Post Incorporation Compliance

Post-Incorporation Compliances for Private Limited Company

Congratulations on successfully incorporating your private limited company ! However, remember that incorporation is just the beginning of your journey. The real work starts immediately after receiving your Certificate of Incorporation, as you must fulfil several mandatory compliances under the Companies Act 2013. These post-incorporation compliances are critical for ensuring your company can legally operate, establish proper governance, and avoid substantial penalties. Failing to meet these requirements leads to financial consequences and could result in your company being struck off the Register of Companies (ROC).

The Companies Act 2013, along with various rules framed thereunder, establishes strict timelines — ranging from 30 to 180 days after incorporation—within which these compliances must be completed. Understanding and adhering to these deadlines is crucial for every new private limited company in India. The risks of non-compliance are significant: heavy penalties, legal inability to conduct business, potential director disqualifications, and even company strike-off. This comprehensive guide will walk you through each essential compliance step, ensuring your new company starts on the right legal footing.

Director Disclosures (Filing of MBP-1) Form

One of the immediate post-incorporation requirements is the disclosure of interests by all directors of the company. As per Section 184(1) of the Companies Act, every director must disclose their concern or interest in any company, corporate body, firm, or other association of individuals (including shareholding interest) by giving a notice in writing in Form MBP-1.

The timeline for disclosures : Directors of newly incorporated companies must make their disclosures at the first board meeting they attend following their appointment during the incorporation process, where they were named as the first directors in the Articles of Association (AOA). Existing directors are required to make disclosures at the first board meeting of each financial year. If their particulars or interests change from what was previously disclosed, then the disclosure must be made at the first board meeting held after such change.

Consequences on Non-Disclosure : Failure to disclose interests can lead to penalties ranging from ₹50,000 to ₹1 lakh for the director. Additionally, if a director enters into a contract or arrangement without proper disclosure, the contract may be voidable at the company's option, and the director may need to account for any profits made from such contracts.

The First Board Meeting After Incorporation

One of the initial and most critical compliances is convening the first board meeting within 30 days of incorporation, as mandated by Section 173 of the Companies Act, 2013. This meeting establishes the governance foundation of your company. The meeting must follow proper notice requirements and maintain minutes as prescribed in Secretarial Standard-1 (SS-1). The notice period can be waived if all directors consent to a shorter notice period.

Appointment of First Statutory Auditor

Section 139(6) of the Companies Act mandates that the Board of Directors appoint the first auditor within 30 days from the date of registration of the company. This appointment is one of the key agenda items of the first board meeting. Auditors serve as independent watchdogs for your company's financial reporting. They provide credibility to your financial statements, which is crucial for stakeholders, including potential investors, banks, and regulatory authorities.

If the Board fails to appoint the first auditor within the 30-day window, the members of the company must appoint the first auditor within 90 days at an extraordinary general meeting. This cascading timeline ensures that every company has an auditor in place early in its existence. The auditor appointed will hold office until the conclusion of the first Annual General Meeting (AGM). Ensure you select a qualified chartered accountant or firm with a valid certificate of practice.

While there's some debate in professional circles about whether Form ADT-1 filing is strictly required for the first auditor appointed by the Board, it's widely considered good practice to file this form within 15 days of the appointment. This approach ensures transparency and proper statutory record-keeping.

The government fee for filing Form ADT-1 depends on the authorised capital

Statutory Auditor Independence: Activities Strictly Prohibited

The Companies Act establishes a clear separation between audit and non-audit services to ensure auditor independence and objectivity. Under Section 144, a statutory auditor must not engage in any activity other than the statutory audit responsibility for the company. This strict separation is fundamental to maintaining the integrity and reliability of financial reporting. Think of it this way: the auditor is like a referee in a sporting match—they must remain completely impartial and cannot coach either team or have any stake in the outcome. The law specifically prohibits auditors from providing the following services to their audit clients:

This prohibition applies whether these services would be provided directly or indirectly to the company, its holding company, or its subsidiary company. Violations of these restrictions can lead to severe penalties for both the auditor and the company, which is prescribed in section 147, which may be up to five lakh rupees.

Issue of Share Certificate

Under Section 56(4)(a) of the Companies Act, a company must issue share certificates to all the initial subscribers within two months (60 days) from the date of incorporation. These certificates serve as prima facie evidence of ownership of shares in the company. Share certificates are legal documents that certify ownership of shares. They're similar to a property deed for real estate or the title certificate for a vehicle—they provide tangible proof of ownership that can be relied upon in legal and financial matters. For newly incorporated companies, share certificates are typically issued to the subscribers of the Memorandum of Association. These are the founding shareholders who agreed to take shares during the incorporation process.

It's worth noting that for non-small private companies, shares are now required to be issued in dematerialized form. This necessitates obtaining an International Securities Identification Number (ISIN) and appointing a Registrar and Transfer Agent (RTA), adding another layer to the share issuance process.

Mandatory Dematerialization of Shares

The Ministry of Corporate Affairs (MCA) has mandated the dematerialisation of shares for certain companies through amendments to the Companies (Prospectus and Allotment of Securities) Rules, 2014. Understanding the current regulatory framework is essential for compliance planning :

For newly incorporated non-small private companies, the best practice is to issue shares directly in dematerialised form rather than first issuing physical certificates and then converting them. This approach streamlines the process and avoids the additional step of dematerialisation later. However, the legal requirement to issue share certificates within 60 days of incorporation still applies under Section 56(4)(a) of the Companies Act.

The dematerialisation process requires several steps:

• Obtaining ISIN for the company's shares from depositories (NSDL or CDSL)
• Appointing a Registrar and Transfer Agent (RTA)
• Entering into agreements with depositories NSDL and/or CDSL
• Ensuring shareholders open their own Demat accounts to hold shares in electronic form

Share Franking or Stamp Duty Payment

Once share certificates are issued, payment of applicable stamp duty becomes mandatory within 30 days of the issue of the share certificate. Stamp duty on shares is governed by the Indian Stamp Act of 1899, with specific provisions and rates determined by state stamp duty laws. The stamp duty is calculated based on the value of shares being issued and the state where the registered office is located. As per Section 21 of the Indian Stamp Act, stamp duty is paid on the securities' issue price/transaction price, not just the nominal or par value. If shares are issued at a premium, duty is calculated based on the full issue price, including the premium.

Stamp Duty for Physical Share Certificates

For companies issuing physical share certificates, franking is one traditional method of paying stamp duty. This involves making impressions on the share certificate using a Franking Machine, which is typically installed in the office of the sub-registrar or collector of the stamp office. In most states, stamp duty is paid online, and the process of making payment varies significantly. The documents typically required for payment of stamp duty on physical share certificates include:

Stamp Duty for Dematerialized Shares

The stamp duty payment process is entirely online for companies issuing shares in dematerialised form (as required for non-small private companies). The Government of India has implemented a centralised system for collecting stamp duty on securities market instruments through stock exchanges, clearing corporations, and depositories.

Uniform Stamp Duty/Rates : The Finance Act 2019 amended the Indian Stamp Act to provide uniform rates of 0.005% of the value of security as stamp duty across states for securities market instruments. It's important to note that non-payment of stamp duty is technically a criminal offence for which directors may face legal consequences, including potential imprisonment in severe cases.

Statutory Registers & Records

From the very first day of incorporation, your company is legally obligated to maintain various statutory registers at its registered office. These registers function as the official record-keeping system of your company's key information and are subject to inspection by directors, members, and regulatory authorities. The Companies Act of 2013 mandates the maintenance of several registers. Here is a comprehensive table of the statutory registers with their applicable sections and rules :

Companies must keep copies of incorporation documents (e.g., Certificate of Incorporation) at their registered office until dissolution. They must also maintain statutory registers (e.g., register of members) in physical or electronic form. These registers must be updated regularly to reflect the current state of company affairs.