Amendments to the Companies Incorporation Rules

[The following guest post is contributed by Bhushan Shah and Neha Lakshman from Mansukhlal Hiralal & Company. The views
expressed in the article are personal.]
The Ministry of
Corporate Affairs (MCA) has notified
the Companies Incorporation (Third Amendment) Rules, 2016 by way of a notification
in the official gazette on 27 July 2016. This update captures some of the important
changes brought about by the amendment:
1.         Eligibly
to Incorporate One Person Company
: Earlier, the rules stated that no person
shall be eligible to incorporate more than a single One Person Company or
become nominee in more than one such company. However, the new rules now state
that ‘A natural person shall not be
member of more than a One Person Company at any point of time and the said
person shall not be a nominee of more than a one Person Company’
. Therefore
an individual may now incorporate multiple One Person Companies, subject to
renouncing membership of the earlier companies or cessation of the corporate
existence of the earlier One Person Companies.
2.         DIN
Verification
: In case a subscriber to the memorandum possesses a valid
Director Identification Number (DIN)
and the particulars provided therein are up to date on the date of application
and the declaration to this effect is given in the application, the proof of
identity and residence of such subscribers need not be attached.
3.         Certified
Resolution
: Partnership firms are no longer required to submit to the
Registrar of Companies (ROC) the
certified true copy of the resolution agreed to by all the partners specifying
inter alia the authorization to subscribe to the memorandum of association of
the proposed company and to make investment in the proposed company, the number
of shares proposed to be subscribed in the body corporate, and the name of the
partner authorized to subscribe to the Memorandum.
4.         Online
Business
: Every company which has a website for conducting online business
or otherwise, shall disclose/publish its name, address of its registered
office, the Corporate Identity Number, Telephone number, fax number if any,
email and the name of the person who may be contacted in case of any queries or
grievances on the home page of the said website. The Central Government may, as
and when required, notify the other documents on which the name of the company
shall be printed.
5.         Shifting
of registered office
: A company was not allowed to shift its registered
office if any inquiry, inspection or investigation had been initiated against
the company or any prosecution was pending against the company under the Companies
Act, 2013. However, the amendment states that if, on completion of such
inquiry, inspection or investigation, no prosecution is envisaged or no
prosecution is pending, then the shifting of registered office shall be
allowed. The same is applicable to the shifting of the registered office of a company
from one state to another.
6.         No
Change of Name in the Event of Default

Henceforth, the change of name shall not be allowed to a company which
has not filed annual returns or financial statements due for filing with the
Registrar or which has failed to pay or repay matured deposits or debentures or
interest thereon. However, the change of name shall be allowed upon filing of
the necessary documents or payment or repayment of matured deposits or
debentures or interest thereon as the case may be.
7.         Unlimited
Liability to Limited Liability
: The Rules also prescribe the procedure for conversion
of a company with unlimited liability into one with limited liability, which
includes: (a) the passing of a special resolution, (b) publication of notice in
newspapers seeking objections to the conversion and (c) thereafter making an application
to the ROC along with the documents prescribed by the rules, which includes a
copy of the altered memorandum and articles, declaration of solvency signed by
two directors, no-objection certificates from secured creditors, auditor’s
certificate, etc.

Further,
this converted company shall not change its name for a period of one year from
the date of such conversion. The company shall also refrain from declaring or
distributing any dividend without satisfying past debts, liabilities,
obligations or contracts incurred or entered into before conversion.
It is important to note that an unlimited
liability company shall not be eligible for conversion into a company limited
by shares or guarantee in case: (a) its net worth is negative, or (b) an
application is pending under the provisions of the Companies Act 1956 or the
Companies Act, 2013 for striking off its name, or (c) the company is in default
of any of its Annual Returns or financial statements under the provisions of
the Companies Act, 1956 or the Companies Act, 2013, or (d) a petition for
winding up is pending against the company, or (e) the company has not received
amount due on calls in arrears, from its directors, for a period of not less
than six months from the due date; or (f) an inquiry, inspection or investigation
is pending against the company.
Comment:
We believe these amendments to the Rules have been made with the intention of
mitigating the practical difficulties faced by business persons in
incorporating companies and with the intent of increasing transparency and accountability.
– Bhushan Shah
and Neha Lakshman

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment

  • “COMMENT : …”
    Unclear; hence needs to be reviewed, and if so agreed, to be elaborated on the twofold ‘intention’ referred to.
    As regards ‘the intent of increasing transparency and accountability’, how far such a belief is well founded is suspect; and requires an in-depth study , separately, wrt each of the listed amendments, in isolation.

    To Add:

    "1. Eligibly to Incorporate One Person Company…"

    Essence of the change (s) intended to be ushered in, as believed, is not clear. In substance, the new rules do not seem to bring into effect any such identifiable change !

    "4. Online Business: Every company which has a website for conducting online business or OTHERWISE,…"

    ‘OTHERWISE’ – No clarity as to what it seeks to convey!

    "7. Unlimited Liability to Limited Liability:…"

    The enumerated amendments are not seen to have fully /squarely taken care of all the basic deficiencies in the LLP, recognized as a safe-/ foolproof- form of ‘legal entity’.

    For independent viewpoints, as shared and repetitively urged for due consideration, anyone interested, may care to go through the 2 articles-

    (2005) 128 Com. Cas. 1
    (2006) 65 SCL 42

    Over to eminent law experts, both within and without the portals of the government, for a proactive and sincere deliberation, and to share independent views, for enlightenment in 'public interest'.

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