Whether subscription money can be received in cash by newly incorporated company

In case of newly incorporated company, situation may occur when subscribers to the Memorandum of Association (‘MOA’) fails to pay subscription money as agreed by them in MOA. Earlier there was no time limit prescribed in the Companies Act, 2013 (the Principal Act) for depositing the subscription money by the subscribers to the Company. The Government has come up with the Notification dated 02.11.2018 with regard to commencement of the Companies (Amendment) Ordinance, 2018 (“the Ordinance”). As per this Ordinance, a Company which has been incorporated on or after 02 November 2018, shall within 180 days of incorporation required to file the declaration by the director with the Registrar of Companies (“ROC”) stating that every Subscriber to the Memorandum has paid the value of shares taken by them.  A declaration for ‘Commencement of Business’ (“COB”) is re-introduced by way of inserting a new Section 10A after section 10 of the Principal Act.

Now, the question, which is very crucial, is ‘whether subscription money can be received in cash by newly incorporated company’.

In this regard, it is submitted that there is no prohibition/restriction under the Principal Act for receiving the subscription money in cash (i.e. not through account payee cheque or other banking channel). However, the Company and/or subscribers have to comply with the provisions of the Income Tax Act with regard to cash transaction.

Further, please note that e-Form INC-20A (Declaration for commencement of business) is required to be filed pursuant to Pursuant to Section 10A(1)(a) of the Principal Act, and Rule 23A of the Companies (Incorporation) Rules, 2014.

Please note that Ministry of Corporate Affairs (“MCA”) has provided the instruction Kit for e-Form INC-20A. The Instruction Kit has been prepared to help you file e-Forms with ease. This Instruction Kit provides references to law(s) governing the e-Forms, instructions to fill the e-Form at field level and common instructions to fill all e-Forms. The document also includes important points to be noted for successful submission. In this concern, please note that an attachment to this e-Form INC-20A, a Subscribers proof of payment for value of shares is mandatory to attached with this form. Therefore, in case of receipt of subscription money in cash will make a hurdle to verify about subscription proof of payment for value of shares.

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PROVISIONS OF COMMENCEMENT OF BUSINESS

The concept of Certificate of ‘Commencement of Business’ were earlier provided under Section 149 of the Companies Act, 1956 (“the Erstwhile Act”). The provisions were only applicable to newly incorporated public companies having share capital.

It was also introduced by the Companies Act, 2013 (“the Principal Act”) under the Section 11 thereof. Section 11 of the Principal Act was introduced for providing declaration of COB and exercising of borrowing powers by the newly incorporated Companies. This time the provisions were applicable to all companies, whether private and public.

It is pertinent to note that under the Principal Act, no certificate of COB was facilitated by ROC, but the documents filed in this regard were taken on record only, whereas in the Erstwhile Act a certificate of COB was issued by ROC.

The Government of India (“GOI”) had received several representations from industry stakeholders for amending various provisions of the Principal Act to ensure ease of doing business in India. For the promotion of ease of doing business in India the GOI came up with some relaxations to the corporate entities vide Notification dated 26.05.2015 and notified the Companies Amendment Act, 2015 (“the Amendment Act”).

The GOI is authorised to appoint different dates for implementation of different provisions in the Amendment Act. Accordingly, while most provisions have become effective from 29 May 2015. Consequent to the commencement of the Amendment Act, section 11 was omitted (deleted) by the Amendment Act w.e.f. 29 May 2015.

In the continuation of the Amendment Act, MCA has amended the Companies (Incorporation) Rules, 2014 (“the Principal Rules”) vide Companies (Incorporation) Second Amendment Rules, 2015 (“the Second Amendment Rules”) w.e.f. 29.05.2015. Accordingly, existing Rule 24 in the Principal Rules was omitted by the Second Amendment Rules w.e.f. 29 May 2015.

The GOI has come up with the Notification dated 02.11.2018 with regard to commencement of the Companies (Amendment) Ordinance, 2018. The Principal Act has further amended by way of passing of such ordinance on 2^nd November, 2018. Declaration for COB is re-introduced by way of inserting a new Section 10A after section 10 of the Principal Act.

The text of Section 10A of the Principal Act are as follow;

1. A company incorporated after the commencement of the Companies (Amendment) Ordinance, 2018 and having a share capital shall not commence any business or exercise any borrowing powers unless— 

(a) a declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and

(b) the company has filed with the Registrar a verification of its registered office as provided in subsection (2) of section 12.

2. If any default is made in complying with the requirements of this section, the company shall be liable to a penalty of fifty thousand rupees and every officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues but not exceeding an amount of one lakh rupees.

3. Where no declaration has been filed with the Registrar under clause (a) of sub-section (1) within a period of one hundred and eighty days of the date of incorporation of the company and the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may, without prejudice to the provisions of sub-section (2), initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.

After the above amendment, the MCA has further amended the Principal Rules vide Companies (Incorporation) Fourth Amendment Rules, 2018 (“the Fourth Amendment Rules”) w.e.f. 18.12.2018. According to the Fourth Amendment Rules, a new Rule 23A shall be introduced by the MCA in Principal Rules, which is also reproduced below: 

“23A’ Declaration at the time of commencement of business – The declaration under section 10A by a director shall be in Form No. lNC-20A and shall be filed as provided in the Companies [Registration Offices and Fees) Rules, 2014 and the contents of the said form shall be verified by a company Secretary or a chartered Accountant or a cost Accountant in practice: 

Provided that in the case of a company pursuing objects requiring registration or approval from any sectoral regulators such as the Reserve Bank of India, Securities and Exchange Board of India, etc., the registration or approval, as the case may be from such regulator shall also be obtained and attached with the declaration.”.

According to the provisions of section 10A of the Principal Act, as inserted by the Ordinance, the companies having share capital, which have been incorporated on after the date of commencement of the Ordinance, for the purpose of commencement of their businesses and exercise borrowing powers, are required to file a declaration within the period of 180 days from the date of incorporation by any of their director with regard to acceptance of subscription money from their subscribers.

The ordinance was come into force on 2^nd November, 2018, therefore all the provisions of this section become applicable from 2^nd November, 2018. Now, every company having share capital incorporated after 2^nd November, 2018 has to file Form INC 20A with 180 days i.e. before 1^st May 2019.

Further, the companies are also required to ensure about the compliance of provisions of section 12(2) of the Principal Act, which talks about filing of a verification of their registered offices. In case the Company fails to file the declaration within the prescribed time, the Company shall be liable to penalty of Rs. 50,000/- and every officer in default shall be liable to a penalty of Rs. 1000/- for each defaulting day subject to maximum amount of Rs. 1 lac.

In addition to this, ROC may remove of name of the company from the ROC, if he has a reasonable cause to believe that the Company is not carrying on any business and operation. 

Crux of the Provisions of Commencement of Business: –

1. The following Companies are not required to file Form INC 20A:

• Companies incorporated before 2^nd November, 2018 (i.e. before the commencement of the Companies (Amendment) Ordinance, 2018).
• Companies incorporated after 2^nd November, 2018 without share capital.

2. Every company required to file form 20A shall file the same within 180 days of its incorporation.

3. Non filling of form INC 20A allows ROC one additional ground to strike off the name of your Company from its Register.

4. The penalties for non-compliance are very high which has been done intentionally so as to curb out the number of shell companies incorporated. Following are the penalties for non-compliance:

• Penalty to be levied on the company: A penalty of Rs 50,000 will be levied on the company if it fails to comply with the mentioned requirement.
• Penalty to be levied on the officers: Every such officer in default shall be liable to a penalty of Rs 1,000 per day for each day during which the default continues subject to a maximum of Rs 1,00,000.
• Company strike-off: If ROC has reasonable grounds to believe that the company is not carrying on any business or operations even after 180 days of incorporation, ROC may remove the name of the company from the Register of companies.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.