Corporate and incorporation Lawyers

What is Corporate and Incorporation Law?

Corporate and incorporation law is merely the law that governs the incorporation, operation, management, and closure of companies in India. The laws merely help regulate how the companies operate under a governed and regulated legal framework, of which the corporate law regulates companies that possess an ordered set of norms to guarantee public accountability, ethical behaviour, and transparency. The features of incorporation touch upon the constraints of the formal process associated with the legal process of incorporation of a company, while corporate law is broader in nature and encompasses features like mergers and acquisitions, corporate governance, compliance, and settlement of disputes.

What Laws Govern Company Incorporation in India?

India has a highly developed and comprehensive legal structure for the incorporation of companies in the form of numerous statutes listed below.

1. Companies Act, 2013

This is the major law to govern company incorporation and administration in India and makes provisions for the company enrollment procedure, the manner in which companies have to be controlled, directors' roles and responsibilities, audit responsibilities, and directors' annual compliance. The Act introduced the idea of One Person Company (OPC); introduced the idea of Corporate Social Responsibility (CSR); introduced or revised elements of governance like greater standards of transparency and accountability.

2. Limited Liability Partnership (LLP) Act, 2008

The Act regulates the incorporation and functioning of LLPs, which are hybrid forms of business that combine limited liability partnership. LLPs grant partners limited liability but allow internal business flexibility like partnerships. An LLP has to be registered with the Registrar, and partners must submit statutory annual reports.

3. Indian Contract Act, 1872

This Act regulates contracts and agreements entered into by companies, and mandates all the domains of the contracts: valid contracts, enforceability, breach and remedies. The Indian Contract Act will be applicable to any corporate deal, vendor agreements, employment contracts, MOUs.

4. SEBI Regulations

The Securities and Exchange Board of India introduced the Securities and Exchange Board of India Regulations, which will apply to listed companies and public companies only. SEBI Regulations regulate the procedure of initial public offer, insider trading, takeover codes, continuous disclosure, and compliance, and protect investors and the principles of justice in the marketplace.

5. Foreign Exchange Management Act (FEMA), 1999

FEMA regulates foreign investments and cross-border transactions as well as external commercial borrowings. Companies receiving FDI or engaging in overseas trade, among others, have to abide by FEMA to make sure that they are adopting legal and financial practices in transactions with foreign companies.

6. Insolvency and Bankruptcy Code (IBC), 2016

The IBC does provide for a time-bound resolution of the distressed companies, with a goal of maximising the interest of the creditors and the debtors. The IBC provides for corporate insolvency resolution procedures, liquidation procedures, and fast-track procedures for start-ups and small companies. This is a less transparent mechanism to exit or for revival for the founders or the companies.

7. The Income Tax Act, 1961 & GST Laws

Income Tax Act and GST laws regulate the direct and indirect taxes of a company. The Income Tax Act fixes the corporate tax rate to which a company is liable, the exemptions to which a company is liable, and what it means to be compliant. The GST Act makes provisions for indirect taxation of goods and services transactions, like provisions when considering input credits on goods or services acquired, and state-to-state transactions, so that the businesses will be taxed equally irrespective of the state they are in. 

How to Incorporate a Company in India?

In India, the Ministry of Corporate Affairs (MCA) is the government ministry with the responsibility for the incorporation of a corporation as follows:

Selection of Appropriate Business Structure: Select an appropriate business structure that best fits your requirement of capital, ownership, and liability as an entrepreneur i.e. Private Limited Company, Public Limited Company, Limited Liability Partnership, One Person Company, etc.

Reservation of Name: Reserve a unique name under the RUN (Reserve Unique Name) facility or through the SPICe+ Part A form.

Digital Signatures (Digital Signature Certificate): Obtain Digital Signatures for all proposed directors.

Director Identification Number (DIN): Obtain a DIN for all directors.

Preparation of Memorandum of Association (MOA) and the Articles of Association (AOA): The MOA explains that the business of the company is approved, and the AOA deals with the internal working and proceedings of the business.

Filing of SPICe+ (INC-32): electronic incorporation form for PAN, TAN, EPFO, ESIC, and GST.

Certificate of Incorporation: received from the Registrar of Companies for the legal existence of the company.

What Kind of Companies Can Be Formed?

There are different types of companies in India to can be formed, based on your business needs:

1. Private Limited Company (Pvt Ltd)

This is the most popular type of incorporation of choice among start-ups and small to medium-sized businesses. This accommodates 2 directors and 2 members (shareholders) with a maximum of 200 members. You can't be a Pvt Ltd company if you sell your shares to the general public and your name should contain "Private limited".

2. Public Limited Company

A public limited company can issue its shares to the public. A public limited company can raise funds through stock exchanges. 3 directors and 7 members/shareholders, besides that, a public company is not limited with regard to the maximum number of members. This type of arrangement will be suitable for larger companies which have to be financed and expanded to a great extent.

3. One Person Company (OPC)

An OPC is a setup which is especially formed for a single person who wants limited liability without partners. One person can create it, but it may have one member and one nominee. Although having complete freedom, you cannot raise venture funds or be a public company unless you meet some requirements.

4. Limited Liability Partnership (LLP)

LLPs combine the limited liability benefit of a company with the nature of flexibility of a general partnership structure. It is a very good option for professionals, i.e., accountants, consultants, or lawyers, where it has at least two partners and no restriction on the maximum partners.

5. Section 8 Company

Section 8 companies are all non-profit organisations registered for the purpose of promoting commerce, art, science, education, social welfare, or charity. Section 8 companies do not distribute profits to members, and the entire surplus should be used in promoting their objectives. Section 8 companies are registered under the Companies Act, 2013.

What are the Main Obligations of a Corporate Lawyer?

You must have a corporate lawyer for corporate governance and compliance of a company. Their work may include:

1. Advisory: Giving recommendations on the corporate structure and memorandum of association/instrument of forming (incorporation documents).
2. Documentation: Preparing and checking memorandum of associations (MOAs), articles of association (AOAs), shareholder agreements, non-disclosure agreements etc.
3. 3. Compliance: Compliance pertaining to regulatory filings with MCA, SEBI, RBI, etc.
4. Transactional Work: Due diligence, mergers and acquisitions, restructuring.
5. Dispute Resolution: Representation of the companies before tribunals, courts, and arbitration proceedings.

What are Typical Legal Challenges in Corporate Law?

Companies usually face legal problems which call for the expertise of professionals:

1. Disputes between Shareholders

Shareholder conflicts usually arise over management choices, dividends/profits, share dilution and voting rights, etc. Shareholder conflict may escalate into legal conflict where minority shareholders' rights are infringed or the articles of association of the company are breached.  Legal resolutions to conflict are usually made by negotiation, arbitration and cases in court.

2. Breach of Fiduciary Duty

Directors and principal managerial personnel are obligated to act in good faith and in the best interests of the firm.

Abuse in this context is if they make unauthorised use of their office for personal gains or act negligently or recklessly and cause loss to the company or any of its stakeholders. Such actions fall under the scope of a potential breach of fiduciary duty under the Companies Act, 2013, which leads to potential civil and criminal liability. 

3. Non-compliance with Regulatory Requirements

Failure to adhere to statutory procedure and process in terms of compliance of companies with statutory requirements like filing annual returns, board resolution, tax returns, and accounting books, can lead to severe penalties and prosecution. Failure to follow procedures as mandated by SEBI, RBI and MCA will affect, in particular, listed companies, and foreign investment companies.

4. Breaches of Employment Law

Conflicts are common with respect to employment agreements, wrongful dismissal, office harassment, or unpaid salary. Companies must adhere to legislative standards with respect to industrial disputes acts (such as the Industrial Disputes Act, the Payment of Wages Act and the POSH Act - Prevention of Sexual Harassment Act). Disregard for employee issues may lead to liability in legal cases or harm to reputation.

5. Fraud and Financial Misconduct

Frauds committed by companies, such as embezzlement of commissions, stealing company funds, insider trading, failure to prepare authentic accounts or misappropriation of company funds for personal purposes, can also draw regulation by investigative agencies such as the Serious Fraud Investigation Office (SFIO), or the Enforcement Directorate (ED). Directors may even be liable for offences under the Companies Act or the Indian Penal Code (Now Bhartiya Nyaya Sanhita, 2023); they may be prosecuted and punished for a violation.

What Is the Role of the MCA (Ministry of Corporate Affairs)?

The Ministry of Corporate Affairs (MCA) is the nodal agency that governs corporate legislation in India. The MCA operates through its website https://www.mca.gov.in/, which supports ease of compliance and transparency of business. The central role of the MCA is:

Incorporation of companies: Firms will file their incorporation documents on the MCA portal, along with their SPICe+ document, to form their new company online.

Compliance filings are made annually: All firms will file their balance sheets, board resolutions and annual returns on the MCA portal to comply with their statutory obligations under the Companies Act, 2013.

Alterations in companies: Directors, registered office, share capital, or internal structure of the company alterations will be submitted and registered under the MCA.

Public revelation of company data: The portal offers stakeholders, investors and the general public easy confirmation of the legal and financial status of any registered company. MCA is a key part of the chain of company governance, compliance monitoring and public revelation of company data.

With the digitisation of incorporation and compliance, the MCA is a key driver of ease of doing business in India.

Why is Corporate Compliance Significant?

Compliance with corporate legislation is not only a legal obligation, but also an ethical business practice in India. Non-compliance with statutory obligations can have severe consequences for companies and directors:

Penalties and Fines: Delays in submitting statutory documents or dishonest presentation of facts, attract serious fines according to the Companies Act, 2013 and other related laws.

Disqualification of Directors: Section 164 of the Companies Act defines a director of a company as any person who is appointed as a director of a company; however, it is a status of person as a corporate "officer" that might disqualify him from appointment as a director. Default or non-compliance has several effects on the director's career and governance.

Strike-Off, or Suspension of Business: Those companies that fail to perform statutory duties for a very long time might have their registration struck off by the Registrar of Companies (ROC), which is as opposed to a suspension, an action which takes a firm off the register completely.

Loss of Credibility and Investor Trust: Non-compliant companies have risks of losing credibility among the investor, creditor, and stakeholder community. Compliance damages fundraising and creating alliances, and may be able to cause loss of procuring and/or retaining a customer base.

As a way to minimise such threats, companies will need to:

• Conduct ongoing audits (accounting and compliance-based),
• Keep statutory accounts up-to-date,
• Consult on greater levels of compliance using legal advisors
• Utilise digital platforms and digital channels (such as the MCA portal) to submit on time.

With the present regulatory scenario, non-compliance is not an option, compliance is one of the fundamental building blocks of building a long-term sustainable firm with a good reputation.

What is the Role of SEBI and RBI in Corporate Regulation?

SEBI (Securities and Exchange Board of India)

SEBI is the key regulator of India's capital markets. It is tasked with ensuring that there is fairness and transparency in the markets and that investors are protected through good disclosures, insider trading regulations, and corporate governance rules. Indian public listed companies are subject to strict disclosure requirements and are required to adhere to SEBI's Listing Obligations and Disclosure Requirements (LODR) as a condition precedent to having a fair and efficient market.

RBI (Reserve Bank of India):

RBI regulates the financial intermediaries (banks and NBFCs), foreign exchange transactions, and remittances.

It plays a central role in overseeing and monitoring monetary policy and compliance with its licensing of banks and others for foreign investment transactions. Being the prudential regulator, the RBI also formulates the regulations and guidelines under FEMA for foreign direct investment and foreign institutional investment and ensures the smooth and secure transfer of cross border transactions and payments. 

Why Consult a Corporate and Incorporation Lawyer?

Legal complexities of corporate business require professional expertise for any company. A corporate attorney:

• Facilitates smooth incorporation through preparation and filing papers, acquiring licenses, and adherence to regulatory frameworks.
• Develops contracts and policies that are tailored to your unique business model so that you can gain legal protection and operational clarity.
• Discovers and mitigates legal risks with due diligence, compliance and risk analysis, and preventive measures.
• Helps with conflict resolutions and mergers with guidance on how to manage litigation, negotiate settlements or regulatory clearances during M&A or restructurings.
• Reminds you of legal reforms, industry regulatory updates, and compliance deadlines to evade penalties.

FAQs 

Is the registration of a company compulsory in India?

Yes, a registered company is a legally enforceable entity that can operate.

Can I register the company online?

Incorporation is entirely online via the MCA portal.

What is the distinction between MOA and AOA?

The MOA enumerate the goals of the company; the AOA enumerate the rules of the company for internal administration.

Is an Indian company permitted to have a director who is a foreigner?

Yes, as long as they furnish the necessary documentation and have a DIN.

How many directors can be in a Private Limited Company?

Minimum of 2 directors, maximum of 15.

Do companies need to apply separately for PAN and TAN?

PAN and TAN are automatically allotted upon incorporation on submission of the application in the SPICe+ form.

What is a company's compliance requirement on a yearly basis?

Filing of AOC-4, filing of MGT-7, holding board meeting(s) and general meeting(s), books of accounts, and audit reports.

Is LLP convertible into a Private limited company?

Yes, on conditions and subject to procedure.