HOW TO START?
One Strategy to understand the Company law for students or professionals those who have no background of the subject i.e.
Think Like a founder who is starting a “Business”. Now Read it.
So the first question you should ask yourself as a founder, how many people you need to start your “Company”? Minimum amount of money as per law (Capital)you must have to start your “Company”?
Although as per new companies act a single person can start a one person Company and under amended Companies act there is no minimum Capital requirement. Although it is standard practice to start a company with two directors and a capital of INR 1,00,000.
You are a business founder and a quick question strikes your mind, what are “Shares”? (In my previous post i wrote about the approach and strategy for students and fresh professionals to understand the Company law and its practice i.e. to think like founder)
WHAT ARE SHARES?
So, you have sorted out the people required to start your Company and now you need money to start the business which is known as Capital. For instance, you are starting your Company with 1 lakh rupees and to which you are contributing 70,000 and your friend/Co-Founder is contributing 30,000 INR. But you decided to divide this total amount into small units i.e. 10,000 units @Rs.10 (Popularly known as face value of one share) for one unit. So, now you are holding 7000 unit (In value 70,000 INR and in Percentage 70 Percent of the Capital and ownership).
Hence a share is unit of ownership and your unit describes your share of profit, voting power and so on. Companies act section 2(84) defines shares.
WHAT ARE THE TYPES OF CAPITAL?
So, you wanted to start your business with the money alongside your co-founder and initially you decided to start with Rs.1,00,000 (Known as Capital). You believe that you may need One crore to do the business during the life of the Company (at least initially you thought). So, this is the maximum capital company is allowed to raise during its life known as Authorized Capital (It can be revised and raised with the relevant amendments).
The capital that you offer to your investors is “issued capital” and the part of issued capital investor has taken up is “subscribed capital”. The amount of subscribed capital that investor has paid for is “Paid-up capital”.
For instance: You think your company may need One Crore in its lifetime which divided into 10,00,000 units (10 Rs each unit) i.e. Authorized Capital. You issued shares amounting to Rs.1,00,000./-(10,000 units @10 each) and thereafter, complete amount of share capital was subscribed by investors i.e. you and your co-founder. Further, said amount was paid and it became paid up capital.
WHAT IS MOA (MEMORANDUM OF ASSOCIATION) AND WHY IT IS IMPORTANT FOR ANY LAW STUDENT OR FOUNDER TO HAVE KNOWLEDGE ABOUT IT? (SEC 4 AND SCHEDULE -I WITH THE TABLES)
Like a boundary wall of any house or fort, it plays the same role for any company. This is the document which is a partial constitution for any company as it speaks about the subjects such as object with which you have formulated your company like; For manufacturing and sale of machinery or for any fintech business or sports business or perfume business whatsoever it is. Similarly, this document states about the capital with which you are starting you company, shares subscribers and members. This document states about where is the registered office of the Company or the liability of members wrt to company.
So it sets out a maximum limit for the act of any company and a company can’t go beyond the boundaries set out in this document. For instance, you can’t do a business which is not mentioned in your MOA or you can’t shift your registered office beyond the territory mentioned in MOA or you can’t raise equity capital beyond the scope of MOA and so on. Even a majority members/shareholders consent can’t permit an act which is not mentioned in MOA.
So, whether you can’t start any other business in your company which was not otherwise mentioned in the object clause of MOA? or you can’t shift your ROC ?or can’t raise equity capital beyond what was originally mentioned in MOA?
Yes, You can, by amending MOA as per the act i.e. by passing a Special Resolution to amend MOA and file MGT 14 with ROC alongside other forms based on situation such as SH-7 or in some case with the approval of Regional Director or NCLT.
YOU ARE A FOUNDER AND WANTED TO RAISE FUNDING THROUGH CONVERTIBLE PREFERENCE SHARE OR DEBENTURES AND WANTED TO ISSUE ESOP TO EMPLOYEES. WHAT IS THE FIRST THING YOU SHOULD CHECK?
AOA (Article of Association). In simple words this is a contract between members and the company that sets out the terms on day-to-day governance and internal affairs of the Company. For instance; Classes of shares you can issue or Transfer of Shares or Board Composition or Dividend etc.
So, a founder can raise a particular class of shares to raise funds or can issue ESOPs or have Drag along or tag along rights or Rights of refusals only if it is mentioned in AOA. Even a share holding agreement can’t supersede AOA unless it is already mentioned that SHA will over rule AOA. However, AOA can’t supersede the ACT and MOA.
It is one of the most relevant documents for the VC and investors, maximum board controls have their doorway through AOA
BOARD OF DIRECTORS – FIDUCIARY GUARDIAN.
A Company acts through its board. It not only acts as a statutory gatekeeper (Like Shares issue, Raising Loan, Signing Financial Statements) but can be held responsible for negligence in performance of duties under law. The board has all those powers which are not exclusively reserved for the shareholders.
Being a founder, you must know that law states that every year there should be minimum 4 meetings of the board. A company is required to call any meeting by giving notice. For instance; Board Meeting should be called by giving notice for a period not less than 7 days to the directors. Supposedly, if any officer or person is responsible and fails to call meetings he can be penalized under the company’s act.
It is mandatory for a Company to call an AGM (General Meeting) of members and shareholders. For such a meeting clear 21 days’ notice is a must and it should be called within 6 months from FY end. So, adoption of financial statements, declaration of dividend, appointment of directors or auditors are among mandatory agenda items of AGM.
IF YOU ARE A FOUNDER OF THE STARTUP IN THAT CASE YOU MUST KNOW YOUR COMPANY HAS A LEGAL BLACK BOX. WHAT IS IT.?
Minutes, they are the permanent and written record of the Board Meeting or General Meeting (I.e. Meeting of the Shareholders or creditors). Every Company should ensure that minutes of the meeting should be prepared and signed by the Chairman and Director of the company within 30 days from the date of meeting. It is mandatory under law to prepare and maintain the books of Minutes at the registered office of the Company. Failure to do so may attract penalty on Company and officer in default.
So minute is like legal black box of the company describing the proceeding. Minutes of the meeting which if kept as per the Company law act as the prima facie evidence of proceedings before the Courts and Tribunal.
So, ensure that minute book (Physical or electronic) should be maintained on day-to-day basis. There are many instances wherein resolution passed and acts done based upon resolutions stood void and illegal as company failed to maintain the minutes books, resultantly, they failed to establish the legal standing of the Board Resolution and acts done through it.
For instance, in a recent ROC ruling, they imposed a cost of INR 150000 on AB Inbev Company for failure to maintain the Minutes book as Per the Provision of law.
For a detail understanding: Read 118,119 of CA, 2013, Secretarial Standard (1) on Minutes, Rules, Circulars and Rule 25 of Merger and Acquisition)
YOU ARE A FOUNDER AND ARE SURE ABOUT THE EXPANSION STRATEGY, YOU HAVE A GREAT PRODUCT OR SERVICE DEMAND BUT DO NOT WANT TO DILUTE, WHAT IS THE WAY AHEAD?
Debenture.
A debenture is a loan instrument a company issues to investors. In return, the company promises to pay interest regularly and repay principal on a set date. It can be secured (Backed by an asset as mortgage but in that case forming a debenture trust is mandatory) or unsecured debenture. A debenture debt may have tenure of10 years but not longer than 30 years.
Many time Founders raise funds through Convertible note i.e. the debenture convertible into shares subject to the terms of issuance. Now it is relevant to note that the debenture fund is a loan not equity (Your equity won’t be diluted unless CCP takes effect) therefore, debenture holder has no voting rights, therefore, it turns out to be a preferred strategic choice for the stable entities. (You may read more about the same in Section 71 of CA, 2013 and Rule 18 of Debenture Rules, 2014)
In next series of “Think Like Founder” we will write on the basics of Private Equity and PE Firm. An insight into the complete ecosystem of Private Equity Firms.
©Think Like Founder-Dixit Mehta ©Dixit Mehta
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