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Reply to SCN received from MCA-CMS

As you all know, Ministry of Corporate Affairs created AI based system called “Compliance Monitoring System” which will automatically track certain non-compliances based on various filings done by the corporates. Many companies started receiving show cause notice (SCN) since 4th of November, 2019 regarding violation of Section 96 i.e Annual General Meeting and Section 204 i.e Secretarial Audit Report. Fundamental question that asked by all is How to reply/respond to the show cause notice received from ROC/MCA/CMS? Before going to how to reply, let’s understand some basics.

Why Show Cause Notice?

As per Section 96 of the Companies Act: Every company other than a OPC shall in each year hold in addition to any other meetings, a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it, and not more than 15 months shall elapse between the date of one annual general meeting of a company and that of the next. Provided that in case of the first annual general meeting, it shall be held within a period of 9 months from the date of closing of the first financial year of the company and in any other case, within a period of 6 months, from the date of closing of the financial year. 

Now, there are following 2 probabilities for getting notice for violation of Section 96:

  1. You exceeded specified timeline of 9 months or 6 months from the closure of financial year or
  2. The gap between 2 AGM exceeded 15 months.

How MCA come to know your AGM dates and violation?

MCA comes to know your AGM dates through filings done in AOC-4 and MGT-7. New launched AI based system tracks dates from your e-forms and if there is violation, it will automatically send notice on your company’s email id. 

What exactly SCN tells?

SCN is a system generated notice sent on company’s email of which is registered with the MCA.  Notice contains its unique number, date & time, non-compliant section, provisions of that section and among other things.

SCN also provides 15 days time to give reply to the SCN through MCA CMS portal. If company fails to give reply within 15 days, Registrar of Companies will initiate penal action against the company.

Further, it is the duty of the company to give SCN to all its Directors, KMP etc. Delivering SCN though e-mail will be treated as deemed to have been served upon every officer in default of the company in terms 20 of the Companies Act, 2013

What to reply for Violation of Section 96?

Check first what the exactly non-compliance is? If you really failed to conduct an AGM on timeline, your reply should contain acceptance of non-compliance and prayer for imposing low penalty due to small size of the company, nothing loss to the shareholders and general public, no repetitive nature of non-compliance etc. etc. 

There are chances that you conducted an AGM within due date but you have mentioned wrong AGM date in e-forms AOC-4 or MGT-7 which give rise to issuance of SCN. In that case, your reply categorically deny the non-compliance of Section 96 but you should accept mistake done in filing e-forms and prayer should contain no penalty as AGM was held within due date. You might get order to amend both the e-forms with correct date of AGM.

In reply, you should contain clause that ‘Opportunity of being heard personally must be provided before passing any order or imposing any penalty’.

Process to reply SCN received from MCA-CMS?

  • Prepare a letter of reply in 1 pdf file
  • Prepare and compile evidence or supporting documents in another pdf file 
  • Now, go to https://mcacms.gov.in/
  • Click on ‘Reply for Show Cause Notice’
  • Click on SECRETARIAL AUDIT  OR ANNUAL GENERAL MEETING whichever non-compliance is
  • Enter CMS reference number mentioned at the top of the SCN (it looks like: D/RC201/9999/2019/96/16-17)
  • Search CMS reference number
  • Click on Send OTP button
  • OTP will be send on registered email id of the company in which SCN received
  • Enter OTP and Login
  • After login, you will find your company’s name and non-compliance
  • You can give reply maximum by 500 words in tab. If reply exceeded 500 words, attach PDF file in attachment section
  • You can attach 2 PDF file upto 50 MB
  • After writing reply or attaching attachments, press submit reply button to finally submit.

Please note that CMS portal is not accepting e-forms. If you want to attach e-form as a proof, you need to first print it out, scan and then attach. 

What after submission of Reply?

If company desires to make an oral representation through its authorized representative, it must indicate the same while submitting its reply in electronic mode. The adjudicating officer shall allow such person to make such representation after fixing a date of appearance. 

If, after considering the reply submitted by company, the adjudicating officer is of the opinion that physical appearance is required, he shall issue a notice, within a period of 10 working days from the date of receipt of reply, fixing a date for the appearance of such company, through its authorized representative.

Powers of Adjudicating Officer

The adjudicating officer shall exercise the following powers, namely:-

(a) to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case after recording reasons in writing;

(b) to order for evidence or to produce any document, which in the opinion of the adjudicating officer, may be relevant to the subject matter.

What if person fails to reply or appear

If any person fails to reply or neglects or refuses to appear before the adjudicating officer, the adjudicating officer may pass an order imposing the penalty, in the absence of such person after recording the reasons for doing so.

Passing of Order

The adjudicating officer shall pass an order within 90 days of the date of issue of notice where any person appeared before the adjudicating officer. In case an order is passed after the aforementioned duration, the reasons of the delay shall be recorded by the adjudicating officer and no such order shall be invalid merely because of its passing after the expiry of period.

The adjudicating officer shall send a copy of the order passed by him to the concerned company, officer who is in default or any other person or all of them and to the Central Government and a copy of the order shall also be uploaded on the website.

Quantum of Penalty

While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely:-

(a) size of the company;

(b) nature of business carried on by the company;

(c) injury to public interest;

(d) nature of the default;

(e) repetition of the default;

(f) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; and

(g) the amount of loss caused to an investor or group of investors or creditors as a result of the default:

The penalty imposed shall be less than the minimum penalty prescribed if any, under the relevant section of the Act. In case a fixed sum of penalty is provided for default of a provision, the adjudicating officer shall impose that fixed sum, in case of any default therein.

Payment of Penalty

Penalty shall be paid through Ministry of Corporate Affairs portal only. All sums realized by way of penalties under the Act shall be credited to the Consolidated Fund of India.

Appeal against the order of Adjudicating Authority

Company can file appeal against the order of the adjudicating officer in writing with the Regional Director having jurisdiction in the matter within a period of 60 days from the date of receipt of the order of in Form ADJsetting forth the grounds of appeal and shall be accompanied by a certified copy of the order against which the appeal is sought.

On the receipt of an appeal, office of the Regional Director shall endorse the date on such appeal and shall sign such endorsement. If, on scrutiny, the appeal is found to be in order, it shall be duly registered and given a serial number. 

On the admission of the appeal, the Regional Director shall serve a copy of appeal upon the adjudicating officer against whose order the appeal is sought along-with a notice requiring such adjudicating officer to file his reply within 21 days.

A copy of every reply, application or written representation filed by the adjudicating officer before the Regional Director shall be forthwith served on the appellant by the adjudicating officer.

The Regional Director shall notify the parties, the date of hearing of the appeal which shall not be a date earlier than thirty days following the date of such notification for hearing of the appeal.

On the date fixed for hearing the Regional Director may, subject to the reasons to be recorded in writing, pass any order as he thinks fit including an order for adjournment of the hearing to a future date.

In case the appellant or the adjudicating officer does not appear on the date fixed for hearing, the Regional Director may dispose of the appeal ex-parte. Providedthat where the appellant appears afterwards and satisfies the Regional Director that there was sufficient cause for his nonappearance, the Regional Director may make an order setting aside the ex-parte order and restore the appeal.

A certified copy of every order passed by the Regional Director shall be communicated to the adjudicating officer, to the appellant and to the Central Government.

Thank You.

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There are drastic changes in the provisions of filing of e-forms, documents with the Registrar after the introduction of the Companies Amendment Act, 2017 and the Companies Amendment Ordinance Act, 2018. Earlier, Section 403 of the Companies Act, 2013 prescribed 270 days timeline within which any document can be filled with the Registrar with additional fees. CAA, 2017 amended Section 403 and timeline of 270 days has been removed. Now, you have to file any statutory document within the time mentioned in relevant section for e.g AOC-4 within 30 days of AGM, MGT-7 within 60 days of AGM and like. After the expiry of the time given in relevant section you can file document with an additional fees as mentioned in Section 403 and also need to pay penalty if you receive show case notice from Registrar. 


Let us know understand timeline and consequences of non filing or late filing of any statutory document with the Registrar of Companies.

Filing of financial statements in AOC-4 (Section 137)

Every Company has to file a copy of the financial statements, including consolidated financial statement, if any, along with all the documents which are required to be attached to such financial statements, with the Registrar within 30 days of the date of AGM in form AO4-4 with normal fees.

What if Company fails to file AOC-4 within 30 days of AGM?

If a company fails to file the copy of the financial statements within 30 days from the date of AGM, Company can file AOC-4 after 30 days of AGM but after the payment of additional fees of Rs.100/- each per day.

What is the penalty amount of delay of filing AOC-4?

If you failed to file financial statement within 30 days, Company and Every Director are liable for following amount of Penalty:

The company shall be liable to a penalty of Rs. 1,000/- for every day during which the failure continues but which shall not be more than Rs. 10,00,000/- and

The managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the directors of the company, shall be liable to a penalty of Rs. 1,00,000/- and in case of continuing failure, with further penalty of Rs. 1,000/- for each day after the first during which such failure continues, subject to a maximum of Rs.5,00,000/-.

Filing of Annual Return in MGT-7 [Section 92(4)]

Every company shall file with the Registrar a copy of the annual return in form MGT-7, within 60 days from the date of AGM with normal fees.

What if Company fails to file MGT-7 within 60 days of AGM?

If a company fails to file the copy of the Annual Return within 60 days from the date of AGM, Company can file MGT-7 after 60 days of AGM but after the payment of additional fees of Rs.100/- each per day.

What is the penalty amount of delay of filing MGT-7?

If a company fails to file the copy of the Annual Return within 60 days from the date of AGM, Company and Every Director are liable for following amount of Penalty:

Company and its every officer who is in default shall be liable to a penalty of Rs. 50,000/- and in case of continuing failure, with further penalty of Rs. 100/- for each day during which such failure continues, subject to a maximum of Rs. 5,00,000/-. 

If you receive notice from ROC and penalty is levied after due adjudication needs to paid otherwise additional fees paid is sufficient. 

In both of the above cases, penalty is required to be paid only if you receive notice from Registrar and it is levied after due adjudication otherwise additional fees @ Rs.100/- per day is sufficient. As of now, there is no process to apply Registrar to adjudicate penalty on non-compliance so we can assume that Company can’t approach Registrar to adjudicate the penalty on non-compliance.

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Conversion of LLP into Company


A Limited Liability Partnership (LLP) is a corporate business form combining features of both Company and traditional partnership firms. It offers the benefits of a limited liability to the partners. The concept of LLP was emerged and got place in statutes in 2008 while the concept of private company is much older. 

LLPs offer several advantages like separate Legal entity, limited liability of partners, perpetual succession, lesser compliance cost than companies etc. In spite of several benefits of LLP there are some drawbacks also like

  • LLPs attract income tax at the rate of 30% while Companies attract income tax at the rate of 22%. This is the biggest advantage of Company over LLP. 
  • LLPs do not have the concept of shareholding So, Venture Capitalists and Private Equity Investors who want to actively participate in the management of the business do not prefer to invest in the LLP. 
  • Bankers and FIs prefer to lend Companies than to LLPs so Companies have better borrowing capacity.

For whom LLP is best?

It is suitable for the startups which need Limited Liability in business; Want to save annual compliance expenses and audit expenses, Don’t want to raise the funds from Angel Investor or Venture Capital firms in the initial phase; Don’t want to issue shares to employees as ESOP.

For whom Company is best?

It is suitable by the startup when they want need funding from investors and VCs; Offer shares to employees as ESOP; Need borrowings from Banks and FIs; Need foreign funding etc.

Conversion of LLP into Company

LLP Act, 2008 does not cover the provision of conversion of LLP into Company but Section 366 of the Companies Act, 2013 and Company (Authorized to Register) Rules, 2014 allows LLP to convert into a Company as per the provisions contained therein. Many Limited Liability Partnerships (LLPs) are now converting itself into a Private Limited Company for more growth & expansion and for infusing equity capital.


  • LLP must have at least 2 partners; approval from all the partners is required.
  • Advertisement in newspaper, in form URC-2, in a local language wherein registered office of LLP is situated and a national newspaper.
  • No Objection Certificate (NOC) is required from the Registrar of Companies where such LLP is registered.

Process of Conversion of LLP into Company

  • Publish newspaper notice in form URC-2

A notice seeking objections for conversion of LLP into company must be published in form URC-2 in atleast 2 newspapers one in local language wherein registered office is situated and another in english language newspaper.

  • File RUN 

Name Approval has to be obtained from the ROC by submitting an application in RUN. Object clause of Company must be attached. 

  • Filing form No URC – 1 & SPICe & SPICe MOA and SPICe AOA

After getting the approval of name from Registrar of Companies and after 21 days from the publication of newspaper advertisement, the applicant should file the form No URC-1 & SPICe along with the following documents.

Attachments to URC-1

  1. List of the members with details viz. names, address, occupation, shares held by them appropriately, etc.
  2. List of the first directors of the private company with details viz. names, address, the DIN etc.
  3. An affidavit from every person proposed as first directors, that he is not banned to be a director under section-164 
  4. A list including the names & addresses of partners of LLP 
  5. A copy of LLP agreement & certificate of registration duly verified by two designated partners 
  6. A statement indicating the following specifications q) the nominal share capital of firm & the number of shares into which it is separated b) the number of shares taken & the amount paid for every share c) the name of the firm, with the addition of word Limited or private limited is required.
  7. A written consent of all partners of LLP
  8. A written consent or No objection certificate from all creditors.
  9. Copy of newspaper advertisement, 
  10. Statement of accounts of the company which must not be 30 days preceding the date of the application and it must be duly certified by the auditor.
  11. A copy of latest income tax return
  12. Undertaking by proposed first directors with regard to compliance with Stamp Act

Attachments to SPICe

  1. Consent & Declaration by first Directors in form DIR-2; (On Plain Paper)
  2. Self-Declaration by first directors and subscribers in form INC-9; (On Plain Paper)
  3. ID Proof and Address Proof of Directors; (PAN card and Aadhar card)
  4. Resolution of Partners for conversion of LLP into Company;
  5. Proof of regd. Office like Rent Agreement/Sale deed
  6. Latest Electricity bill (Not older than 2 Months)
  7. NOC of Owner of Office, If Regd office is rented.

  • Issue Share Certificates to the members.


Recently, Government slashed the corporate tax rate of Companies from 30% to 22% while tax rate on LLPs are unchanged and continue to attract tax @ 30%. So, many existing LLPs are now planning to convert themselves into Companies for multiple reasons like Growth and Expansion, Infusing equity capital, reducing tax liabilities, receiving foreign investment, attracting VCs and HNIs etc. 

Thank You.

For any query, write to dvg.pcs@gmail.com

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Reporting of Foreign Direct Investment in India

Foreign Direct Investment (FDI) has been an important source of funds for companies in a country where capital is scarcely available. Under FDI, overseas money, either by an individual or entity, is invested in an Indian company. 

Modes of FDI

Investment in India can be made either under Automatic Route which does not require approval from RBI or under Approval Route which requires prior approval from the concerned Ministries / Departments via a single window - Foreign Investment Facilitation Portal (FIFB) administered by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry, Government of India. 

Forms of Business for Foreigners

A Foreign business entity can enter India via a following number of alternatives, subject to general conditions mentioned in FDI Policy:

As an Indian Company either by setting up a wholly owned subsidiary or Joint Venture with an Indian entity/person.  

Operate as a Foreign Company and be registered with the Registrar of Companies, MCA. 

Liaison office - This type of office is only allowed to collect market information and liaison with the foreign company. They are not allowed to earn income from any activities. 
Branch Office - The scope of activities of BOs is much larger as compared to Liaison Offices. BOs are allowed to generate revenue by various providing professional services and technical support for products imported/assembled/manufactured by the parent/holding company. 

Project Office - Set up to execute specific projects, project offices are allowed in India if:

  • The foreign entity has secured a contract in India, which will be funded via inward remittance by either a bilateral or multilateral financing agency.
  • Loan has been sanctioned by a public financial institution or bank to the Indian company contracting the project. 

FDI in Limited Liability Partnership

FDI in LLPs is allowed upto 100% under automatic route since 2015 provided LLPs are adhering to the specific sectoral limits. Foreign companies or individuals can be appointed as Partner or Designated Partner of LLP. LLPs can make further downstream investment in another company or LLP. Earlier they were not permitted to make any downstream investments. Repatriation of capital is permissible with adherence of appropriate pricing guidelines and reporting requirements. 

FDI in Private Limited Company

An Eligible Indian Company can take foreign investment and issue shares and other convertible securities subject to the Companies Act, 2013, Foreign Exchange Management Act, 2000 and Consolidated FDI Policy. 

Payment for Share and other specified securities 

An India company issuing shares to a person resident outside India should receive the payment for the shares through one of the following routes:

  • Inward remittance through normal banking channel.
  • Debit to NRE/FCNR account of the person concerned maintained with an authorised dealer or bank in India.

RBI Compliances Post Allotment

Earlier, there was 2 stage reporting requirement i.e First reporting after receipt of money in Advance Reporting Form (ARF) and Second after allotment in form FC-GPR. Now, Only 1 reporting is required to be made i.e after allotment in form FC-GPR.

After receipt of Money, Investee Indian Company has to call Board Meeting and allot securities as per provisions of Companies Act, 2013. Investee Indian Company has to file e-form PAS-3 with the RoC within 30 days of Allotment. 

Investee Indian Company has to additionally file form FC-GPR with the RBI in firms portal of RBI. The following are the steps required for reporting of foreign investment.

1. Creation of Entity User

Investee Indian Company has to create Entity Master if they are receiving foreign investment first time through this link:


Entity User is short form required to be filed by authorized representative of Investee Indian Company with the following details:

  • His / Her Full name, Address, Email Id, PAN, Mobile No;
  • User Name for Investee Indian Company;
  • Name of Investee Indian Company/LLP, Address and its CIN/LLPIN;
  • Jurisdictional Regional office of RBI;
  • Authority Letter in a specified format.

Once Entity Master form is approved, you will get user id and password in your provided e-mail id. Login to https://firms.rbi.org.in/firms/faces/pages/login.xhtml and fill entity master details. 

2. Creation of Business User

After successful filing of entity master details, Investee Indian Company has to create business user through this link:


Business User is short form required to be filed by authorized representative of Investee Indian Company with the following details:

  • His/Her Full name, Address, Email Id, PAN, Mobile No;
  • User Name for Investee Indian Company;
  • Details of Authorized Dealer Bank to whom reporting is made; 
  • Name of Investee Indian Company, PAN and CIN;
  • Authority Letter in a specified format.

Once Business User is created, you will get user id and password in your provided e-mail id. Login to https://firms.rbi.org.in/firms/faces/pages/login.xhtml. After login you can find Single Master Form (SMF) in left tab. You can click and select FC-GPR for reporting of foreign investment. 

3. Filing of form FC-GPR for issue of shares

Form FC-GPR needs to be filled within 30 days from the date of issue of shares with the following documents: 

  • Copy of Foreign Inward Remittance Certificate received from AD Bank
  • Copy of KYC of Foreign Investor received from AD Bank
  • Certificate from the Company Secretary of the company accepting investment from persons resident outside India certifying that: 
    • All the requirements of the Companies Act, 2013 have been complied with; 
    • Terms and conditions of the Government approval, if any, have been complied with; 
    • The company is eligible to issue shares under these Regulations; and
    • The company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration; 

  • Certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.
  • Declaration from Director/Authorized Representative of Investee Indian Company in a specified format.
  • Any other supporting documents like MOA in case of allotment towards subscription, Board / General Meeting Resolution in case of subsequent allotment etc.
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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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