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PRIVATE LIMITED COMPANY

Section 3(1) (iii) defines a private company as one which—

(a)

has a minimum paid-up share capital of Rs.1 Lakh or such higher capital as may be prescribed;and

(b)

by its Articles Association:

restricts the right of transfer of its share;

limits the number of its members to 50 which will not include:-

A.	members who are employees of the company; and
B.	members who are ex-employees of the company and were members while in such employment and who have continued to be members after ceasing to be employees;

prohibits any invitation to the public to subscribe for any shares or debentures of the company; and

Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.

This goes to say that a private company, in addition to the earlier conditions, shall have a minimum paid-up share capital of Rupees One Lakh or such higher capital as may be prescribed and its Articles shall prohibit invitation or acceptance of deposits from persons other than its members, directors or their relatives. In case of such companies, public interest is not involved.

The basic characteristics of a private company in terms of section 3(1)(iii) of the Act do not get altered just because it is a subsidiary of a public company in view of the fiction in terms of section 3(1)(iv)(c) of the Act that it is a public company. May be it is a public company in relation to other provisions of the Act but not with reference to its basic characteristics. In terms of that section, a company is a private company when its articles restrict the right of transfer of shares, restrict its membership to 50 (other than employees shareholders) and prohibits invitation to public to subscribe to its shares. Therefore, all the provisions in the articles to maintain the basic characteristics of a private company in terms of that section is restriction on the right to transfer and the same will apply even if a private company is a subsidiary of a public company.

Persons desirous of forming a company must adhere to the step by step procedure as discussed below:-

1.	Selection of type of the company.
2.	Selection of name for the proposed company.
3.	Apply for Directors Identification Number and Digital Signatures.
4.	Drafting of Memorandum and Articles of Association.
5.	Stamping, digitally signing and e-filing of various documents with the Registrar.
6.	Payment of Fees.
7.	Obtaining Certificate of Incorporation.
8.	Preparation and filing of Prospectus/Statement in lieu of Prospectus and e-Form 19/20 (in case of public companies) for obtaining the certificate of commencement of business.
9.	Obtaining Certificate of Commencement of business (in case of public limited companies).

1. Selection of the type of company

The Promoters of a company may be individual entrepreneurs or body corporate engaged in efforts to incorporate a company. They have the power of defining the object of the company and deciding various matters for the company proposed to be incorporated. It is depending upon, the purposes for which the company is to be incorporated, proposed scale of operations, capital involved, etc. The promoters can select type of the company as they wish to form themselves into viz. private company, public company, non-profit making company, etc.

2. Selection of name

Six names are required to be selected in order of preference after taking notes of numerous provisions, clarifications, circulars and rules made by the Ministry of Corporate Affairs, etc. In case key word is required, significance of each key word should be given in the e-Form 1A.

2.1 Applying for ascertaining the availability of the selected name

The promoters are required to make an application to the concerned Registrar of Companies to be submitted electronically to the Ministry of Corporate Affairs on the portal of MCA. An application shall be in e-Form 1A as prescribed by Notification No. GSR 56(E) dated 10th Feb., 2006 duly digitally signed by any one promoter or managing director or director or manager or secretary of the company along with the required fee for ascertaining whether the selected name is available for adoption by the promoters of the proposed company.

2.2 Approval of the name

After receipt of completed application in e-Form 1A, the Registrar shall intimate whether the proposed name is available for adoption or not. The confirmation of the name made available by the Registrar shall be valid for a period of six months.In case, if the promoters fail to submit all the required documents for incorporation within that period, then they are required to submit another application after payment of requisite fees.

3. Requirement for having DIN

As per proviso to section 253 of the Companies Act, 1956, inserted by the Companies (Amendment) Act, 2006, w.e.f. 1-11-2006, no company shall appoint or re-appoint any individual as director of the company unless he has been allotted a Director Identification Number under section 266B.

New section 266A has been inserted by the Companies (Amendment) Act, 2006 which provides that every individual, intending to be appointed as director of a company shall make an application for allotment of Director Identification Number (DIN) to the Central Government in the prescribed DIN Form. Therefore, before submission of e-Form 1A all the directors of the proposed company must ensure that they are having DIN and if they are not having DIN, it should be first obtained.

Specific care should be taken that a person cannot have more than one DIN, therefore, a DIN once obtained shall serve the requirement for all the companies in which he is a director or intended to be a director.

3.1 Requirement for having digital signatures

After 16th Sept., 2006, every documents prescribed under the Companies Act, 1956 is required to be filed with the digital signature of the managing director or director or manager or secretary of the Company, therefore, it is compulsorily required to obtain digital signatures of at least one director to sign the e-Form 1A and other documents. It may be noted that if the director or other persons covered are having digital signatures, their signatures may be used for the above said purpose and there is no need take new signature again.

4. Preparation of the Memorandum of Association (MOA) and Articles of Association (AOA)

Drafting of the MOA and AOA is generally a step subsequent to the availability of name made by the Registrar. It should be noted that the main objects should match with the objects shown in e-Form. These two documents are basically the charter and internal rules and regulations of the companies. Therefore, they must be drafted with utmost care with the experts advise and the other object clause should be drafted in a very broader sense.

5. Filing of documents with the Registrar

Next step for the promoters is to file the following documents with the Registrar for incorporation of the company. The following documents shall be submitted to the Registrar alongwith the adequate filing fees as applicable for registration of the company online with in a period of six months from the date of intimation of availability of name:-

Memorandum of Association, duly signed by the subscribers and witnessed, showing the number of shares against their names electronically attached in PDF file. It should also be properly stamped as per the stamp duty applicable in the State, where the registered office of the company is to be situated.Simultaneously original stamped copy of the Memorandum of Association shall be submitted with the Registrar of Companies concerned.

Articles of Association should be duly signed by the subscribers and witnessed, showing the number of shares against their names electronically. It should be properly stamped according to the authorized share capital as per the stamp duty applicable in the state, where the registered office of the company to be situated. Simultaneously original stamped copy of the Memorandum of Association shall be submitted with the Registrar of Companies concerned.

Copy of the agreement, if any, which the company proposes to, enter in to with any individual for appointment as its managing or whole-time director or manager shall be attached in the PDF file.

Declaration in e-Form 1 by an advocate or company secretary or chartered accountant engaged in whole time practice in India or by a person named in the Articles as a director, manager or secretary of the company, that all the requirements of the Companies Act, 1956 and the rules made thereunder have been complied with in respect of registration and matters precedent and incidental thereto, which may be accepted by the Registrar as sufficient evidence of such compliance. It should be carefully noted that details of all the companies in which directors are also director should be given and the names, addresses and other particulars of directors and promoters should be matched with the information provided in the DIN application Form. [ Section 33(2)] (Appendix 2).

Power of Attorney for should be furnished by all the subscribers in favour of any one subscriber or any other person authorising him to file these documents and to with the Registrar and to obtain certificate of incorporation. The power of attorney should be given on Non-Judicial stamp paper of appropriate value and shall be submitted to the Registrar. (Appendix 3).

Other agreement if any, which has been stated in the Memorandum or Articles of Association shall also be filed in the PDF file with the Registrar because in such cases the agreement will form part of this basic document.

E-Form 18 is to be filed with the Registrar electronically with the digital signatures in regard to location of the registered office. E-Form 18 shall also be certified by the company secretary or chartered accountant or cost accountant in whole –time practice. [ Section 146 (2)] (Appendix 4)

E-Form 32 is required to be filed with the Registrar electronically for filing particulars of directors. The personal details should match with the information provided in the DIN. Following additional details are also required to given in e-Form 32:

(a)	Name and CIN of all the companies in which they are directors;
(b)	Names of partnership concerns in which they are partner;
(c)	Names of proprietorship concerns in which they are proprietor;

In case if the field provided in the e-From 32 is not sufficient, an annexure may also be enclosed for the required details. As an e- Form 32 provides fields for three directors only, e-Form 32AD i.e. Addendum to e-Form 32 shall be submitted for additional appointments. E-Form 32 AD, if any is also required to be certified by the company secretary or chartered accountant or cost accountant in practice digitally before filing with the Registrar. Consent to act as director on plain paper and authorization to submit e-Form 32 from all the director should be attached with the e-Form 32.

E-form 32 is required to be digitally signed by the director or managing director or manager or secretary of the company. E-Form 32 shall be filed along with the adequate filing fee as prescribed under Schedule XIII of the Companies Act, 1956, However, no separate filing fee is required to be paid on the addendum of e-Form 32.( Appendix 5).

6. Payment of registration fees for a new company

The fees payable to the Registrar at the time of registration of a new company varies according to the authorized capital of a company proposed to be registered as per Schedule X to the Act. Fees can be calculated by the MCA portal.

7. Certificate of Incorporation (section 33 and 34)

On the satisfaction of the Registrar that the requirements specified in sections 33(1) and 33(2) have been complied with by the company, he shall retain the documents and register the MOA, AOA and other documents. Section 34(1) cast an obligation on the Registrar to issue a Certificate of Incorporation, normally within 7 days of the receipt of documents.

8. Commencement of Business

A Private limited company and a company not having share capital may commence its business activities from the date of its incorporation. However, a public Limited Company having share capital is required to take certificate of commencement of business before it can commence business.

FOREIGN COMPANIES-

Indian has amongst the most 6 liberal and transparent policies on FDI among emerging economies. FDI up to 100% is allowed under almost all activities, except a few.Press Note 7 (2008 Series) further provides that the following sectors are prohibited for FDI:

The extant policy does not permit FDI in the following cases:

(I)	gambling and betting;
(II)	lottery business;
(III)	atomic energy;
(IV)	retail trading (except single branded product retailing).

General permission of the Reserve Bank of India (RBI) is available to Indian companies to issue right/bonus shares, subject to certain conditions. Entitlement of rights shares is not automatically available to investors who have been allotted such shares as Overseas Corporate Bodies (OCBs). OCBs have been derecognized as a class of investors with effect from 16 September 2003. Such issuing companies would have to seek specific permission from RBI, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai for issue of shares on right basis to erstwhile OCBs. However bonus shares can be issued to erstwhile OCBs

Where a scheme of merger or amalgamation of two or more Indian companies has been approved by a court in India, the transferee company may issue shares to the shareholders of the transferor company resident outside India, subject to ensuring that the percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the percentage specified in the approval granted by the Central Government or the RBI.

An individual resident in India may purchase equity shares offered by a foreign company under its ESOP scheme if he/she is an employee or a director of an Indian office, branch or subsidiary of a foreign company.

In the case of the software field, a resident may purchase shares of a Joint Venture Company/Wholly owned Subsidiary (JV/WOS) if he/she is an employee or director of the Indian Promoter Company where the shares so acquired do not exceed 5% of the paid-up capital of the JV/WOS outside India. .

Entry options for foreign investor

By incorporating a company under the Companies Act 1956 through:

!. By incorporating a company under the Companies Act 1956 through:
(II)	joint ventures; or
(III)	wholly owned subsidiary.

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to any equity caps prescribed in respect of activities under the FDI policy.

2. As a foreign company through:
(I)	liaison office/representative office;
(II)	project office;
(III)	branch office.

Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office of other place of business) Regulations, 2000.

Establishments set up in Special Economic Zones, Free Trade Zone, Software Technology Park or as Export Oriented Units, are entitled to several fiscal benefits. Please note that the benefits extended to the above cease in 2010, with the exception of Special Economic Zones, which do not have a Sunset Clause.

Foreign Companies

Registration of non-resident companies

A foreign company, meaning a body corporate incorporated outside India but having a place of business in India (Companies Act, sec 591), is required, within 30 days of the establishment of a place of business in India, to deliver to the Registrar for registration, a certificate copy of the charter, statutes, memorandum articles, etc, of the company, full address of the registered or principal office of the company, names of the persons in India authorized to accept service of process on the company and the full address of the office of the company in India.

The Registrar, for the purposes of a foreign company, is the Registrar having jurisdiction over New Delhi. The documents referred to must also be delivered to the Registrar of the State in which the principal place of business of the company is situated.

Establishing a legal presence in India

In addition to a wholly owned subsidiary/joint venture in India, a foreign company may establish its presence in India by either setting up:

a	liaison office;
b	branch office;
c	branch office;

Establishing a liaison office and a branch office or project office requires prior approval of the Reserve Bank of India (“RBI”). Liaison office in India

A liaison office means a place of business to act as a channel of communication between the principal place of business or head office and the entity in India but which does not undertake any commercial/trading/industrial activity and maintains itself out of inward remittances received from abroad. A liaison office may be permitted to carry on the following activities:

a	representing in India the parent company/group companies;
b	promoting export/import from/to India;
c	promoting technical/financial collaboration between parent/group companies and companies in India; and
d	acting as a communication channel between the parent company and Indian companies.

Branch office in India

A foreign company/person resident outside India may be permitted by RBI to undertake the following activities:

(I)	import/export of goods;
(II)	rendering professional or consultancy services;
(III)	carrying out research work in which the parent company is engaged;
(IV)	promoting technical or financial collaborations between Indian companies and parent or overseas group company;
(V)	representing the parent company in India and acting as buying/selling agent in India;
(VI)	rendering services in information technology and development of software in India;
(VII)	rendering technical support to the products supplied by the parent/group companies; and foreign airline/shipping company

FOREIGN INVESMENT IN INDIA-STEPS

Q1: What are the forms in which business can be conducted by a foreign company in India?

. A foreign company planning to set up business operations in India may:

	Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.
	Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

Q2: What is the procedure for receiving Foreign Direct Investment in an Indian company?

An Indian company may receive Foreign Direct Investment under the two routes as given under :

Automatic Route :
FDI up to 100 per cent is allowed under the automatic route in almost all the activities/sector. FDI in sectors /activities to the extent permitted under the automatic route does not require any prior approval either of the Government or the Reserve Bank of India. Sectors /Activities not permitted under automatic route have to take approval from FIPB (Government Route) for investing in India.

ii)

Government Route:
FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.

Indian companies having foreign investment approval through FIPB route do not require any further clearance from the Reserve Bank of India for receiving inward remittance and for the issue of shares to the non-resident investors.

The Indian company having received FDI either under the Automatic route or the Government route is required to report in the Form FC-GPR, Annexure II, the details of the receipt of the amount of consideration for issue of equity instrument viz. shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares through an AD Category –I Bank, together with copy/( ies) of the FIRC evidencing the receipt of inward remittances along with the Know Your Customer (KYC) report on the non-resident investors from the overseas bank remitting the amount, to the Regional Office concerned of the Reserve Bank of India within 30 days from the date of receipt of inward remittances. Further, the Indian company is required to issue the equity instrument within 180 days, from the date of receipt of inward remittance or debit to NRE/FCNR (B) account in case of NRI/ PIO.

After issue of shares / fully and mandatorily convertible debentures / fully and mandatorily convertible preference shares, the Indian company has to file the required documents in Form FC-GPR , Annexure – I with bank in which funds were received. Bank will forward the FC-GPR Annexure- I and the documents to Regional office of Reserve Bank of India.

Q3:

Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?

FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

i)	Retail Trading (except single brand product retailing)
ii)	Atomic Energy
iii)	Lottery Business
iv)	Gambling and Betting
v)	Business of Chit Fund
vi)	Nidhi Company
vii)	Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003).
viii)	Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).
ix)	Trading in Transferable Development Rights (TDRs).
x)	Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

Q4:

What is the procedure to be followed after investment is made under the Automatic Route or with Government approval?

Indian companies including those which are micro and small enterprises (MSEs) can issue capital against FDI.

On receipt of share application money :
Within 30 days of receipt of share application money/amount of consideration from the non-resident investor, the Indian company is required to report to the Regional Office concerned of the Reserve Bank of India, under whose jurisdiction its Registered Office is located, through bank in which funds have been received in Form FC-GPR Annexure-II , containing the following details :

i)	Name and address of the foreign investor/s;
ii)	Date of receipt of funds and the Rupee equivalent;
iii)	Name and address of the authorized dealer through whom the funds have been received;
iv)	Details of the Government approval, if any; and
v)	KYC report on the non-resident investor from the overseas bank remitting the amount of consideration.

Upon issue of shares to non-resident investors :
Within 30 days from the date of issue of shares, a report in Form FC-GPR- PART A together with the following documents should be filed with the Regional Office concerned of the Reserve Bank of India through bank in which investment has been received.

Q5:

What are the guidelines for transfer of existing shares from non-residents to residents or residents to non-residents?

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can vest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided;

Transfer of shares/ fully and mandatorily convertible debentures from Non-Resident to Resident:
The term ‘transfer’ is defined under FEMA as including "sale, purchase, acquisition, mortgage, pledge, gift, loan or any other form of transfer of right, possession or lien” {Section 2 (ze) of FEMA, 1999}. The FEMA Regulations give specific permission covering the following forms of transfer i.e. transfer by way of sale and gift. These permissions are discussed below :

Transfer of shares/ fully and mandatorily convertible debentures by way of sale :
A person resident outside India can freely transfer shares/ fully and mandatorily convertible debenture by way of sale to a person resident in India as under :

Any person resident outside India (not being a NRI or an erstwhile OCB), can transfer by way of sale the shares/ fully and mandatorily convertible debentures to any person resident outside India or an NRI may transfer by way of sale, the shares/ fully and mandatorily convertible debentures held by him to another NRI only provided that the person to whom the shares are being transferred has obtained prior permission of the Central Government to acquire the shares if he has previous venture or tie up in India through investment in shares or debentures or a technical collaboration or a trade mark agreement or investment by whatever name called in the same field or allied field in which the Indian company whose shares are being transferred is engaged.
• Any person resident outside India may sell shares/ fully and mandatorily convertible debenture acquired in accordance with the FEMA Regulations, on a recognized Stock Exchange in India through a registered broker.
• Any person resident outside India may also sell share or convertible debenture of an Indian company to a resident subject to adherence to pricing guidelines, documentation and reporting requirements as specified from time to time.
• Shares/convertible debentures of Indian companies purchased under Portfolio Investment Scheme by NRIs and erstwhile OCBs cannot be transferred, by way of sale under private arrangement.

ii)

Transfer of shares/ fully and mandatorily convertible debentures by way of Gift :
A person resident outside India can freely transfer shares/ fully and mandatorily convertible debentures by way of gift to a person resident in India as under :

Any person resident outside India, (not being a NRI or an erstwhile OCB), can transfer by way of gift the shares/ fully and mandatorily convertible debentures to any person resident outside India

a NRI may transfer by way of gift, the shares/convertible debentures held by him to another NRI only, provided that the person to whom the shares are being transferred has obtained prior permission of the Central Government to acquire the shares if he has previous venture or tie up in India through investment in shares or debentures or a technical collaboration or a trade mark agreement or investment by whatever name called in the same field or allied field in which the Indian company whose shares are being transferred is engaged.

Any person resident outside India may transfer share/ fully and mandatorily convertible debentures to a person resident in India by way of gift.

Transfer of shares/ fully and mandatorily convertible debentures from Resident to Non-Resident:
A person resident in India may transfer by way of sale to a person resident outside India any shares/ fully and mandatorily convertible debenture of an Indian company whose activities (other than financial service sector activities1) fall under the Automatic Route of the FDI Scheme provided the parties concerned comply with the FDI sectoral limits, pricing guidelines, documentation and reporting requirements for such transfers, as may be specified by the Reserve Bank of India, from time to time.
However, the above general permission is not available where :

a)	The transfer of shares/ fully and mandatorily convertible debentures falls within the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as amended from time to time.
b)	The transfer of shares/ fully and mandatorily convertible debentures is at a price which does not adhere to the pricing guidelines specified by the Reserve Bank of India from time to time.
c)	The activity of the Indian investee company falls outside the automatic route and where FIPB approval has been obtained for the said transfer.

Q6:

Can a person resident in India transfer security by way of gift to a person resident outside India?

A person resident in India who proposes to transfer security by way of gift to a person resident outside India [other than an erstwhile OCBs] shall make an application to the Central Office of the Foreign Exchange Department, Reserve Bank of India furnishing the following information, namely:

Name and address of the transferor and the proposed transferee

Relationship between the transferor and the proposed transferee

Reasons for making the gift.

In case of Government dated securities, treasury bills and bonds, a certificate issued by a Chartered Accountant on the market value of such securities.

In case of units of domestic mutual funds and units of Money Market Mutual Funds, a certificate from the issuer on the Net Asset Value of such security.

In case of shares/ fully and mandatorily convertible debentures, a certificate from a Chartered Account on the value of such securities according to the guidelines issued by the Securities & Exchange Board of India or the Discounted Free Cash Flow Cash (DCF) method with regard to listed companies and unlisted companies, respectively.

Certificate from the Indian company concerned certifying that the proposed transfer of shares/convertible debentures, by way of gift, from resident to the non-resident shall not breach the applicable sectoral cap/ FDI limit in the company and that the proposed number of shares/convertible debentures to be held by the non-resident transferee shall not exceed 5 per cent of the paid up capital of the company.

The transfer of security by way of gift may be permitted by the Reserve bank provided :

i)	The donee is eligible to hold such security under Schedules 1, 4 and 5 to Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended from time to time.
ii)	The gift does not exceed 5 per cent of the paid up capital of the Indian company/ each series of debentures/ each mutual fund scheme
ii)	The applicable sectoral cap/ foreign direct investment limit in the Indian company is not breached
iii)	The donor and the donee are relatives as defined in section 6 of the Companies Act, 1956.
iv)	donor and the donee are relatives as defined in section 6 of the Companies Act, 1956.
v)	The value of security to be transferred by the donor together with any security transferred to any person residing outside India as gift in the calendar year does not exceed the rupee equivalent of USD 25,000.
vi)	Such other conditions as considered necessary in public interest by the Reserve Bank.

Q7:

What if the transfer of shares from resident to non-resident does not fall under the above categories?

. In case the transfer does not fit into any of the above categories, either the transferor (resident) or the transferee (non-resident) can make an application to the Reserve Bank for permission for the transfer of shares. The application has to be accompanied with the following documents:

A copy of the FIPB approval (if required).

Consent letter from transferor and transferee clearly indicating the number of shares, name of the investee company and the price at which the transfer is proposed to be effected.

The present/post transfer shareholding pattern of the Indian investee company showing the equity participation by residents and non-residents category-wise.

Copies of the Reserve Bank of India's approvals/ acknowledged copies of FC-GPR evidencing the existing holdings of the non-residents.

If the sellers/ transferors are NRIs / OCBs, the copies of the Reserve Bank of India's approvals evidencing the shares held by them on repatriation / non-repatriation basis.

Open Offer document filed with the SEBI if the acquisition of shares by non-resident is under SEBI Takeover Regulations.

Fair Valuation Certificate from the SEBI registered Category-I-Merchant Banker or Chartered Accountant indicating the value of shares as per the following guidelines :

where shares of an Indian company are listed on a recognized stock exchange in India, the price of shares transferred by way of sale shall not be less than the price at which a preferential allotment of shares can be made under the SEBI Guidelines, as applicable, provided that the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares.

where the shares of an Indian company are not listed on a recognized stock exchange in India, the transfer of shares shall be at a price not less than the fair value to be determined by a SEBI registered Category – I - Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow (DCF) method.

Q8:

What are the reporting obligations in case of transfer of shares between resident and non-resident ?

transaction should be reported by submission of form FC-TRS to the AD Category – I bank, within 60 days from the date of receipt/remittance of the amount of consideration. The onus of submission of the form FC-TRS within the given timeframe would be on the resident in India, the transferor or transferee, as the case may be.

Q9:

What is the method of payment and remittance/credit of sale proceeds in case of transfer of shares between resident and non-resident ?

The sale consideration in respect of the shares purchased by a person resident outside India shall be remitted to India through normal banking channels. In case the buyer is a Foreign Institutional Investor (FII), payment should be made by debit to its Special Non-Resident Rupee Account. In case the buyer is a NRI, the payment may be made by way of debit to his NRE/FCNR (B) accounts. However, if the shares are acquired on non-repatriation basis by NRI, the consideration shall be remitted to India through normal banking channel or paid out of funds held in NRE/FCNR (B)/NRO accounts.

The sale proceeds of shares (net of taxes) sold by a person resident outside India) may be remitted outside India. In case of FII the sale proceeds may be credited to its special Non-Resident Rupee Account. In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/FCNR(B) accounts and if the shares sold were held on non repatriation basis, the sale proceeds may be credited to his NRO account subject to payment of taxes. The sale proceeds of shares (net of taxes) sold by an erstwhile OCB may be remitted outside India directly if the shares were held on repatriation basis and if the shares sold were held on non-repatriation basis, the sale proceeds may be credited to its NRO (Current) Account subject to payment of taxes, except in the case of erstwhile OCBs whose accounts have been blocked by Reserve Bank.

Q10:

Are the investments and profits earned in India repatriable?

All foreign investments are freely repatriable (net of applicable taxes) except in cases where:

i)	the foreign investment is in a sector like Construction and Development Projects and Defence wherein the foreign investment is subject to a lock-in-period; and
ii)	NRIs choose to invest specifically under non-repatriable schemes.

Further, dividends (net of applicable taxes) declared on foreign investments can be remitted freely through an Authorized Dealer bank.

Q11:

What are the guidelines on issue and valuation of shares in case of existing companies?

A. The price of shares issued to persons resident outside India under the FDI Scheme shall not be less than :

The price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company is listed on any recognized stock exchange in India;

the price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment.

The price of shares transferred from resident to a non-resident and vice versa should be determined as under:

Transfer of shares from a resident to a non-resident:
a) In case of listed shares, at a price which is not less than the price at which a preferential allotment of shares would be made under SEBI guidelines.

b) In case of unlisted shares at a price which is not less than the fair value as per the Discount Free Cash Flow (DCF) Method to be determined by a SEBI registered Category-I- Merchant Banker/Chartered Accountant.
ii) Transfer of shares from a non-resident to a resident - The price should not be more than the minimum price at which the transfer of shares would have been made from a resident to a non-resident.
In any case, the price per share arrived at as per the above method should be certified by a SEBI registered Category-I-Merchant Banker / Chartered Accountant.

Q12: Can a foreign investor invest in Preference Shares? What are the regulations applicable in case of such investments?

Yes. Foreign investment through preference shares is treated as foreign direct investment. However, the preference shares should be fully and mandatorily convertible into equity shares within a specified time to be reckoned as part of share capital under FDI. Investment in other forms of preference shares requires to comply with the ECB norms.

Q13: Can shares be issued against Lumpsum Fee, Royalty and ECB?

An Indian company eligible to issue shares under the FDI policy and subject to pricing guidelines as specified by the Reserve Bank from time to time, may issue shares to a person resident outside India :

	being a provider of technology / technical know-how, against Royalty / Lumpsum fees due for payment; and
	against External Commercial Borrowing (ECB) (other than import dues deemed as ECB or Trade Credit as per RBI Guidelines).
	Provided, that the foreign equity in the company, after the conversion of royalty / lumpsum fee / ECB into equity, is within the sectoral cap notified, if any.

Q14: What are the other modes of issues of shares for which general permission is available under RBI Notification No. FEMA 20 dated May 3, 2000?

Issue of shares under ESOP by Indian companies to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India directly or through a Trust up to 5% of the paid up capital of the company.

	Issue and acquisition of shares by non-residents after merger or de-merger or amalgamation of Indian companies.
	Issue shares or preference shares or convertible debentures on rights basis by an Indian company to a person resident outside India.

Q15: Can a foreign investor invest in shares issued by an unlisted company in India?

Yes. As per the regulations/guidelines issued by the Reserve Bank of India/Government of India, investment can be made in shares issued by an unlisted Indian company.

Q16: Can a foreigner set up a partnership/ proprietorship concern in India?

Only NRIs/PIOs are allowed to set up partnership/proprietorship concerns in India on non-repatriation basis.

FOREIGN DIRECT INVESTMENT IN INDIA-FAQS

Q1: Who can invest in India?

A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy. A citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Policy, only after approval from Government of India.

Q2: Whether residents of Nepal and Bhutan can invest in India?

NRI’s resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

Q3:

Types of Instruments that can be issued by Indian companies to foreigners?

Indian companies can issue equity shares, fully, compulsorily and mandatorily convertible debentures and fully, compulsorily and mandatorily convertible preference shares subject to pricing guidelines/valuation norms prescribed under FEMA Regulations. The pricing of the capital instruments should be decided/determined upfront at the time of issue of the instruments.

Other types of Preference shares/Debentures i.e. non-convertible, optionally convertible or partially convertible for issue of which funds have been received on or after May 1, 2007 are considered as debt. Accordingly all norms applicable for ECBs relating to eligible borrowers, recognized lenders, amount and maturity, end-use stipulations, etc. shall apply.

Q4:

Into which Indian Entities FDI can be made?

Indian companies including those which are micro and small enterprises (MSEs) can issue capital against FDI.

Q5:

Whether FDI in Partnership Firm / Proprietary Concern is permitted?

a)	Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers / Authorized banks.
b)	The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business or print media sector.
c)	Amount invested shall not be eligible for repatriation outside India.
d)	Investments with repatriation benefits: NRIs/PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns/partnership firms with repatriation benefits. The application will be decided in consultation with the Government of India.

Q6:

What are conditions on issue/Transfer of shares by Indian entities to foreigners?

The capital instruments should be issued within 180 days from the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor. In case, the capital instruments are not issued within 180 days from the date of receipt of the inward remittance or date of debit to the NRE/FCNR (B) account, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be. Non-compliance with the above provision would be reckoned as a contravention under FEMA and would attract penal provisions. In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the RBI, on the merits of the case.

Q7:

What would be issue price of shares issued to non-residents?

Price of shares issued to persons resident outside India under the FDI Policy, shall not be less
than -

a)	The price worked out in accordance with the SEBI guidelines, as applicable, where the shares of the company is listed on any recognised stock exchange in India;
b)	The fair valuation of shares done by a SEBI registered Category - I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method, where the shares of the company is not listed on any recognised stock exchange in India ; and
c)	The price as applicable to transfer of shares from resident to non-resident as per the pricing guidelines laid down by the Reserve Bank from time to time, where the issue of shares is on preferential allotment.

Q8:

What are the Entry Routes for foreign investment in India?

Investments can be made by non-residents in the equity shares/fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company, through two routes; the Automatic Route and the Government Route. Under the Automatic Route, the non-resident investor or the Indian company does not require any approval from the RBI or Government of India for the investment. Under the Government Route, prior approval of the Government of India through Foreign Investment Promotion Board (FIPB) is required. Proposals for foreign investment under Government route as laid down in the FDI policy from time to time, are considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic Affairs (DEA), Ministry of Finance.

Q9:

What are the Guidelines for consideration of FDI proposals under Approval Route by FIPB?

The following guidelines are laid down to enable the FIPB to consider the proposals for FDI and formulate its recommendations.

All applications should be put up before the FIPB by its Secretariat within 15 days and it should be ensured that comments of the administrative ministries are placed before the Board either prior to/or in the meeting of the Board.

Proposals should be considered by the Board keeping in view the time frame of thirty (30) days for communicating Government decision.

In cases in which either the proposal is not cleared or further information is required in order to obviate delays presentation by applicant in the meeting of the FIPB should be resorted to.

While considering cases and making recommendations, FIPB should keep in mind the sectoral requirements and the sectoral policies vis-à-vis the proposal (s).

FIPB would consider each proposal in its totality.

The Board should examine the following while considering proposals submitted to it for consideration.

While considering cases and making recommendations, FIPB should keep in mind the sectoral requirements and the sectoral policies vis-à-vis the proposal (s).

•	Whether the items of activity involve industrial licence or not and if so the considerations for grant of industrial licence must be gone into;
•	Whether the proposal involves any export projection and if so the items of export and the projected destinations.
•	Whether the proposal has any strategic or defence related considerations.

Q10:

What are the approval levels for cases to be approved under Government Route?

The following approval levels shall operate for proposals involving FDI under the Government route i.e. requiring prior Government approval:

a)	The Minister of Finance who is in-charge of FIPB would consider the recommendations of FIPB on proposals with total foreign equity inflow of and below Rs.1200 crore.
b)	The recommendations of FIPB on proposals with total foreign equity inflow of more than Rs. 1200 crore would be placed for consideration of CCEA. The FIPB Secretariat in DEA will process the recommendations of FIPB to obtain the approval of Minister of Finance and CCEA.
c)	The CCEA would also consider the proposals which may be referred to it by the FIPB/ the minister of Finance (in-charge of FIPB).

Q11:

Which are sectors prohibited for foreign investment in India?

FDI is prohibited in the following activities/sectors:

Retail Trading (except single brand product retailing)

Lottery Business including Government /private lottery, online lotteries,etc.

Gambling and Betting including casinos etc.

Business of chit fund

Nidhi Company

Trading in Transferable Development Rights (TDRs)

Real Estate Business or Construction of Farm Houses

Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes.

•

Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).Besides foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for Lottery Business and Gambling and Betting activities.

BRANCH OFFICE /LIASION OFFICE IN INDIA-PROCEDURES

Q1:How can foreign companies open Liaison /Branch office in India?

With effect from February 1, 2010, foreign companies/entities desirous of setting up of Liaison Office / Branch Office (LO/BO) are required to submit their application in Form FNC along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai through an Authorized Dealer bank.

The applications from such entities in Form FNC will be considered by the Reserve Bank under two routes:

Reserve Bank Route

Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route.

Government Route

Where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route. Applications from entities falling under this category and those from Non - Government Organizations / Non - Profit Organizations / Government Bodies / Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

The following additional criteria are also considered by the Reserve Bank while sanctioning Liaison/Branch Offices of foreign entities :

Track Record

For Branch Office	a profit making track record during the immediately preceding five financial years in the home country.
For Liaison Office	a profit making track record during the immediately preceding three financial years in the home country.

Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name].

For Branch Office	not less than USD 100,000 or its equivalent.
For Liaison Office	not less than USD 50,000 or its equivalent.

Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Authorized Dealer in whose jurisdiction the office is set up. The Branch / Liaison offices established with the Reserve Bank's approval will be allotted a Unique Identification Number (UIN). The BOs / LOs shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India.

Liaison/Branch offices have to file an Annual Activity Certificate (AACs) from the Auditors, as at end of March 31, along with the audited Balance Sheet on or before September 30 of that year, stating that the Liaison Office has undertaken only those activities permitted by Reserve Bank of India. In case the annual accounts of the LO/ BO are finalized with reference to a date other than March 31, the AAC along with the audited Balance Sheet may be submitted within six months from the due date of the Balance Sheet.

Q2: What are the permitted activities of Liaison Office/ Representative Office?

A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. A Liaison Office can undertake the following activities in India :

i)	Representing in India the parent company / group compa¬nies.
ii)	Promoting export / import from / to India.
iii)	Promoting technical/financial collaborations be¬tween parent/group companies and companies in India.
iv)	Acting as a communication channel between the parent company and Indian companies.

Q3:

Can Foreign Insurance Companies / Banks set up Liaison Office in India?

Foreign Insurance companies can establish Liaison Offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA). Similarly, foreign banks can establish Liaison Offices in India only after obtaining approval from the Department of Banking Operations and Development (DBOD), Reserve Bank of India.

Q4:

What is the procedure for setting up Branch office?

Permission for setting up branch offices is granted by the Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai. Reserve Bank of India considers the track record of the applicant company, existing trade relations with India, the activity of the company proposing to set up office in India as well as the financial position of the company while scrutinizing the application. The application in Form FNC should be submitted to the Reserve Bank through the Authorized Dealer bank.

Q5:

What are the permitted activities of Branch Office?

Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to represent the parent / group companies and undertake the following activities in India :

i)	Export / Import of goods.
ii)	Rendering professional or consultancy services.
iii)	Carrying out research work, in areas in which the parent company is engaged.
iv)	Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
v)	Representing the parent company in India and acting as buying / selling agent in India.
vi)	Rendering services in information technology and development of software in India.
vii)	Rendering technical support to the products supplied by parent/group companies.
viii)	Foreign airline / shipping company.

Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.

Note :	Retail trading activities of any nature is not allowed for a Branch Office in India.
	A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.
	Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.

Q6:

Whether Branch Offices are permitted to remit profit outside India?

Branch Offices are permitted to remit outside India profit of the branch net of applicable Indian taxes, on production of the following documents to the satisfaction of the Authorized Dealer through whom the remittance is effected :

A Certified copy of the audited Balance Sheet and Profit and Loss account for the relevant year;

A Chartered Accountant’s certificate certifying -

i)	The manner of arriving at the remittable profit
ii)	That the entire remittable profit has been earned by undertaking the permitted activities
iii)	That the profit does not include any profit on revaluation of the assets of the branch.

Q7:

What are the documents to be submitted to the AD bank at the time of closure of the Liaison/ Branch Office?

At the time of winding up of Branch/Liaison offices, the company has to approach the designated AD Category - I bank with the following documents:

Copy of the Reserve Bank's permission/ approval from the sectoral regulator(s) for establishing the BO / LO.

Auditor’s certificate - i) 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;

i)	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
ii)	confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.
iii)	That the profit does not include any profit on revaluation of the assets of the branch.

No-objection / Tax Clearance Certificate from Income-Tax authority for the remittance/s.

Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.

) A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 1956, in case of winding up of the Office in India.

Any other document/s, specified by the Reserve Bank while granting approval.

Q8:

What is the procedure for setting up Project Office?

The Reserve Bank has granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract from an Indian company to execute a project in India, and i. the project is funded directly by inward remittance from abroad; or ii. the project is funded by a bilateral or multilateral International Financing Agency; or iii. the project has been cleared by an appropriate authority; or iv. a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project. However, if the above criteria are not met or if the parent entity is established in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, such applications have to be forwarded to the Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai for approval.

Q9:

. What are the bank accounts permitted to a Project Office?

AD Category – I banks can open non-interest bearing Foreign Currency Account for Project Offices in India subject to the following:

	The Project Office has been established in India, with the general / specific permission of Reserve Bank, having the requisite approval from the concerned Project Sanctioning Authority concerned.
	The contract, under which the project has been sanctioned, specifically provides for payment in foreign currency.
	Each Project Office can open two Foreign Currency Accounts, usually one denominated in USD and other in home currency, provided both are maintained with the same AD category–I bank.
	The permissible debits to the account shall be payment of project related expenditure and credits shall be foreign currency receipts from the Project Sanctioning Authority, and remittances from parent/ group company abroad or bilateral / multilateral international financing agency.
	The responsibility of ensuring that only the approved debits and credits are allowed in the Foreign Currency Account shall rest solely with the branch concerned of the AD. Further, the Accounts shall be subject to 100 per cent scrutiny by the Concurrent Auditor of the respective AD banks.
	The Foreign Currency accounts have to be closed at the completion of the Project.

Q10:

What are the general conditions applicable to Liaison / Branch / Project Office of foreign entities in India?

The general conditions applicable to Liaison/Branch/Project Office of foreign entities in India are as under;

i)	Without prior permission of the Reserve Bank, no person being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China can establish in India, a Branch or a Liaison Office or a Project Office or any other place of business.
ii)	Partnership / Proprietary concerns set up abroad are not allowed to establish Branch /Liaison/Project Offices in India.
iii)	Entities from Nepal are allowed to establish only Liaison Offices in India.
iv)	Branch/Project Offices of a foreign entity, excluding a Liaison Office are permitted to acquire property for their own use and to carry out permitted/incidental activities but not for leasing or renting out the property. However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Bhutan or China are not allowed to acquire immovable property in India even for a Branch Office. These entities are allowed to lease such property for a period not exceeding five years.
v)	Branch / Liaison / Project Offices are allowed to open non-interest bearing INR current accounts in India. Such Offices are required to approach their Authorized Dealers for opening the accounts.
vi)	Transfer of assets of Liaison / Branch Office to subsidiaries or other Liaison/Branch Offices is allowed with specific approval of the Central Office of the Reserve Bank.
vii)	Authorized Dealers can allow term deposit account for a period not exceeding 6 months in favor of a branch/office of a person resident outside India provided the bank is satisfied that the term deposit is out of temporary surplus funds and the branch / office furnishes an undertaking that the maturity proceeds of the term deposit will be utilized for their business in India within 3 months of maturity. However, such facility may not be extended to shipping/airline companies.

BOARD MEETINGS-PROCEEDURES,STEPS,RULES-

1. Overview

A meeting of the Board of directors is an important forum in the working of companies. Several statutory prescriptions are incorporated in the Companies Act, 1956, to ensure that the actions approved by the Board are in the interest of the company and reflect the fiduciary nature of the duties of directors.

2. Periodicity of the Board Meetings

Section 285 of the Act provides that every company, private or public, shall hold at least one meeting of the Board in a period of three months and four meetings in a year. But a company registered under section 25 of the Companies Act, has privilege that the Board or the Governing Body may meet at least once in six months.

3. Interval between two Board Meetings

The Expression ‘every three months’occuring in section 285 naturally means three months taken together. Provisions of section 285 will be fulfilled if the Board of directors meet on the first of January, or the 31st March or any date in between. Next three months should naturally comprise April to June. It is open to the Board of directors to meet on any date during three months from April to June. Similarly, the Board may, at least, meet on a particular date during July to September and so on. In section 285 there is no scope for making backward calculation.

4. Notice of Board Meeting

Section 286 of the Companies Act, stipulates that a meeting of the Board of directors shall be held after giving notice. The notice shall be given in writing to every director in India and at his usual address in India. Notice shall be given reasonably in advance say for seven days before the date of the meeting. Although it is not incumbent to give notice to a foreign director at the address outside India. However, sound corporate practice requires that notice to be sent to all directors, whether in India or outside.

Day, Date, Time and Place for Holding Board Meetings

5. Day of holding meeting

Board meetings are normally held during business hours and on a day, which is not a public holiday. However, a Board meeting may validly be held on public holiday. Department has clarified vide Letter No. 8/11(285)/63-PR, dated 2-5-1963 that it would not raise any objection if an original Board meeting is held on a public holiday for the convenience of the directors although it considers that an original Board meeting should normally be held only on a working day.

6. Time of holding Board meetings

Board meetings can be held during business hours or outside business hours. There is no restriction on that matter under the Act.

7. Place for holding Board Meeting

Board meetings can be held at any place whether it be a company’s registered office or head office or any other premises and whether or not it is within the same city, town, village or state in which the registered office of the company is situated. Board meeting can also be held at places other than these places including abroad.

8. Quorum of the Board Meeting

In terms of the provisions of section 287 of the Companies Act, 1956, the quorum for a Board meeting shall be one-third of its total strength of directors who are in office or two directors. Whichever is higher. Any fraction arising in counting of one-third will be rounded off as one. For example, in a Board having seven directors, the quorum shall be three directors. It is also provided that where the interested directors exceed or equal two-thirds of the total strength, the number of remaining disinterested directors present at the meeting being not less than two shall be the quorum of that business of the meeting. This section also applies to a private company.Section 287(2) lays down only minimum number to from a quorum: the company by its articles can provide for a higher number as quorum.

9. Time, day and place for holding adjourned Board Meetings

As per provisions of section 288 (1), if a Board meeting is adjourned for want of quorum then the adjourned meeting shall be held at the same day in the next week at the same time and place or if the day is a public holiday till the next succeeding day which is not a public holiday at the same time and place. Therefore, an adjourned meeting should be held only on a working day.

10. Directors cannot appoint a Proxy for Board Meetings

The Companies Act provide that it is necessary for the directors to attend the Board meetings personally once in every quarter. Proxies are not allowed at Board meetings and directors are not allowed to appoint their representatives to attend the Board meetings and cast vote on their behalf.

11. Payment of observer for the Board Meetings

The directors are allowed to receive sitting fees for each meeting of the Board or a committee thereof attended by them. The sitting fees payable by public companies and private companies subsidiary to public companies to their directors for attending the Board meeting or committee thereof has been revised w.e.f 24th July, 2003. The directors of companies with a paid-up share capital and free reserves of Rs. 10 crore and above or turnover of Rs. 50 crore and above shall be paid sitting fees not exceeding Rs. 20,000 and directors of other companies will be paid sitting fees not exceeding Rs. 10,000.

MINUTES OF BOARD MEETINGS

1. Minutes of decisions or resolutions

These are records of formal decisions of the directors of the company at duly convened meeting and are prefixed by the word ‘Resolve’. Minutes of resolution may be recorded in various ways. They may be simply set down as a statement of what was resolved. Alternatively, they may be accompanied by a statement indicating the mover and seconder and how the resolution was carried. Either form of recording the resolution is acceptable. Some advocate that the latter form should be used in respect of minutes of general meetings of members and the former in respect of Board meetings. But that is entirely a matter of opinion. A third type of recording, which is desirable in cases where the recitals are numerous and/or lengthy, is one which prefixes a recital to the resolution. A recital is a short explanation of why it is necessary or expedient to pass the resolution.

It is generally not necessary, and in fact brought with the risk of unpredictable consequences, to record the discussion which led up to the adoption of a certain resolution or making of a certain decision. Only the decisions or resolutions actually taken and the names of the persons proposing and seconding those decisions or resolutions, should therefore, be recorded. However, motions carried through or ruled upon by the chairman are on the same footing as resolutions for the purpose of recording the minutes.

As the element of urgency is part of the word ‘minutes’ as used in the context of minutes of proceedings, it is advisable to draft the minutes as soon as possible after the conclusion of meetings.

2. Time-limit for recording and signing of minutes of Board meetings.

Section 193 (1) of the Companies Act, 1956 alia provides that every company shall cause minutes of all proceedings of every meeting of its Board of directors, to be kept by making within thirty days of the conclusion of every such meeting concerned, entries thereof in the books kept for that purpose with their pages consecutively numbered. The minutes need not be signed within that period. (Department of Company Affairs’ (MCA) circular NO. 25 of 1975, dated 1 September, 1975.

It is not obligatory to wait for the next Board meeting in order to have the minutes signed of the meeting already held. The chairman of the meeting at any time may sign such minutes before the next Board meeting is held. A confirmation of minutes of a meeting at the next meeting is not contemplated under the law. [Department of Company Affairs’ (MCA) Circular No. 8/2 Misc. 75-CL-V, dated 5 May, 1975.

It is, however, common practice to confirm and / or note the minutes at the next meeting and sign the same by the chairman. Confirmation really means noting. The Act does not require either confirmation or noting, but noting is a good secretarial practice. It is also a good practice to circulate minutes in draft to the directors.

Minutes must be signed latest on the date of the next succeeding meeting of the Board. It is not necessary that the minutes are signed by all the directors present at the meeting [Prafulla Kumar Rout v orient Engg. Works Pvt. Ltd. 91986) 60 COMP Cas 65 (Ori) but it is necessary to mention the names of the directors present. It is desirable to mention the names of the directors who have absented from the meeting together with a statement as to whether they have been granted leave of absence or not. Minutes of a board meeting, which was held in accordance with the directions of a court are to be signed by the chairman appointed by the court and such minutes are to be taken as authentic minute.

3. Correction in the minutes of the board meetings

Minutes once recorded and signed cannot be changed materially, subsequently. Minutes once made and signed, ought never to be altered by striking out or adding anything. {Re, Cowley & Co42 Ch d 204} If a correction involves a major departure from the earlier minutes, the proper procedure is to pass a resolution at a subsequent meeting and mention the fact of the resolution in the old minutes as a cross reference.

4. Adoption of minutes of Board meetings

It is the general practice to draft the Board meetings minutes and get it approved by the chairman and thereafter it is recorded in the minutes book. Simultaneously, copy of the draft minutes is circulated to all the directors either before or at the time of circulation the agenda for the next meeting. At the next meeting, the minutes of the earlier meeting recorded in the book, are adopted by the Board and in token thereof, the chairman signs the minutes with the date. It would be more appropriate to record that the Board approved the minutes of the previous meeting of the board held on…. Instead of saying that the Board confirmed minutes of the last meeting’.

5. Action on any resolution can be taken after conclusion of the meeting

Action on any resolution or any matter approved by the board at a meeting can be taken immediately on the conclusion of the meeting. It is not necessary to wait till the minutes are recorded, approved and adopted at the next meeting.

6. Numbering of minutes and resolutions

Either of the following methods may be used for the purpose of numbering of the minutes:-

•	Number the minutes of the Board meeting like 1st, 2nd 3rd and so on as to confirm that there is no fabrication of the minutes at a later stage.
•	Resolution may also be serially numbered with identification of the number of the Board meeting like 1.2, 4.12, 6.7 (in that case the 1, 4 and 6 denotes the number of the Board meeting and 2, 12 and 7 specify the item number of the particular business transacted at the meeting). It may be noted that he number should be confined to special items and not to routine matters.

7. Circulation of the minutes of the board meetings among the directors

The Companies Act, 1956 has neither provided for confirmation of minutes of the Board meeting at the next such meeting nor has it contained provisions making it mandatory the minutes of Board meeting among directors. Generally, at the time of nomination of directors on Board by financial institutions, banks, etc., they impose conditions relating to that.

In general practice, the nominating bodies require circulation of minutes. It is also a good secretarial practice that after the minutes have been written and got signed, should be circulated among the followings;-

•	All the directors, including nominee director of company;
•	The financial institutors/banks which has nominated director on the Board of accompany.

8. Inspection of the minutes of the Board meetings.

The Companies Act, 1956 has no express provision in relation to inspection of minutes books of Board meetings, the same shall be open for the inspection of auditors. The directors shall also be eligible to see these books.

Right to inspection cannot be denied whatever be the motive of member.

9. Related registers and files to the minutes of the Board meetings

Following optional registers may also be taken care of being related to minutes books of Board meetings;-

•	Attendance Register of directors;
•	Common Seal Register;
•	Index of Minutes Register;
•	Agenda Book.

In addition to the above, the file containing the notices of Board meetings, letters of disclosures made by the directors, copy of the statements placed before the meeting duly initialed by the chairman, proof of dispatch of notice to the directors, copy of the resignation letter from the directors, agenda papers, etc. should be carefully kept at the registered office of the company.

ANNUAL GENERAL MEETING-

1. Annual General Meetings

Pursuant to the provisions of section 166, every company, whether public or private, incorporated under the provisions of the Companies Act, 1956 shall hold during every year a general meeting of members, which shall be called ‘Annual General Meeting’. It is mandatory on every company to hold an annual general meeting in every calendar year.

2. Time-limit for holding the first annual general meeting

A new company which is registered under the Act, shall hold its first annual general meeting latest within a period of eighteen months from the date of its incorporation, namely, the date on which the Registrar has issued the certificate of incorporation to the company. If the first annual general meeting is so held, it is not necessary for the company to hold another annual general meeting in the year of its incorporation or in the following year. It may also be noted in this connection that the accounts placed before the first annual general meeting shall be for the period beginning from the date of incorporation and ending on a day of financial year, which will not precede the first annual general meeting by more than nine months from the close of the first financial year of the company-section 210(3). This may be illustrated by the following example:

Date of incorporation of company	23-10-2007
Date by which the first annual general meeting ought to be held	22-04-2009
The holding of the first annual general meeting shall comply with the following criteria of the Act:-
The gap between the last date of the accounting period and the meeting shall not exceed 9 months	23-10-2007
The second annual general meeting shall be held during the third year of incorporation.Therefore, in the above example assuming that the first accounts shall be for the period from	31-3-2008
The first AGM was to be held on or before (within a gap of nine months)	31-12-2008
The first accounts for next period will end on	31-03-2009
The second AGM will be held on or before (namely the third year after incorporation 30-09-2009
In the above example, since it was proposed to close the first accounts as on 31-03-2008, the first annual general meeting could be held before 31-12-2008 and the second annual general meeting could be held during the third year of incorporation.
As explained above there is no need to hold annual general meeting in the first calendar year of its incorporation, i.e.2007.

3. Time-limit for holding subsequent annual general meetings

As mentioned above, every company shall hold every year an annual general meeting and ordinarily there shall not be a gap of more than fifteen months between two such meetings. Further that in terms of the provisions of section 210 an annual general meeting shall be held within a period of six months from the end of the financial year whose accounts are proposed to be considered at the said annual general meeting. Accordingly, it is the rule that a company, whose financial year ends on 31st March, shall hold its annual general meeting by 30th September every year.

4. Filing of Annual Return

Every company (whether public or private having a share capital, as well as every company not having a share capital, is required to file annual return with the Registrar within sixty days from the day on which each of the annual general meetings is held.

Consequences of not filing the annual return are very serious. If a company fails to comply with any of the provisions contained in section 159, 160, or 161, the company, and every officer of the company who is default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues. If the annual return is not filed continuously for three financial years, then any director of such public limited company shall not be eligible for appointment as a director of any other public company for a period of five years from the date on which such public company in which he is a director failed, inter alia, to file annual returns.

5. Financial Year

A financial year is a period of twelve months and the accounts of a company for a financial year shall be placed at every annual general meeting. But in certain circumstances a financial year may be for less than a year or it may be for more than a year as in the case of the first annual general meeting but is shall not exceed fifteen months.

The Registrar has power to extend a financial year up to eighteen months in terms of the proviso under section 210 (4) of the Act. The company shall make an application in the prescribed e-Form 61 with the Registrar before the due date for closing of the financial year. The application may be made by a letter giving full justification for seeking extension of time certified by the chartered accountant or company secretary or cost accountant in practice.

Where a company proposed to extend its financial year and in that process requires extension in time for holding its annual general meeting it shall make an application in the e-Form 61 with the

Registrar of Companies for extending financial year under section 210 (4) and for granting extension in time for holding annual general meeting under the proviso to section 166 (1).

6. Uniform accounting year under Income-tax Act, 1961

For the purpose of the Income-tax Act, 1961, previous year means the financial year immediately preceding the assessment year. Accordingly, for the purpose of the said Act, from the assessment year 1989-90, the assesses including companies were required to declare their income every year as on 31st March. All that is necessary from the said assessment year is to make up the account as on 31st March, for the purpose of submitting the Income-Tax return.

DIGITAL SIGNATURES

What is a Digital Signature Certificate (DSC)?

Digital Signature Certificates are electronic format of physical signatures. DSC can be presented electronically to access information or services on the Internet, to prove the identity or to sign certain documents digitally.

Why is DSC required?

W.e.f. 16th September 2006 all the documents required to be filed with ROC have to be filed on portal of Ministry of Corporate Affairs at www.mca.gov.in using Digital Signature Certificate.

Who issues the Digital Signature Certificate?

A licensed Certifying Authority (CA) issues the digital signature. Various certifying authorities licensed by MCA include TCS, SIFY and MTNL etc.

Is Director Identification Number (DIN) a pre-requisite to apply for DSC?

It is not necessary that person should first have DIN number as a pre-requisite to apply for DSC. DSC can be obtained without DIN. But both DSC and DIN are required for filing any documents on portal of MCA.

What is the validity period of a Digital Signature Certificate?

The Certifying Authorities are authorized to issue a Digital Signature Certificate with validity or one or two years.

What is the legal status of a Digital Signature?

Digital Signatures have legal validity and are admitted in Court of Law for various purposes.

DIN NUMBER-DIRECTOR'S IDENTIFICATION NUMBER

1. Application for allotment of Director Identification Number

Section 266A inserted by the Companies (Amendment) Act, 2006 which, has been notified by Notification No. G.S.R. 648E dated 19th Oct.’ 2006 and has come into the force w.e.f. 1st Nov., 2006. The new section provides that every-

(a) Individual, intending to be appointed as director of a company; or

(b) Director of a Company appointed before the commencement of the Companies(Amendment) Act, 2006, shall make an application for allotment of Director Identification Number to the Central Government in form DIN-1.

Every applicant, who has made an application for allotment of Director Identification Number, may be appointed as a director in a company, or, hold office as director in a company till such time such applicant has been allotted Director Identification Number.

2. Allotment of Director Identification Number

Section 266B has been inserted by the Companies(Amendment) Act, 2006, which provides that the Central Government shall, within one month from the receipt of the application under section 266A, allot a Director Identification Number to an applicant.

3. Obligation on the Director to intimate Director Identification Number to concerned company or companies

Section 266D of the Companies (Amendment) Act, 2006 provides existing director shall, within one month of the receipt of Director Identification Number from the Central Government, intimate his Director Identification Number to the company or all companies wherein he is a director. Such intimation is required to be given in Form DIN-2.

4. Important feature of Director Identification Number

Any individual who is a director or intends to become a director of a company should apply for DIN. All the directors of a company must obtain DIN.
DIN application is to be supported by identity proof of any of the following viz. PAN card, Driving License, Passport, Voter ID Card, Ration card, Electricity Bill, Bank Statement.
DIN application is also to be supported with proof of residence of the applicant director which can be any one of the following viz. Passport, Voter Id Card, Ration card, Driving license, Electricity Bill,Telephone Bill and Bank Statement.
DIN is mandatory for e-filing of forms and documents and PAN cannot be used as an alternative to DIN.
DIN is mandatory for directors of Indian companies who are not citizens of India.
DIN is not mandatory for directors of foreign company having branch offices in India.
Only a single DIN is required for an individual, irrespective of number of directorship held by him/her. All the directorships of an individual would be mapped in the database through that DIN.
Even on resignation of a director the DIN will not be cancelled.

5. Formalities to be complied with for appointment of first directors

In the case of the appointment of first directors of a company, the following formalities must be complied with at the time of incorporation:-

Confirm whether the proposed director is having Directors identification Number (DIN), if he is not having DIN, apply in Form DIN. No company shall appoint or re-appoint any individual as director of the company unless he has been allotted a Director Identification Number under section 266B.
Obtain consent in the plain paper and the same shall be filed with the e-form 32.
Prepare e-form 32 in respect of the first directors and file it with the Registrar supported by the consent to act as a director;
Agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager shall be filed with the registrar;
E-Form 32 may be filed within 30 days after incorporation. It is advisable to file them at the time of filing of other documents for incorporation. The registrar also insists on it to be filed at the time of incorporation.
Particulars in the Register of directors shall be entered with respect to each director immediately after the incorporation of the company.
Particulars of the Directors’ shareholding will be entered in the Register of directors’ shareholdings;[Section 307]
Information relating to the director’s interests in other companies, firms and also names of his relatives for the purpose of section 297 and 299 of the Act will be obtained. A general notice of the interests under section 299 will also be given in Form 24AA prescribed under the Companies (Central Government’s) General Rules & Forms. 1956.

TIME LIMIT FOR INCORPORATION

	Nature of Activity	Time Schedule
1.	Allottment of DIN	3 days
2.	Acquiring Digital Signature	2 days
3.	Name approval	3- 4 days
4.	Drafting of MOA & AOA, stamping, digitally signing and filing the documents on MCA portal	3 days
5.	Grant of Certificate of Incorporation	4 days

it is best to open a subsidiary of foreign parent, however, depending upon circumstances and facts, on can open an indian company majority held by foreigners, branch of foreign parent or liasion office of foreign parent. From 7th Jan 2009, LLP (Limited liability partnerships) can also be formed in India.

FDI is prohibited in select areas like agricultural businesses, real estate (besides infrastructure) etc. These must be carefully studied before any decision of incorporation in India.

Below stated 2 main compliances under Foreign Exchange Management Act 1999 are very important post incorporation of a company held by foreigners in India.

1. FCGPR form

2. CS / CA certificate for fair value of the shares issued to foreign shareholder.

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