Declaration for ‘operationalization’ of entity

The erstwhile ‘commencement of business’ rule is back with a bang! Under this, companies incorporated after Nov 2, 2018 would not be allowed to commence business activities unless a declaration is filed by a Director (within 180 days of incorporation) confirming that share capital as stated in the Memorandum of Association (‘MOA’) has been fully paid by the subscribers and its registered office¹ is duly verified. While this may seem a procedural requirement for most, subsidiaries of foreign organizations can face headwinds if there are delays in opening local bank accounts and remitting capital, or if they are required to seek prior approvals before infusion of capital (for e.g. FCRA² approvals for not-for-profit companies). The default shall attract penal implications and can be a ground to initiate the strike-off of the Company if there is sufficient reason for them to believe that no business or operations are being carried on.

Physical inspection of the registered office

Continuing from the above change, the Government now also has the power to inspect the registered offices to make sure companies are operational. This can again become a ground for strike-off and while this specifically targets shell companies in India, subsidiaries of foreign organizations should also note this requirement while setting up their registered offices locally. Though the power to inspect the registered office can be exercised by the Government under these provisions, it needs to be seen as to how this will be practically dealt with.

Other changes

Many other amendments such as enhancement of penalties and prosecution for non-compliance with the new beneficial ownership rules³ , changes in procedure for change of a company’s financial year as well as amendments in National Company Law Tribunal’s (NCLT’s) scope, re-categorization of offences and registration of charges etc. will also impact all corporate organizations in general.

Companies should definitely note these changes and reach out to their local advisors and partners to comply with the new ordinance at the earliest. Failure to do so may lead to significant actions for non-compliance!

For a deeper discussion of how this issue might affect your business, please feel free to contact:

¹A registered office is the local address which is registered with the Indian Company House
²Foreign Contribution Regulations Act, 2010 (read with relevant rules, regulations and notifications)
³A new requirement in India that mandates maintenance of an official record of persons holding beneficial shares in entities along with necessary compliances with the Registrar of Companies

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