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Significant Beneficial Owner – Lifting of Corporate Veil!


In India, People using various means for hiding their real identity and remain in the back door for various ill motives. Government are now actively focusing on illicit usage of trusts, corporate and non-corporate forms, for money laundering, terror financing and parking of black money by individuals who are behind those trusts and other forms. 

On June 14, 2018, MCA issued the Companies (Beneficial Interest and Significant Beneficial Interest) Rules 2018 and enforced section 90 of the Act. On Feb 8, 2019, MCA has notified the revised rules on SBO. The sole objective of these rules is ‘to identify the ultimate beneficial individual or group of individuals who have control or ownership of the reporting company disregarding the intermediate shareholding by non-individual persons.’

Govt. made clear that any individual holding any significant beneficial interest need to come out and disclose his/her holdings. Prima facie, responsibility lies with the individual who is holding beneficial interest and failure on the part of beneficial owner attracts fine as well as imprisonment also. Only few offences of Companies Act, 2013, are now non-compoundable and punishable with imprisonment and violation of SBO rules in one of them!! 

Section 90(10) of the Companies Act, 2013 provides that If any person fails to make a declaration, he shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than Rs. 1 lakh but which may extend to Rs. 10 lakh or with both and where the failure is a continuing one, with a further fine which may extend to Rs. 1000/- for every day after the first during which the failure continues.

Who is Significant Beneficial Owners? 

Significant Beneficial Owner in relation to a reporting company means an individual, who acting alone or together or through one or more persons or trust, possesses one or more of the following rights or entitlements in reporting company, namely:-

  • Holds indirectly, or together with any direct holdings, more than 10% of the shares;
  • Holds indirectly, or together with any direct holdings, more than 10% of the voting rights in the shares;
  • Has right to receive or participate in more than 10% of the total distributable dividend, or any other distribution, in a financial year through indirect holdings alone, or together with any direct holdings;
  • Has right to exercise or actually exercises, directly or indirectly, significant influence or control, in any manner other than through direct holdings alone. 

Explanation I - For the purpose of this clause, if an individual does not hold any right or entitlement indirectly, he shall not be considered to be a significant beneficial owner. Therefore, a person must have an indirect right or entitlement (whether alongwith direct or only indirect) in order to be a SBO. This is mainly because the provisions have been framed to identify the ultimate beneficial owners who are hiding their real identity.

"Significant Influence" – Need clarification!

It means the power to participate, directly or indirectly, in the financial and operating policy decisions of the reporting company but is not control or joint control of those policies. 

Now, Startup incubators, Venture Capital Investors, P.E Founds etc. are participating in financial and operation decisions, appoints nominee directors etc. by virtue of Investment Agreement. Will they are also SBO? This questions needs to be addressed by the Govt.

Who could be SBO?

There are following types of persons that can be in member list of reporting entity.

1. Individual Shareholders

Whether individual shareholders are also SBO?

No. In order to be a SBO, a person must have an indirect right or entitlement and his/her name is not entered in the register of members. Where the person has only direct holding, he shall not be termed as the SBO. 

Whether individual shareholders holding direct as well as indirect also needs declaration?

Yes. In this case, individual’s direct holding is clubbed with indirect holding and if it is more than 10%, s/he is considered SBO.

2. Body corporate shareholder holding more than 10% (Other than LLP)

Any individual holding, directly or indirectly, 51% or more in that body corporate shareholder, then s/he is treated as a SBO. 

3. HUF holding more than 10%

Karta of that HUF is a SBO.

4. Partnership firm including LLP holding more than 10% 

All Partners are SBO. If Partnership firm has body corporate as a partners, then individual holding majority stake in that body corporate is a SBO.

5. Trust holding more than 10%

  • Trustee (In case of charitable trust) is a SBO
  • Beneficiary (In case of a specific trust) is a SBO
  • Settler (In case of revocable trust) is a SBO

6. Pooled investment vehicle or an entity controlled by the pooled investment vehicle holding more than 10%

Partner or Investment Manager or Chief Executive Officer of an entity is a SBO.

Steps to Comply this provisions by Reporting Company

  • The Reporting Company first check whether there are any non-Individual member holding more than 10% of shares or voting or dividend rights in the company.
  • If reporting company has reason to believe that individual is SBO, Send notices to such Individual or Promoters or Directors or any other officer of non-individual members in Form No. BEN-4 seeking information of SBO.
  • Receiving Form No. BEN-1 from the Significant Beneficial Owner within 90 days from the commencement of these rules and within 30 days from any change in holdings.
  • Filing of E-form No. BEN-2 with ROC by the Company within 30 days from the date of receipt of declaration in Form No. BEN-1 from the SBO.
  • Maintaining Register of all SBOs in Form No. BEN-3.


These rules shall not be made applicable to the extent the share of the reporting company is held by,

  • The authority constituted under sub-section (5) of section 125 of the Act;
  • Its holding reporting company:

Provided that the details of such holding reporting company shall be reported in Form No. BEN-2.

  • The Central Government, State Government or any local Authority;
  • Reporting company, or a body corporate, or an entity controlled by the Central Government or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments;
  • Securities and Exchange Board of India registered Investment Vehicles such as mutual funds, alternative investment funds (AIF), Real Estate Investment Trusts (REITs), Infrastructure Investment Trust (lnVITs) regulated by the Securities and Exchange Board of India;
  • investment Vehicles regulated by Reserve Bank of India, or Insurance Regulatory and Development Authority of India, or Pension Fund Regulatory and Development Authority.

Issues need to be addressed

Start-up Investment

Whether investment made by the private equity funds and venture capital investors, who are not registered with the regulators can fall into this framework. If yes, it is very difficult to find SBO.

What would be the extent of the ‘participation in financial and operating policy decisions’ to qualify as ‘significant influence’? It is common for private equity and venture capital investors to have nominee directors, some rights on financial and operating policy decisions of a company as per their investment agreement. 

Test of Persons acting together

The rules cast obligation on companies to ‘take necessary steps to find out’ their significant beneficial owners, especially where persons are ‘acting together’. How can company know whether persons are acting individually or together?


The spirit of the Amendment Rules is to bring in more clarity and is in alignment with the government’s drive to inculcate transparency and accountability in the corporate set-up. The disclosures relating to SBO are expected to lead to transparency of shareholding structures and help the government identify benami transactions and prevent money laundering activities.

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Employee Stock Option Plan – Meaning, Benefits and Process


Traditionally, ESOPs were given to remunerate senior employees and to acknowledge their proven contribution to the company. However, in modern times, ESOPs are used as compensation and motivational tool as startups can’t afford to spend high salaries in the beginning stage. Employee Stock Options in India has gained immense popularity in the recent times with the emergence of a vibrant startup ecosystem in the country

Stories of how Infosys, one of the earliest companies to offer ESOPs, created millionaires of employees such as drivers, are very well known. Google recently employed an Indian with a Package of 1.2 crore Per Annum, with a catch that half of it was in form of ESOPs. 


Employee Stock Option Plans are the plans in which employees get the right to purchase a number of shares (decided by the employer) in lieu of Salary in the company at a discounted price (less than the market price). The option provided under this scheme confers a right but not an obligation on the employee. 

Employees have to wait for a certain time period – known as vesting period – before they can exercise the right to purchase those specified number of shares. Upon vesting of options, employees can exercise the options to get shares by paying the pre-determined exercise price.

ESOPs are generally awarded for performance or tenure of the employee with the company. Thus, it serves a two-fold purpose for both the company and the employees.

  1. It acts as a tool of motivation for the employees that once they own a stock they feel responsible for performance of the company, as it determines the value of the stocks of the company. 
  2. It helps the employer to retain the company and assure a good level of performance in the work.

Step by Step Process for issue of ESOP

1. Preparation of list of eligible employees for ESOP

This is the first step and basic step required for ESOP scheme. Employees should be carefully selected for participation in ESOP scheme after considering his/her experience, roles and responsibility etc. 

2. Preparation of ESOP policy

It is the most important step for Companies. Following are essential things that must be kept in mind while drafting ESOP policy:

  • Quantum of ESOP pool;
  • Employees Selection and evaluation criteria for participating in the scheme;
  • Rights of option holders;
  • Rights of shareholders like Tag along, Drag along and pre-emption rights;
  • Exit mechanism;
  • Tax liabilities.

3. Board Approval

After preparation of list of eligible employee, quantum of options, drafting of ESOP scheme, next step is to convene a Board Meeting for final board approval. Board have to approve list of employees participating in the scheme, draft ESOP scheme, notice of general meeting for approval of shareholders. 

4. General Meeting

General Meeting of members of the company will have to convene for their approval of ESOP scheme by Special Resolution. However, Only Ordinary Resolution in required for issue ESOP by Private Limited Company. 

5. Filing of Form MGT-14

E-form MGT-14 must be filled by all the companies (Except Private Limited Company) attaching Special Resolution for approval of Scheme, Explanatory Statement, Notice of GM, and approved ESOP policy. 

6. Preparation & Dispatch of Grant Letter 

After approval of shareholders, Company need to send Grant Letter to all the eligible shareholders to participate in the scheme mentioning their entitlement, vesting schedule, date of vesting, last date upto which exercise can be made, exercise price, manner of exercise of options and other terms and conditions. 

7. Vesting of ESOPs

There must be minimum 1 year time gap in between granting of option and vesting of option. For e.g: If you grant the option on 01st April, 2019, it can’t be exercised before 01st April, 2020. 

8. Exercise of ESOPs

After completion of vesting period, employees can apply for shares or further wait upto the last date on which exercise can be made or not apply for the shares. ESOP grants only right and not obligation to employees for purchase of shares. 

9. Allotment of Shares 

If shareholders apply for shares, companies need to allot the shares and file e-form PAS-3 for allotment of shares by attaching Special or Ordinary Resolution for approval of ESOP, Resolution for allotment of shares, list of allottees etc.

10. Issue Share Certificate & Payment of Stamp Duty

Company need to issue share certificate to the shareholders within 30 days after allotment. Companies need to pay stamp duty on issue of shares according to the stamp rates prevailing in the state.


  • ESOPs can be treated as a retainership instrument for small businesses as there is a lock in period for exercising the right to purchase the shares. Thus, a business can retain its employees. If an employee opts for this option then he has to serve the lock in period to become eligible to exercise it.

  • Getting shares of the company in which they are working gives employees an ownership feeling. They start feeling that they are not employees of the organisation but owners. Also, they get to share the profits of the company in the form of dividends and are motivated to work for the best of the company.

  • Businesses that needs funds and are not in a position to spend hefty amounts can offer this option to their employees in lieu of salary and motivate them to work for the betterment of the company.

  • It is a non-cash compensation tool to compete for the best human resources.

  • It gives an opportunity to corporate to pay without a reduction in book profits. 

  • Boosted Morale of Employees.


  • When the ESOPs are exercised the founders share holding gets diluted. 

  • Since, Company is unlisted Company, there are no marketability or liquidity of shares of private company. Hence, there are chances of disputes between employers and employees when employee leaves the organization.

  • There are also chances of disputes while transfer of shares and the value at which shares should be transferred. 

Things to take care by employees when having ESOPS in lieu of salary 

Proper Documentation

Employees should ensure that all the documentation is in place. They should also consider the present value and future value of shares.

Proper Exit Mechanism

Ensure there is a proper exit mechanism, like promoter buyback, in case listing of the start-up is delayed.


ESOPs are considered as part of an employee’s perks and taxed accordingly. But it is important to understand that if you were to dispose the shares, the difference between the sale price and the fair market value as on date of allotment, will be subjected to personal capital gains in the hands of employees.


Thus ESOPs are a really good tool for startups to attract and retain talent, but at the same time it’s a bet for the employees. Employees should be convinced about the growth of company and should see if proper documentation is in place.

IT industry like Infosys was the first to use this ESOP feature in India. Now, almost all the sectors are using this to attract and retain best talents of the industry. Nowadays, Startup companies are actively using ESOP for attracting best human resources and to stop brain drain. Many startups fail just because of non-availability of qualified and experienced employees because startup companies can’t afford to pay higher packages to them like MNCs offer. The only option for startups to retain and attract them is to use ESOP so that employees can feel ownership rights and help startup to grow and foster. 

Stocks are never vested immediately - founders want you to stick around for a reasonable amount of time (say, 4 years) for you to be entitled to the benefits. Hence, immediate value of the stocks is just an indicative number. The startup needs to be massively successful before those numbers become meaningful and of any real (cash) value. More than the stocks themselves, you need to do a lot of hard work to find more about the company, founders and their vision. Very few startups go on to become big names. it may sound, but ESOP's of only such companies makes sense. Rest, as I said earlier, is just as good as a piece of paper.

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Setting up of an entity in USA from India

Many investors and business firms are keen to set up a Company in United States of America to expand the horizon of their products and services in other developed regions like US, Europe, and South America. Setting up of an entity in US offers several advantages like enhanced credibility in international market, attraction of angel investors, taxation benefits etc. 

Any Indian or foreign national can set up either C-Corporation (Company) or LLC (similar to that of LLP) in USA. There’s another entity type called an ‘S-Corporation’ but that entity requires all shareholders to be US Citizens. There is no restriction on the number of owners for a US Corporation or LLC, which country the owners are from or whether they are individuals or other companies.  

Key consideration before setting up of an Company or LLC in US by Indians

  • Choosing an entity 

Indian business should ask themselves first following questions before setting up of an entity in USA:

  1. Whether the entity would be set up in USA, but the operation would be carried out in India.
  2. Whether the entity would be set up in USA for marketing and brand building exercise and the rest of operation is carried out in India.
  3. Whether the entity would be subsidiary of an Indian business firm, but would carry out full-fledged operations in USA.

You can opt for LLC in case for first two situations and C-Corporation. Both entities offer big benefits to your business. Incorporating a business allows you to establish credibility and professionalism. It also provides limited liability protection.

  • Choosing a state 

In the United States, you can form a Corporation or LLC in any of the 50 States. Some US states are more “business-friendly” or “international-friendly” than others, especially Delaware, Nevada and Wyoming. Delaware, Nevada and Wyoming banks are more familiar with dealing with international clients without a local office than other states. This can make opening a bank account much easier. Moreover, after forming your company in these states, if you would like to operate from other states of US, it is still possible to do so through foreign qualification process.

If you simply want to form a US company because you need to open a US bank account and will not be opening a US branch or have a physical presence, then you might choose Wyoming which has lower annual state fees than other states. But if you want to form a company for the purpose of obtaining US investment or venture capital, you may consider a Delaware Corporation as this is the entity that is required by the vast majority of US investors and venture capitalists.

Differences between Corporation and LLC

There are difference in Corporation and LLC. However, both have limited liability protection. Same like Company and LLP in India, Corporation and LLC in US works. Choosing an entity is depend upon many things like your business structure, scalability, turnover, requirement to set up physical office in US etc. Major consideration before choosing an entity is given below:  

Ø Taxes

Corporations are responsible for paying tax on their profits and on dividends the entity distributes to its shareholders. Since dividends are not tax deductible, dividends are taxed twice. This is referred to as double taxation. While double taxation is seen as a disadvantage for businesses choosing to file as a corporation, this additional tax responsibility can often be offset by federal deductions that are only available only to corporations like advertising costs, operating expenses, employee fringe benefits such as medical and retirement plans etc. 

As of 2018, corporations pay a flat tax of 21% on their profits, which is lower than the top five individual tax rates. While this is largely offset by double taxation, any income the corporation chooses to retain at the end of the year will be taxed only once at the new 21% rate. This allows the owners of the corporation to save on taxes by investing some profits back into the business.

An LLC is taxed as a pass-through entity by default. This means that the profits of the business are "passed through" to the owners (called members). Profits and losses are reported on the individual tax returns for the owners, and not at the business level. As a result, filing taxes is often simpler for owners of an LLC. Any losses or operating costs of the business can be deducted on personal tax returns, which can help offset other income. However, an LLC may elect to be taxed as Corporation while it is an uncommon choice but it may make financial sense for some businesses.

  • Compliances

Corporations are required to hold an annual shareholder meeting each year and the proceedings and discussions must be recorded and prepared called corporate minutes. A corporation is generally required to file an annual report. Any actions or changes in the business will require a corporate resolution to be voted on at a meeting with the board of directors.

LLC is not required to keep minutes, hold annual meetings, or have a board of directors. While some states still require LLCs to file annual reports, others do not.

Process to incorporate a Corporation or LLC in the USA from India

Once you’ve decided what type of company you’d like to form and which state you will be forming the company, there are only a few basic requirements we need to form your company for you.

1. Appoint a Registered Agent

To incorporate an entity in USA, you first need to appoint a ‘Registered Agent’ who is a person or company that must have a physical address in the state of formation, be available during business hours, and will accept and sign for official legal and state documents for the company. Registered Agent is the link between you and US Government. They will accept documents, scan them and email them to you, and if necessary, forward documents via International Mail that cannot be scanned or require a physical signature.

2. Choose a Company Name

Registered Agent will search the name whether it is available in your chosen state or not same like here we do.

3. Provide Names and Addresses of the Directors, Members etc

You should provide details of Directors, Members of proposed Company/LLC alongwith its KYC documents like Passport, Address Proof, ID Proof etc. After successful documentation and form filing, your company or LLC can get incorporated in 1-2 days.

4. Federal Employer Identification Number

The Federal Employer Identification Number (FEIN) also known as an “EIN” or simply “Tax ID Number” is a number issued by the United States Internal Revenue Service (IRS) that is somewhat like an identification number for companies. Once your company is formed, Registered Agent assists you in obtaining this number from the IRS. The EIN will be needed to open a US bank account.

5. Apostille or Certificate of Authentication

If you intend to open a bank account in India or if a local company or government office will require proof of the formation of your US Corporation or LLC, you may need to have the company formation documents certified with an “Apostille”. You can ask your registered agent to send apostille certificate of formation through international courier.  

6. Open a US Bank Account

US Bank Account is compulsory for following:

  • To accept US payments;
  • To open a US merchant account;
  • To open a physical branch office in the US. 

Most banks will require you to have physical address in the United States and which must not be your Registered Agent’s address. Some banks may accept your Registered Agent address for opening the bank account, but you will need to arrange to have your bank statements etc. routed through either a mail forwarding service or have them delivered electronically. 

You should open an account in the bank that has presence in both US and in India like city bank has branches in India and in US. 

7. Open a Bank Account in Your Home Country

If you need to open a bank account in your home country, the bank will more than likely require the above-mentioned “Apostille” certificate of formation. Contact your local bank for more details on what is required to open a bank account in your country.

8. Get a US Phone Number, Website etc.

Getting a US Phone number and creating a website provides digital space in US. People nowadays visit your website instead of your physical office. So, create professional looking website and arrange for local US phone number. There are many phone number providers in US who will provide routing to forward your calls to any Indian number you wish as well as VOIP service where calls can be routed over the internet instead of standard voice lines. 

Annual Compliances

Maintain a Registered Agent

You must have a Registered Agent in US to fulfill the requirements of laws. Registered Agent is the middle man between us and US Govt.

File an Annual Report

The “Annual Report” is simply a document that updates the state on the owners, addresses and Registered Agent for your company. In many states it can be filed online. Your Registered Agent will receive and forward the required report to you before it is due. Failure to file this report can result in your company becoming inactive, be assessed late fees and eventually be administratively dissolved.

Pay US Taxes

Your company or the individual owners may have to pay taxes on any US-based income. There are 2 type of taxes one is state level and another is federal level. In addition many states are charging franchise tax. You should be in touch with your registered agent for tax compliances. 

Franchise tax

franchise tax is charged by a state to businesses for the privilege of incorporating or doing business in that state. Franchise taxes, like income taxes, are usually imposed annually. Failure to pay franchise taxes can result in a business becoming disqualified from doing business in a state. Different state have different rates. You should comply accordingly.

Business Income Taxes

All businesses must pay income taxes. These income taxes are based on the profit of the corporation. Corporations may pay both federal income tax and state income tax if the state has an income tax. Some states require businesses to pay both income tax and franchise tax.

The USA is the globe's largest national economy. It offers clear policies and regulations for encouraging startups and at the same time attractive taxation system too. In their market-oriented economy, private individuals and businesses make most of the decisions, and the federal and state governments buy needed goods and services predominantly in the private marketplace. US business firms enjoy greater flexibility than their counterparts in Western Europe and in decisions to expand capital plant, to lay off surplus workers, and to develop new products. Any business man if wants to enter into global scenario, then setting up an entity in USA is must.

Thank You.

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Delayed Payments to MSME and Case filing before MSEFC Council

SMEs are backbone of India economy. Earlier, the large organizations were only considered potential economy boosters but now the scenario has changed. Small and medium-sized enterprises (SMEs) are seen as thegrowth engine of the Indian economy. There are over 5.5 crore small enterprises that drive our Indian economy through manufacturing, exporting, importing, trading, etc. Along with this, the SME sector has been successful in providing employment opportunities in formal and informal sectors. The number of employment opportunities is bound to grow, considering the rising achievements by this sector. The SME contributes 45% to total manufacturing output and 40% to the exports from the nation. It is the largest sector also the training sector for many unemployed and unskilled people. 

Micro, Small and Medium Enterprises Development Act, 2006

The Micro, Small and Medium Enterprises Development Act 2006 is a single comprehensive act for development and regulation of micro and small enterprises. The broad objective of the Act is to facilitate the promotion, development and enhance competitiveness of micro, small and medium enterprises and for matters connected incidental thereto. 

Registration as Micro, Small and Medium Enterprise (MSME) under the Act

The following slabs have been prescribed for classification of enterprises into micro, small and medium under the Act:

Type of 


Manufacturing Industry (Investment in Plant and Machinery)

Service Industry (Investment in Equipments)


Does not exceed Rs. 25 Lakh

Does not exceed Rs. 10 Lakh


Exceeds Rs. 25 Lakh but does not exceed Rs. 5 Crore

Exceeds Rs. 10 Lakh but does not exceed Rs. 2 Crore


Exceeds Rs. 5 Crore but does not exceed Rs. 10 Crore

Exceeds Rs. 2 Crore but does not exceed Rs. 5 Crore

New Proposed Definition of MSME – Turnover based

Currently, the Act classifies micro, small and medium enterprises (MSMEs) on the basis of investment in Plant and Machinery or in Equipments. However, Govt. introduced The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018 in Lok Sabha on July 23, 2018. The Bill introduces a uniform classification for all MSMEs whether they are manufacturing or service-providing enterprises. All MSMEs will be classified on the basis of their annual turnover instead of present criteria of investment. This bill is still not being passed by the Parliament. So at present we have to consider old definition of Micro and Small enterprises till the bill passed in Parliament.

Type of Enterprise

All enterprises (Annual Turnover)


5 Crore


5 to 75 Crore


75 to 250 Crore

Payment Protection to MSME under the Act

Section 15 of the Act states that where the supplier supplies goods or renders any services to any buyer, then the buyer shall make payment on or before the date mentioned in the agreement and, if there is no agreement, then before the appointed date. The proviso to this Section states that the period of credit given by the seller shall not exceed 45 days from the day of acceptance or from the date of deemed acceptance.

  • “Appointed Date” means the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier. 

  • the day of acceptance” means,— 

(a) the day of the actual delivery of goods or the rendering of services; or 

(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier; 

  • “the day of deemed acceptance” means where no objection is made in writing by the buyer regarding acceptance of goods or services within 15 days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;

Whether MSME registration is compulsory to avail benefits?

Where the micro, small and medium enterprises (MSMEs), that are unregistered under the MSMED Act at the time of execution of the contract, can be treated as supplier or not? A bench of Delhi High Court in case of ‘M/S Ramky Infrastructure Private Limited vs. Micro and Small Facilitation Council & Anr’ held that registration of MSMEs under MSMED Act is not mandatory to avail benefits under the Act. An entity which falls within the definition of the micro, small and medium enterprise will be treated as a ‘supplier’ under Section 2(n) of the MSMED Act even if it has not filed a Memorandum as required under Section 8(1) of the MSMED Act.

Penal Interest on Delayed Payment to MSME Enterprise

In case of failure by the buyer to make payment on time, the buyer is required to pay compound interest with monthly interest rests to the supplier on that amount from the agreed date of payment or fifteen days of acceptance of goods or service. The penal interest chargeable for delayed payment to a MSME enterprise is three times of the bank rate notified by the Reserve Bank of India. The penal interest paid by the buyer or payable by the buyer is not allowed as a deduction under the Income Tax Act, making the burden, even higher.

Reference to council in case dispute regarding payment

In case of any dispute regarding the payment of principal or interest between the supplier and the borrower, reference shall have to be made to the jurisdictional Micro and Small Enterprises Facilitation Council (MSEFC), popularly known as ‘MSME Court’ constituted by the respective state governments. MSEFC of the State after examining the case filed by MSME unit will issue directions to the buyer unit for payment of due amount along with interest as per the provisions of the Act. Every reference made to MSEFC shall be decided within a period of 90 days from the date of making such a reference as per provisions laid in the Act.

How to file case before MSEFC?

Office of Development Commissioner, MSME has taken an initiative for filing online application by the supplier MSME unit against the buyer of goods/services before the concerned MSEFC. The government has launched an online delayed payment monitoring system called the MSME Samadhaan for filing an application. Any MSME, having a valid Udyog Aadhaar Memorandum (UAM) can make an application via this portal. After an application is made by the MSME, the MSEFC shall examine the case and then issue directions to the buyer unit for payment of the due amount along with the interest.

Working of MSEFC

From the date of launch of the MSME Samadhaan portal in October 2017, around 3000 applications related to delayed payments is being filled involving an amount of around Rs.750 Crore. This portal has also helped in getting the delayed payments settled mutually between seller and buyer.  

Disclosure Requirements

Section 22 of the Act states that the buyer, who buys goods or avails services from the MSMEs, and is required to get his annual accounts audited, has to mandatorily disclose the following additional information in its annual statement of accounts with respect to the amount due to the MSMEs:

  • The principal amount and the interest due thereon remaining unpaid to the supplier till the appointed date; 
  • The amount of interest paid by the buyer on account of delayed payments; 
  • The principal amount and interest due beyond the appointed date for the period of delay; 
  • The amount of interest accrued and remained unpaid at the end of each year; 
  • The amount of further interests remaining due and payable even in succeeding years, until such date when the interest due is actually paid to the MSMEs.

Half-yearly Reporting Requirements to Companies 

Central Government made it compulsory to file MSME return with the Registrar of Companies w.r.t outstanding payments to MSMEs beyond 45 days. Every Company who get supplies of goods or services from micro and small enterprises, and payment to them are pending for more than 45 days from the date of acceptance or deemed acceptance of goods or services, has to file half-yearly ‘MSME Form I’ within 31st October and 30th April respectively every year. By this step, Govt. wants to get defaulting companies details in advance so that corrective actions can be done on initial stage without any delay.

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Convertible Notes in India – How it help Start-ups in early Stage or Seed Funding Round

Govt. of India issued Consolidated FDI Policy in 2017. The thrust of the policy is to make India an attractive investment destination for foreign investors. A key feature of these policy announcements has been to boost fundraising options for home-grown startups by permitting startups to raise funds through issuance of Convertible Notes which was earlier not allowed. Convertible Notes are extremely popular investment instrument in advanced startup ecosystems such as Silicon Valley, Tel Aviv, Singapore etc.

What is Convertible Notes?

Convertible notes are debt instruments that are convertible into equity at the option of the holder or upon specific trigger events, most typically the company’s next equity fund-raising round. Under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, a convertible note issued by a qualifying startup to a non-resident investor is initially a debt instrument that may, at the option of the note holder, either be repaid or converted into equity within five years from issuance. Such notes also have the advantage of being redeemable at maturity if the startup fails to perform as expected.

What is the situation in India prior to January, 2017?

In India, issuing Convertible Notes (CN) to foreign investors was earlier forbidden since the Reserve Bank of India (RBI) allowed Foreign Direct Investment (FDI) permitted only in equity instruments and instruments that are compulsory convertible into equity shares like Compulsorily Convertible Preference Shares (CCPS) or Compulsorily Convertible Debentures (CCD). All other instruments, including those that are optionally convertible into equity, are treated as debt and have to comply with the External Commercial Borrowings (ECB). Before the new F.D.I policy, it was difficult for startups to raise funds from foreign investors, who are habituated to investing in startups through a convertible note issuance. In addition to that, such notes were not allowed to be issued because they would be considered as ‘Deposits’ under the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014.

R.B.I January, 2017 Notification 

In one of many steps being taken for Ease of Doing Business (EODB) and promote F.D.I in start-ups, the R.B.I has permitted “recognized startups” to raise funding through the convertible note route. The RBI has amended the Foreign Exchange (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, w.e.f January 10, 2017, to allow “recognized startups” to issue convertible notes to foreign investors. 

Valuation Requirements

Unlike other FDI instruments, like Equity Shares or CCPS, pricing guidelines need not to be complied with at the time of issuance of a convertible note. However, the conversion of the convertible note into equity as well as the transfer from a non-resident to a resident investor must be in accordance with the pricing guidelines. The price of shares issued upon conversion must be at or above fair market value, determined by a certified chartered accountant or merchant banker.

How Convertible Note works?

Mr. Dhaval Gusani has just started his start-up providing corporate law & start-up consultancy services. People of India still prefer to take law advisory from his local consultants. His product and business model is not very much popular in India and is undergoing changes along with his technology. However, due to quality services at lower cost, entrepreneurs and businessman now slowly and gradually prefer his services. 

After some time, some angel investors from abroad shown interest in his start-up but they find valuing his company tough as revenue is not reached at break-even point and may be they are not much sure about the success of start-up so they prefer to wait and watch how startup performs without taking immediate equity exposure. They want to fund in the form of debt where the debt should get converted into equity shares before the next round of funding at some discount so that they get to benefit as early investors. So, what we did is as follows:

Company (Dhaval Gusani’s Start-up) is looking to raise Rs. 1 crore at a valuation of Rs 10 Crore (Founder’s value). The potential investors do not understand the basis of this valuation since the company is still trying to stabilize its business model so they decided that Company will issue Rs. 1 crore convertible notes to the investors with a condition that this money shall be converted into equity at a 20% discount to the next round of funding, which ought to take place within 24 months. If Company is unable to raise the money, it has to return the notes along with interest at 10% immediately upon the expiry of the 24th month or any other time that the investors demand. 

1 year later, Company raises Series A funding Rs. 10 crore at a valuation of Rs. 30 crore. Now, the first investors will get to convert their investment of Rs. 1 crore at a valuation of Rs. 24 Crores (20% discount to the Rs 30 crore valuation). In other words, the first investors will get more shares for their money and get compensated for investing early in Company.

Conditions to issue Convertible Notes by Recognized Start-up

  • The minimum investment in a single tranche will have to be at least INR 25 lakhsThis means only serious and bigger investors must be benefitted from a note.
  • The amount will have to be converted within 5 years;
  • The terms of conversion will have to be determined upfront at the time of issue of Convertible Notes.
  • The consideration for convertible notes can be sent through banking channels or through an escrow account. Escrow account to be closed immediately after the requirements are completed or within six months, whichever is earlier.
  • The issue of equity shares in lieu of convertible notes must be in compliance with RBI’s pricing guidelines, that is, valuation must be done through any internationally recognised pricing methodology at an arm’s-length basis by a qualified chartered accountant or merchant banker. 
  • Convertible notes are freely transferable and can be acquired/transferred by way of sale, provided the sale is in accordance with the pricing guidelines prescribed by the RBI.
  • Prior Government approval for the issuance of a convertible note will be required for cases where the startup is engaged in any activity that falls under the approval route under the existing regulatory framework for FDI. Startups engaged in sectors falling in the automatic route for FDI do not require any prior approval with respect to such issuance.

India estimated to house the third-highest number of tech startups in the world after the United States and England. This policy relaxation will help innovative startups raise seed capital in their initial (but critical) phase and explore funding opportunities with both domestic and foreign investors. While the pricing guidelines still act as a hamper with the restrictions on price of such instruments to be determined at fair market value, it is hoped that the RBI proactively exempts issuance of convertible notes by startups from the pricing guidelines for it to bring about the desired impact.

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Starting a business in Singapore - Complete Guide

Every year, Singapore witnesses a large influx of foreign capital and global talent from across the globe. This strong liking towards Singapore can be attributed to its pro-business approach, lower tax rates, business friendly laws, stable political environment, free from corruption and red-tapism, transparency, startup nurturing and among others.

Why so much FDI in Singapore or Why to start Business there?

  • Lower Tax Rates

The corporate tax rate in Singapore is between 8.5%–17%, which is quite lower than the rates prevalent in other countries in the world. It is a great reward to the business owner that is setting up a company in Singapore. In addition, Singapore based holding companies can repatriate dividends from their foreign subsidiaries to free of Singapore tax. 

  • Ranking in Ease of Doing Business

Singapore consistently tops World Bank’s Ease of Doing Business report due to its hassle-free business set-up processes and was also rated as offering the best IP protection, infrastructure, and incentives in Asia by World Economic Forum’s Global Competitiveness Report 2015-16. The Economist Intelligence Unit, Country Forecasts Report in 2014, ranked Singapore as the most attractive investment location, both regionally and globally. The Global Innovation Index (GII) 2015 ranked Singapore as the best-performing Asian country in terms of innovation performance.

  • Locational and Infrastructural advantages

Singapore is location in the heart of South-east Asia and close proximity to emerging markets of India and China. It’s Changi International Airport serves over 80 international airlines with connections to more than 330 cities. Singapore’s seaport infrastructure has been ranked the best in Asia for the past two decades. The container ports here are the busiest in the world, offering 200 shipping lines with links to some 600 ports in 123 countries.

  • Stable Political Environment, Arbitration, Transparent, free from red tapism, Corrupation etc. etc.

Singapore has the most stable political environment in South-east Asia, offering entrepreneurs and investors a strong sense of security and comfort. In the event of cross-border disputes, businesses can rely on Singapore’s reputation as a world-class arbitration facility. The World Economic Forum ranked Singapore as having the best IP protection in Asia. The same report recognised Singapore as a country with sound political infrastructure and policy-making procedures; leading to its ranking as the most transparent country in Asia that enjoys a stable business environment. It is also the least corrupt country in the Asia region, where transparency is valued highly. This is according to the IMD World Competitiveness Report 2015.

Pre-incorporation considerations

Before starting business in Singapore following things must be kept in mind by foreigners:

  • Taxation 

Singaporean tax rate are very much lower as compared to other jurisdictions. The biggest advantage is no tax on dividend distribution & capital gain and Corporate Tax is 8.5 % on your first S$300,000 of annual profit and 17 % thereafter.

  • Local Nominee Directors

Singapore company must have at least 1 Local Resident Director. Such nominee director does not interfere with the affairs of the company and are easily available. This person can be a citizen, permanent resident, or someone with a valid employment pass. Indian can be treated as local if he/she is having valid employment pass. You can appoint as many directors, local and foreign, as you want. You must ensure they are no younger than 18, have a clean criminal record and can’t suffer from bankruptcy. Directors need not be shareholders. 

  • Shareholders 

For Private Limited Company, you can have between 1 to 50 shareholders. A minimum of one shareholder is required. 100% foreign ownership is allowed. Shareholders can be individuals or entities, local or foreign. The director and shareholder records are public accessible like any one can see after paying nominal fees.

  • Company Secretary

You have to appoint a qualified company secretary within six months of incorporation. A sole director or shareholder can’t also be the company secretary, who must be a natural person living in Singapore.

  • Minimum Paid-up Capital

Your company must have at least S$1 in paid up capital for register Pte Ltd company in Singapore, though you can increase the amount at any time after incorporation. Singapore companies do not use authorized capital. It can be Ordinary shares, preference shares or other shares.

  • Registered Address

You need to register a local business address to register Pte Ltd company in Singapore. It can be residential or commercial, but can’t be a post office box. 

Process of Company Registration in Singapore

Step 1: Company Name Reservation

To register a new company, its name should be approved by ACRA – Singapore Company Registration Authority. It will take 2-3 hours for approval of name. The name must be, Unique, meaningful, easy to read and devoid of the vulgar or obscene word, Free of copyright issue. It should not infringe any trademark.

Your application may require an approval of external authority if the company name includes certain words such as the “Bank,” “Finance,” “Educational,” “Media,” etc. 

Once the company name is approved & reserved, it will be automatically reserved for you for 60 days from the date of application. You are advised to incorporate the company within a specified period. However, we as your registered filing agent can ask for an extension of another 60 days by filing a request on your behalf.

Step 2: Company Registration

After the approval of company name, you can apply for company registration. It should not take much time to accomplish the process assuming documents are in order.

Documents required:

  • A brief description of business activities;
  • Details of Singapore registered address of the company;
  • Particulars of all shareholders name, address, contact details and email id;
  • Particulars of all directors name, address, contact details and email id;
  • Particulars of company secretary name, address, contact details and email id;
  • Foreign Entrepreneurs need to submit a copy of their passport and residential address proof;
  • Foreign Companies need to submit Memorandum & Articles of Associations;
  • Singapore Residents must submit a copy of their Singapore identity card;
  • Company Constitution, known as the Memorandum and Articles of Association (MAA). You may decide to adopt the standard Singapore company constitution as available from ACRA, which is acceptable for most.
  • Signed Consent to Act as a Director for each director;
  • Signed Consent to Act as Company Secretary by the company secretary;

Step 3: Certificate of Incorporation

Upon successful registration of the company, ACRA will issue e-Certificate of Incorporation containing a Unique Entity Number (UEN). This e-Certificate is sufficient in Singapore and accepted for all corporate needs A company can also purchase a hard-copy Certificate of Incorporation from ACRA at any time after incorporation. 

Compulsory Compliances

  • Register of Companies 

Companies are required to maintain beneficial ownership information in the form of a Register of Registrable Controllers, and to make the information available to public agencies upon request.

  • Register of Nominee Directors

Companies are required to keep a register of its nominee directors containing the particulars of the nominators of the company’s nominee directors

  • Financial Year

Every company in Singapore is free to determine its financial year. It does not necessarily need to be January to December or April to March accounting cycle. The financial year (accounting cycle) can start in any month of the year.

  • Financial Statements

 Directors of the company are required to set before the shareholders company’s annual financial statements compiled in accordance with the Financial Reporting Standards of Singapore, consisting of:

  • Directors’ Statement
  • Independent Auditors’ Report (if required)
  • Balance Sheet
  • Profit and Loss Statement
  • Statement of Changes in Equity
  • Cash Flow Statement
  • Corresponding Notes to Financial Statements

  • Requirement of Audit

Audit is exempted in the following category of companies:

The Company having only upto 20 shareholders that too only individual and

The Company is ‘Small Company’.

A company qualifies as a ‘small company’ if it meets at least 2 of 3 following criteria for immediate past two consecutive financial years:

  1. Total annual revenue is not more than $10m;
  2. Total assets is not more than $10m;
  3. No. of employees is not more than 50.

  • Annual General Meeting

Every Singapore Company needs to hold its annual general meeting (AGM) once in every calendar year and its financial statements are to be tabled at the AGM for the shareholders’ approval. The Singapore Companies Act states that every company is required to hold an AGM:

  • once in every calendar year; and
  • within 15 months from the date of the last AGM; or
  • within 6 months from its financial year end date, whichever earlier

Newly incorporated companies are allowed to hold the first AGM within 18 months from the date of incorporation.

An AGM must be physically held anywhere in the world, whereby the shareholders meet.

The following matters are to be discussed at an AGM:

  • To approve the Director’s Report and Audit Report;
  • To approve directors’ fees, remuneration and emolument;
  • To re-elect the director(s) (if applicable)
  • To reappoint auditors;
  • To declare dividends, if any;
  • To transact any other business.

Exemption for private companies from holding AGMs 

Private companies are exempted from holding AGMs if they send their financial statements to members within 5 months after the FYE.

  • Filing of Annual Returns

For companies having a share capital and keeping a branch register outside Singapore: Annual returns to be filled within 6 months (if listed) or 8 months (if not listed) after the closure of financial year.

For other companies: Annual returns to be filled within 5 months (if listed) or 7 months (if not listed) after the closure of financial year.

  • Corporate Tax Filing

Every company has to file Corporate tax return by 30 November (paper-filing) and 15 December (e-filing).

Company Registration quick FAQs

Is a one-person company allowed in Singapore?

Yes, a company can be owned and operated by a single person; i.e., a person can be the sole shareholder and director of a company. The following caveats apply: At least one director must be a Singapore-resident director. Therefore if you are a foreign person and not a resident of Singapore, you can still be the shareholder and operating director of your company, but in addition, you will be required to appoint a Singapore-resident person as an additional director. 

Can a foreigner incorporate a Singapore company?

Yes. As stated earlier, foreigners are free to form companies in Singapore and they can be 100% shareholders of their company. A foreigner is not required to relocate to Singapore for this purpose; they are free to operate their company from overseas. 

Do I need to appoint a corporate secretary for my Singapore company?

Yes, each Singapore company must appoint a corporate secretary. A company secretary is an individual who is a resident of Singapore and passed the requisite exam. 

How long will it take to register my Singapore company?

Singapore company registration consists of a number of steps.

  1. Providing information about company structure and supporting documents – 7 days
  2. “Know You Client” (KYC) checks by Corporate Service Provider as required by law: 1 day
  3. Reservation of Company Name with ACRA: 1 day
  4. Preparation of incorporation document set: 2-3 days
  5. Client Review and Signatures on document set: Anywhere from 3 days to 15 days (depends on the client and number of signatories involved)
  6. Incorporation with ACRA: 2 days

So, overall time required to incorporate company in Singapore by foreign person can vary from 7 days to 30 days.

Thank You.

The author of this article can be contact at dvg.pcs@gmail.com or +91 94276 75100. 

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