable for both civil and criminal consequences, depending upon the nature of the breach. Besides the Companies Act, a number of statutes (largely with respect to economic offences), such as Negotiable Instruments Act, 1881 contain provisions in relation to offences committed by a company. Typically the directors in charge of the company are deemed to be guilty of the contravention unless they can prove that such contravention took place without his/her knowledge or that he/she has exercised all due diligence to prevent such contravention.

Back to Top

  • 20. Are there any requirements in relation to the frequency and mode of holding board meetings?

Under the Companies Act, a board meeting must be held at least once in every three (3) months and at least four meetings must be held each year. Notice of the meeting and the agenda setting out the business to be transacted at the meeting is required to be given to every director. Further, there are no restrictions relating to the venue of board meetings. The meeting needs to be conducted with the requisite quorum, which is, one-third of the total strength of the directors or two (2) directors, whichever is higher. However, when the number of directors of a company falls below the requisite quorum, a single director present could be a quorum for the purpose of increasing the number of directors required to have a quorum. The Ministry of Corporate Affairs, since May 2011, permits holding of board meetings by way of video-conferencing. Though the board may hold its meeting through a video conference, all directors are required to ensure that they physically attend at least 1 meeting in a given financial year.
Further, it is permissible to pass a board resolution by circulation, if the draft resolution together with the necessary papers has been sent individually to all the directors of the company. There are however, certain powers of the board, such as power to issue debentures, power to borrow money otherwise than on debentures, power to invest the funds of the company, filling of a casual vacancy, etc. which cannot be exercised in this manner and must be exercised/discussed and approved at a board meeting.

Back to Top

  • 21. What is a statutory meeting?

A statutory meeting is to be conducted by a public limited company within a period of not less than one (1) month and not more than six (6) months from the date at which the company is entitled to commence business.

Back to Top

  • 22. What are the requirements with respect to shareholder meetings?

An AGM is required to be conducted within eighteen months of incorporation. Thereafter, an AGM must be held every year in such a manner that not more than fifteen (15) months elapse between the two AGMs. A board meeting must be duly convened where the details of the meeting are to be approved. Further, there are provisions regarding the date and place of the AGM that must be complied with. A notice of the AGM must be in writing and should be sent at least twenty one (21) days prior to the meeting, unless a meeting by shorter notice is approved by all the shareholders.
An EGM may also be conducted either at the instance of the Board of Directors, or on the requisition of members, holding not less than 1/10th of the paid up capital of the company as at that date. As the preference shareholders have voting rights only in relation to the matters affecting them, they cannot call an EGM, unless the matters pertain to their interests.
The Ministry of Corporate Affairs allows for shareholders’ meeting to be held by way of a video-conference provided that 5 members of a public company and 2 members of a private company are personally present at the place of the meeting.

Back to Top

  • 23. What are the anti-corruption laws applicable in India?

The major anti-corruption legislation of India is the Prevention of Corruption Act, 1988 (‘POCA’), prohibits a public servant from obtaining any ‘gratification’, irrespective of its monetary value, other than his/her legal remuneration, and makes every abettor who has abetted the offence, irrespective of whether any offence is committed in consequence of that abetment, liable to punishment under the POCA.
If any person knowingly projects the money obtained from any illegal gratification as untainted property, and if (a) the total value involved in such offences is Rs. 30,00,000 (Rupees Thirty Lakhs only) or more; or (b) it has any cross-border implication, such offender also becomes liable under the Prevention of Money Laundering Act, 2002. In this regard, it is also pertinent to note that, India has been admitted as the 34th member of the multi-national Financial Action Task Force from June, 2010 and has an added responsibility of curbing the menace of money laundering.

Back to Top

  • 24. Which authorities are required to disclose information under the Right to Information Act, 2005?

Under the Right to Information Act, 2005 (‘RTI Act’), an application can be made to any public authority for the disclosure of information. A public authority has been defined under the RTI Act to mean any authority or body or institution of self- government established or constituted by or under the Constitution, by any law made by the Parliament or State Legislature or by notification by the appropriate Government. Further, by express mention, where the appropriate Government, directly or indirectly, substantially finances an NGO or owns, controls or substantially finances a body, such NGO/body has been conferred the status of a public authority.

Back to Top

  • 25. Who can file an application under the Right to Information Act?

Under the RTI Act, any person who desires to obtain any information can make a request in writing or through electronic means along with the prescribed fee to the designated public information officer of the concerned public authority, specifying the particulars of the information sought by him/her. The applicant is not required to assign any reason for requesting the information or any other personal details, other than those necessary to contact him.

Back to Top

  • 26. When can the public authority be exempted from the obligation to disclose the requested information?

Under the RTI Act, the public authority is exempted from the obligation to disclose information including where the disclosure of the information could prejudicially affect the sovereignty and integrity of India or could cause a breach of privilege of parliament or state legislature, or harm the competitive position of a third party, or where the information was made available under a fiduciary duty, or the information is personal information having no relationship to any public activity, etc. Even file notings, except those containing information falling under the exempted provisions of the RTI Act, can be disclosed to the requisitionists.

Top

 

blue green orange red

© The Nand & Jeet Khemka Foundation 2013. All rights reserved.