Issues in Incorporation of Company under RUN (Reservation of name) regime

Issues in general in Incorporation of Company under Companies Act,2013 and after introduction of new RUN (Reservation of name) procedures w.e.f. 26th January, 2018

MCA (Ministry of Corporate Affairs) has introduced a new way of incorporating a company (under Companies Act, 2013) in India w.e.f. 26^th January, 2018 vide Companies (Incorporation) Amendment Rules, 2018 amending rule 9 & 12 of Companies (Incorporation) Rules, 2014 which provide for ‘RUN (Reservation of name)’ and ‘Application for incorporation of Companies through integrated form SPICe (Form INC-32)’.

Form INC-1 which was used for reserving name of the proposed company is substituted with RUN (Reservation of name) which is a not a eform but a web service and the name can be reserved without having to use DSC (Digital Signature Certificate) and without DIN (Director Identification Number). Incorporation through SPICe was also available before 26^th January, 2018 but it was optional at that time as the other option was also available then with filing of Form INC-7, DIR-12 & INC-22 (an illustrative example taken for private companies having share capital other than producer or government companies) which were discontinued w.e.f 10^th January,2018.

The highlight of this changes made are that SPICe form is made compulsory now with no requirement of DIN and DSC while reserving name and no incorporation fee while filing SPICe form for the proposed company having authorized capital upto INR 10,00,000/-. Stakeholders have to pay INR 1,000/- for reserving name through RUN service, PAN and TAN application fee of INR 175/- and stamp duty on MOA and AOA according to situation of registered office of the proposed company which differs from one state to other.

The steps of incorporating a company are as under:-

1. Reservation of name through RUN web service which can be accessed after logging into MCA21 portal. Stakeholders can also use RUN service if they have login credentials on MCA21 portal without approaching consultants.

2. Filing of form SPICe with linked forms eMOA & eAOA (if subscribers are Indian nationals or subscribers are foreign nationals having valid business visa and documents are executed in India) and requisite attachments such as DIR-2, DIR-9, Affidavits, declarations and so on once the name is reserved.

Points to be noted:

1. The name reserved through RUN is available for 20 days in case of new company and 60 days for name change of existing company. So, SPICe has to be filed within 20 days from the date of reservation of name.

2. No re-submission is allowed unlike Form INC-1 so either application will be accepted or rejected hence utmost care has to be given while selecting the proposed name by doing comprehensive check on MCA21 portal for distinctiveness of the proposed name.

3. A company can also be incorporated without using RUN service by way of filing SPICe form only as it contains both options i.e. filing of incorporation documents in case name is reserved through RUN or not. The advantage of using SPICe form only is that saving on account of RUN service fee of INR 1,000/- and the disadvantage is that reworking on preparation of incorporation documents such as DIR-2, DIR-9, Affidavits, declarations and so on if the proposed name indicated in the SPICe form is not made available by whatever reasons and marked for re-submission.

This a great initiative taken by the government on macro level in favour of stakeholders who are desirous to operate business through the mode of companies registered under Companies act, 2013 by simplifying the whole procedure of incorporation along with no or minimal registration fee. But there are few issues unaddressed by MCA.

Form INC-1 was allowed to be filed till 5^th January,2018 for approval of name. Let us suppose, if an applicant has filed Form INC-1 say on 1^st January,2018 and approval of the same has come on 2^nd January, 2018 then the validity of the name approval would be upto 2^nd March, 2018 i.e. 60 days from the date of name approval as per earlier rule. But the last date for filing SPICe form in case name approval was made using Form INC-1 was 17^th January,2018 as per update given by MCA. At present, the following is the news updated on MCA portal:

“All names which were reserved through INC-1 form for which no incorporation forms were filed before 17th January, have now been expired, as per the notice posted earlier on this portal, and cannot be used for incorporation any more. Stakeholders are advised to use either RUN service for reserving a name afresh or use SPICe form for integrated process of name reservation and incorporation of a company.”

This means that if any applicant has not filed SPICe form for those cases in which name was approved using Form INC-1 within 17^th January,2018 then he will have to start afresh despite of the fact the name was available upto 2^nd March, 2018. If we compare in nutshell then the applicant is benefitted in terms of incorporation fee as he has to incur only fee of INR 1,000/- for reservation of name in the current scheme of incorporation against the dead loss of INR 1,000/- incurred for filing Form INC-1 and saving of the incorporation fee for SPICe form as per earlier rule. The point arises here, if any applicant who is more specific about name of the company and was once approved using Form INC-1 but the same name is not available at the time of reserving the name using RUN then there is no remedy available to the applicant. MCA should have continued SPICe form simultaneously for another 60 days from 6^th January,2018 (assuming the date of name approval for Form INC-1 filed on 5^th January,2018) i.e. upto 6^th March covering the case where the name was approved using Form INC-1 so that no grievance whatsoever would occur at any stage.  In addition to such continuation, its fee would have been equalized with SPICe form having RUN case.

Moreover, I find it very strange about the department officials’ view on the meaning of the word ‘resident.’ We as professionals know the significance of the word ‘resident’, around which the whole Income Tax Act, 1961 revolves. But when it comes to other Acts, most of the persons even department officials confuse it with the meaning of citizen. A resident in India is not necessarily a citizen of India. I have witnessed the SPICe form is sent for resubmission where foreign nationals, being resident, are subscribers who have executed MOAs & AOAs outside the country and are also the only directors of the proposed company, by giving reason for resubmission as “There should be one Indian director as per section 149(3) of Companies Act, 2013 read with circular no. 25/2014 dated 26^th June, 2014.” If we read the section 149(3), it clearly mentions the word resident and the meaning of resident, nowhere the word Indian national is written in the section. There is also a case where the SPICe form was sent for resubmission mentioning “As per rule 13(5) of the Companies (Incorporation) Rules, 2014, all the documents of foreign directors executed outside India should be apostilled, notarized or certified by consular officer” This was in the same case where foreign subscribes cum directors have signed the documents outside India. If we read rule 13(5) of the Companies (Incorporation) Rules, 2014, it clearly says about signing of MOA (Memorandum of Association). But MCA treats it as all the documents covering AOAs, DIR-2, INC-9, DIR-8, Affidavit for non-acceptance of deposits used for filing SPICe form to be apostilled or notarized and certified by consular officer. This misinterpretation of wordings in the law has led to time consumption and substantial increment in the cost.

It would be highly appreciated if the competent authorities who are handling these cases be given more training and make them understand the meaning and interpretation of words used in the law. I understand that there is sometimes ambiguity in law where different interpretation can be possible but the above case which I am discussing is not the matter of ambiguity, it is very much clear.