Authorized Capital and Paid Up Capital

One of the most important decisions while registering a new company is deciding the Capital of the Company.  For taking an informed decision regarding the capital of the company, one should understand two basic concepts relating to capital i.e.  Authorized Capital and Paid Up Capital.

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Authorized Capital and Paid Up Capital

The following points of differentiation will give us a better understanding of the two concepts-

Meaning

  • Authorized Capital is the maximum amount of Share Capital that a company is authorized to have by its constitutional documents to issue to the shareholders. It is not necessary to issue the whole amount of the Authorized Capital; part of it can remain un-issued.
  • The amount of Share Capital that is issued to the shareholder and in exchange of which money is received from the shareholders is called the Paid Up Capital of the company.

Increase of Share Capital:

  • A Company can increase its Paid Up Capital by issuing further shares. However the Paid Up Capital cannot be more than the Authorized Capital.
  • A company can increase its Authorized Capital by altering its Memorandum of Association and increasing the Capital limit stated therein.
  • In view of the above, if a Company wants to increase its Paid Up Capital to an amount which is exceeding its Authorized Capital, then first the Authorized Capital has to be increased accordingly.

Payment of Stamp duty on Share Capital:

  • Stamp Duty is paid on the Authorized Share Capital of the Company.
  • Stamp duty is payable at the time of Company Incorporation and also at the time of increase in Authorized Capital.
  • Stamp duty is not required to be paid on the increase of Paid Up Capital of the company.
  • Rate of stamp duty on Authorized Capital varies from state to state.

Compliances under Companies Act, 2013:

  • Change in the Authorized Capital of the company requires filing of e-form SH7 within 30 days from the date of change.
  • Change in Paid Up Capital of the company requires filing of e-form PAS 3 within 30 days from the date of allotment of shares.

Company Registration for NRIs and Foreign Nationals in India

Private Limited Company is considered to be the most ideal form of business for NRIs, foreign nationals and for foreign entities who want to set up business in India.

According to FEMA guidelines, Foreign Direct Investment (FDI) is not allowed in other types of businesses like Proprietorship, Partnership Firm and One Person Company. Though investment in LLP’s is allowed, but it requires prior approval of the RBI.

Subject to FDI norms, the shares of an Indian Company can be held by a NRI, Foreign National or Foreign Company. Therefore, Incorporation of a Private Limited Company is recommended for foreign nationals as it is the fastest and easiest way to enter into the Indian Market.

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Registration for NRIs and Foreign Nationals in India

In this article, we focus on the requirements, conditions and procedure for setting up a Private Limited Company in India with NRI’s and Foreign Nationals:

Minimum Directors:

For the purpose of incorporating a Private Limited Company in India, there should be atleast two directors, out of which one director should be mandatorily a “Resident of India” (ie, a person who has stayed in India for more than 182 days in the previous year).

The requirement of one Resident Indian Director has to be fulfilled throughout the existence of the Private Limited Company. Therefore, the directors can be a combination of resident and non-resident individuals

Minimum Shareholders:

A Private Limited Company can be set up with minimum two shareholders. The shareholders can be a combination of foreign nationals, non-residents individuals or other entities. There is no condition regarding the residential status for shareholders. The directors can also be the shareholders of the company.

Process of Incorporation:

– Obtain DSC (Digital Signature Certificate)

– Obtain DIN (Directors Indentfication Number)

– MoA & AoA, SPICe INC-32 Filing

– PAN/TAN Applications

The directors should apply for DSCs for signing e-forms and DIN (to be appointed as directors) before proceeding with the process of incorporation.

Documents required for obtaining DSC and DIN:

The primary documents required for obtaining the DIN and DSC are the applicants photograph, Proof of Identity and Proof of Address. The details are listed below:

For Foreign Nationals residing in their home country – Proof of Identity (passport mandatory) – Copy of Driving License, Bank Statement or any utility bill (not older than two months) – Passport size photograph All the above documents should be notarized by a Public Notary in the country of residence and be consuralized or apostilled by the competent authority in the country of residence. (depending on the country where the citizen belongs to).

For Foreign Nationals residing in another foreign country:

– Proof of Identity (passport mandatory)

– Copy of Driving License, Bank Statement or any utility bill in the country of residence (not older than two months)

– Copy of Visa

– Passport size photograph.

All the above documents should be notarized by a Public Notary in the country of residence and be consuralized by the Embassy of the Foreign National’s home country in the country of residence.

For Foreign residents residing in India:

– Resident Permit

– Copy of Passport

– Copy of Visa

– Copy of Bank Statement or any utility bill (not older than two months)

– Passport size photograph.

All the above documents should be attested by consulate of the Foreign Embassy in India.

For Non-resident Indians:

– Proof of Identity

– PAN Card

– Copy of Aadhaar Card, Driving License, Voter ID Card, if any

– Current Address proof such as Copy of Driving License, Bank Statement or any utility bill in the country of residence (not older than two months)

– Passport size photograph.

Current Address proof should be notarized by Public Notary in the country of residence and consularized by the Indian Embassy in the foreign country.

Other Required details and documents for incorporation-

– Proposed Company Name

– Any other business in which the proposed directors are interested

– Address Proof of Proposed Place of Business such as Sale Deed or Rental Agreement

– Utility Bill (Electricity, Telephone, Gas Bill etc) in the name of the premises (not older than 2 months)

– NOC for use of premises as Registered Office.

There are various other documents prepared for the purpose of Incorporation which have to be signed by the proposed directors and subscribers of the Company.

In case such documents are signed outside India by the foreign directors and subscribers, then all such documents shall be required to be notarized by a Public Notary and consularized or apostilled by the competent authority of the foreign country.

Note- Apostillation is acceptable in 105 member-countries of the Hague Convention. In other countries, consularization is to be done by the competent authority.

Understanding Employee Stock Option Plans (ESOP)

Startups have set a certain benchmark when it comes to providing employees with more than just a salary. One such policy that has caught the attention of all is ESOP or the Employee Stock Option Plans.

In the recent era, companies are adopting many employee-friendly policies in order to retain good employees who is up the ante when it comes to company performance and growth. From providing extended maternity leave and women-friendly policies to adopting flexi timings, corporate organizations are leaving no stone unturned to be the leaders and trendsetters in their field of work.

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Employee Stock Option Plans (ESOP)

ESOPs were never as popular until a few years back. Traditionally, these stock options were awarded to senior employees by companies to acknowledge their loyalty and performance. However, in the era of startups, ESOPs are being used as candy to attract good talent at affordable salaries. They are a way of keeping employees focused on company performance and share price appreciation.

ESOPs are not as simple as they seem. Most employees who are given this option believe that they have unlocked a treasure chest! Let us highlight some basic concepts behind this scheme and dispel misnomers.

What are ESOPs?

An ESOP is a qualified, defined employee benefit plan that allows employees to purchase a specific number of shares in a company at a predetermined discounted price in lieu of salary. They are in strict compliance with the Companies (Capital and Debenture) Rules, 2014. There is a vesting period (a waiting period) before they can actually exercise their right to purchase the shares. If an employee leaves the organization during this lock-in period then the ESOPs get lapsed and the benefits stand null and void.

Who is entitled to ESOPs?

As per the Companies Rules, 2014, ESOPs can be given out to the following.

– A permanent employee working in or outside India

– A whole-time or part-time director of the company

– An employee of a subsidiary in India or abroad, holding a company or an associate firm A promoter or a director holding more than 10% of the share equity of a company will not be entitled to participate in this scheme.

The trend was in fact set by software firms like Infosys and Wipro who presented these options to even their clerical staff. There are known examples of even drivers, office assistants, and personal secretaries employed by these IT companies, who turned millionaires, thanks to this scheme.

A motivating sense of ownership:

Offering stocks of the company to employees instills a sense of pride and partnership in them. It keeps them motivated to give their best to the organization thereby building a better value for the company. The participants often push their limits as the growth of the company translates to their own.

Saving on cash:

  For startups, it is a good tool to maintain liquidity. In the early days, ESOPs were smartly presented by small companies to their employees as part of their compensation package to make the overall pay look more attractive without actually affecting the company’s cash reserves.

The tax deal:

How the Indian tax department looks at ESOPs has changed in the past two decades. When ESOPs are issued, the benefits arising out of the scheme are taxed as perquisites and form a part of the employee’s salary. The perquisite value is calculated as the difference between the market value of the stock and the exercise price (ie, the price at which the Company shares are purchased by the employee through the ESOP scheme).

If the employee sells these shares subsequently, then Capital Gains Tax is applicable on the proceeds of sale of stock options. The capital gain is calculated as the difference between the sale price and the price of issue of stocks. The tax applicable also depends on the period for which ESOPs are held. Gains arising out of stocks that are held for more than 12 months from the date of issue are exempted from Capital Gains Tax.

A word of caution Both as an employer and an employee, care must be taken while handling ESOPs. As a company, you have to do the following.

– First, create an ESOP pool and allocate the number of shares that you would like to give out as part of this scheme. Then draft an ESOP scheme, get it approved by the shareholders through an ordinary/special resolution, and file with the Registrar of Companies (ROC).

– While handing over this offer to an employee, a Letter of Grant must be issued in his name, clearly specifying the number of options being granted to him, the vesting period, and other terms and conditions. Remember, when employees exercise their option, the company’s share holding gets diluted.

As an employee, take care to of the following points.

– Ask your employer for a copy of the scheme while accepting the stock options.

– Present an Exercise Application to the employer in case you wish to exercise the option.

– Look for the vesting period clause carefully. There is also an exercise price that is to be paid to the employer in order to exercise the vested options.

The options will not be converted into equity in case you do not wish to pay a price. It is safer to look at ESOPs as an added bonus and not as a part of the salary component. Even though ESOPs are a great incentive for employees, the best rewards can be reaped as part of high growth companies or big multinationals.

VenturEasy can help you with issuing ESOP to your employees. Get in touch with us at ventureasy.com

What is Statutory Audit

Audits are primarily aimed at protecting a company’s shareholders. They help investors gain confidence in a company and reflect the company’s true business health and performance.

A fast-paced business environment combined with the need to be in sync with the global standards has raised the performance bar for companies and brought in high-quality statutory requirements in the country.

The demand for accurately audited accounts has put more weight on the shoulders of a statutory auditor, usually a chartered accountant. As a result, in recent times, statutory audit has magnified in terms of complexity.

Statutory: Let’s understand the word Statutory means anything regulated by laws of the state. Statutory audit is the official inspection of a company’s accounts typically by an independent body. More elaborately put, it is the audit of books of accounts of a company, according to the requirements of a statute, to ensure fair and accurate representation of its financial records. There are many types of audits in India prescribed by different regulatory bodies. However, commonly, the term ‘statutory audit’ deals with the requirements of the Companies Act, 2013.

The right approach

Even though it happens year after year, the microanalysis and the constant questioning can take a toll on a company and its employees. No matter what the business is, or how big it is, the audit process essentially remains the same. Here is a step-by-step guide to help you understand and prepare for this complex annual routine.

  • Step 1 Plan it well: This is the most important part that most people forget. It is important to understand how well the auditor knows your company and business. A detailed study can help you deal with potential issues and problems early. The more the auditor understands your company, the easier it gets for you. So, to help the auditor know you better, you may have to provide the following details. – The corporate structure including the history, locations, and the market share of your company. – Operations comprising services, products, marketing, and processing – Financial statements, accounts, liquidity, stocks and shares, etc.
  • Step 2 Draw up a schedule: Keep a checklist of the tasks and the assignments along with names of the people who are responsible. Working around a timetable makes it easy to review paperwork and identify any misses, and decide on actions to be taken. The auditors too, usually, obtain the management representation letters beforehand.
  • Step 3 The Audit: The whole audit process works around four main areas. a) Cash b) Stocks c) Receivables d) Payables, e) Statutory requirements and records. The audit analysis may be clubbed under broad subheadings based on statutory requirements and records.
Balance sheet Profit and Loss account
Share capital Secured and unsecured loans Current liabilities and provisions Statutory payments and returns Fixed assets Inventories Investments Current assets: sundry, cash and bank balance, deposit Sales and other income Purchase and other direct expenses Manufacturing expenses Administrative expenses Charges

A good auditor will compile previous years’ (PY) working papers for reference. The team will thoroughly examine the company’s accounting systems and financial statements. The depth of inspection depends on the internal control assessment. If the control report is satisfactory, further testing is limited and if not, a more in-depth analysis is carried out. In the initial phase, auditors examine the Previous year’s copy of audited balance sheet, P&L statements, schedules, and the audit report.

  • Step 4 Verification of various registers and files:The auditors will also physically verify the stock-in trade, if any. The important files to be presented include:- Purchase bill – Sales Register – VAT payments and returns – Salary and wages – Fixed assets purchased – Trade license – Property Tax paid challans – E S I paid challan outstanding – Payment of advance tax – TDS certificates – Investment papers – Bank reconciliation statement. The audit team may put a company’s controls to test not only to see their effectiveness but also to verify that everything is actually present and not just on paper. Effectively, every asset and transaction will go through an audit trail to prove its legitimacy.
  • Step 5 Discussion and feedback: Ideally, there is a discussion at the end of each step of the audit. These informal dialogues offer an opportunity for mutual feedback regarding the analysis of the controls, the documents, and the areas that require improvement or prompt action.
  • Step 6 The Audit report: The final audit report is made after complete analysis and understanding of the financial statements and after all areas of concern have been satisfactorily addressed. The audit team then presents its report to the company’s board or audit committee.

The arrival of the annual statutory audit should not serve as a warning signal. It should rather become a part and parcel of a company’s systematic function. Scientologists use the term ‘auditing’ synonymously with counselling. A hassle-free audit can be ensured with knowledge of the process, proper organization, and preparedness.

VenturEasy can support companies with Statutory Audit through Registered Auditors on panel. Get in touch with us at [email protected]

Documents Required for Private Limited Company Registration

Once a name has been given to a company as an entity, the next step is the registration of the company. The list of documents required for private limited company registration is always a cause for confusion. This article takes a look at the necessary steps and documents required for registering a private limited company.

1) Proof of Identity – Directors

Indian Nationals

a) The proposed Directors of the company must submit a copy of their PAN Card. It is mandatory for Directors who are Indian Nationals to submit PAN during the incorporation process. The Ministry of Corporate Affairs will use the name as written on the PAN Card for everything related to the company.

b) Another document to be submitted is the Address proof. This proof should carry the same name as on the PAN Card and the most recent address of the Directors. The documents accepted as address proof include Passport, Election Card or Voter Identity Card, Ration Card, Driving License, Electricity Bill, Telephone Bill, and Aadhaar Card.

Foreign Nationals

a) This is an obvious requirement since the person is a foreign national. The Passport must also be Notarized or Apostilled in the country it was issued in. If in a different language, the passport must be translated by an official translator to English and notarized or apostilled.

b) The submitted address proof should also be notarized or apostilled. It must carry the Director’s name as mentioned in the Passport and the most current address of the Director.

This document must not be older than a year. The following documents are acceptable: Driving License, Residence Card, Bank Statement, Government issued form of identity containing address. If it is in a foreign language, it must be translated and later notarized or apostilled.

2) Proof of Identity – Shareholders

Individual Shareholders: All shareholders must submit their identity and address proofs.

Institutional Shareholders: If one of the shareholders is a Corporate Entity (Company, LLP, etc.,), then they should attach a Certificate of Incorporation of the Body Corporate along with the resolution passed by the Body Corporate to subscribe to the shares of the company under incorporation.

3) Proof of Registered Office Address

There needs to be a valid proof of the company’s registered office. These proof documents must be submitted during the company registration process or within 30 days of incorporation of the company.

a) The registered document of the title of the premises of the registered office in the name of the company; OR

b) The notarized copy of lease / rent agreement in the name of the company along with a copy of rent paid receipt not older than one month

c) The authorization from the Landlord (Name mentioned in the Electricity Bill or Gas Bill or Water Bill or Property Tax Receipt or Sale Deed) to use the premises by the company as its registered office. This is usually referred to as NOC from Landlord;

d) Proof of evidence of any utility service like telephone, gas, electricity, etc. depicting the address of the premises in the name of the owner or document, which is not older than two months.

4) No Objection Certificate

There should also be a No Objection Certificate by the landlord for having the registered office in his/her premises and this person must submit his/her identity proof and address proof.

Additionally, some documents like the INC-9, MOA, and AOA are drafted by VenturEasy. These are made specifically for the incorporation and must be signed by Company promoters and duly notarised.

VenturEasy can assist you in preparation of documents required for private limited company registration along with incorporating your company.