264 / 2021
Quote of the day
Is ensuring Ease of Doing Business, the responsibility of only the Government ? Is it not of other players in the ecosystem too ? Is EODB ranking only on the basis of ease of entering a country for business ? Is it not for continued ease during an enterprise’s entire lifecycle as well ? Why am I bringing up such basic questions when the answers seems obvious ? Because the experience seems otherwise, as shared by many company founders and professionals. Today I am focussing on the banking experience at a fundamental level – just opening a bank account and normal operations. No complex services expected from a bank when you start a company but read on to understand the ground reality through the eyes of a company founder.
Venkat and Varadan, 2 brothers, one an accomplished scientist and another a seasoned banker decided to set up a startup to offer some innovative cutting-edge technology products. Varadan, the retired banker was insistent that the new company bank only with his ex-bank which he had loyally served for several decades as an employee. He would not hear of any new-age bank that was listed in the incorporation forms. Unfortunately though many banks are listed in the Spice+ form, only a handful are actually actively available to select from. His PSU bank was one such though its name appeared in the dropdown list. The intention of the Government is to enable a company to start functioning from day one by offering banking options at the time of incorporation itself. In this case his dear bank was not activated (perhaps technology back-end not tied in with the MCA portal). When we suggested that he cannot bank with his ex-employer because of ‘tech reasons’ he lost his cool demanding how can the Government force me to choose a bank that I am not comfortable with. It took us quite sometime to calm him down and offer a work around – choose any other bank, get the account number allocated but don’t complete the paper work. The account will not get activated. After incorporation you can choose a fresh bank of your choice and approach them for opening a bank account. He was quite upset with the round about process but agreed since choosing a bank in the Spice+ form is mandatory. This option remains a tick-box activity, unless all the listed banks are tied in and available for use. Not sure why the gap exists even after 1+ years of introducing a modified Spice+ form. The unduly long time taken to open a bank account continues with innumerable documents to be signed ! Without a bank account, company cannot commence business !
In another case Rahul, one of the directors stays abroad. But one of the private sector banks the company chose is insisting on signature by both the directors in the account opening form. This despite the board resolution clearly authorising the resident Indian director to sign and complete all account opening formalities. It is a chicken and egg story that without bank account things will not move and to open the account, papers have to be signed by the non-resident director also and sent back in hard copy to the bank. Imagine the loss of time and money in all this – just for opening a bank account! As an alternative, the bank insisted that a Practising Company Secretary sign the resolution along with one director, extending the responsibility of the professional. After much discussion, Rahul and Ravi, the co-founders were frustrated and started hunting for a bank that doesn’t insist on multiple signatures !
Another extreme diligence by the banks is to insist on the digitally signed Certificate of Incorporation to be physically signed by the ROC. Little do they know that gone are the days of certified copies from ROC, sealed and signed. It is lack of knowledge of the front end banking representatives who claim to be ‘Relationship Managers’ coupled with unwanted layers of checks and balances imposed by each bank internally. No two banks seem to follow the same steps. Sometimes no two branches also of the same bank leading to confusion, frustration and loss of precious time.
In another case a hapless professional lamented that a well-known private sector bank refused to open a bank account of an LLP because the name of the bank was not mentioned in the LLP Agreement. Somebody else added that the bank official demanded a new certificate of incorporation when the registered office address changed. A simple issue like this needs to be escalated to the so-called ‘informed higher ups’ in the bank through a chain of emails and calls – all because of ignorance of the corporate practices and requirement under law. A lack of appreciation of how the MCA portal works, what can be extracted authentically from it, what is the role of a director, what is his authority, what is the role of PCS, how boards take decisions, how they are recorded, how they are issued to outsiders etc. It is time the bank officials are properly trained and internal documentation processes streamlined.
What I have shared is just the tip of the iceberg. Dive deeper and you will know the over-zealous bankers adding to the difficulty in doing business – is it lack of awareness or lack of trust or an issue of extreme caution or is it really that corporates have taken the banks for a ride ? It may be either one of these or all but for a first time entrepreneur (plenty as of now) it is a nightmarish experience and in most cases, their first brush with a bank is far from satisfactory. Honestly I would like to believe that all that I have written is hypothetical and imaginary …alas it is factual, experiential, true and realtime. EODB has a long way to go and all the players have a role to play !!
Bank saga aside, in this 264th issue of Samhita, the important piece of news is that wholesale and retail trade is now eligible for MSME benefits, with the change in definition of what is an MSME. There are arguments for and against this allowance and now RBI has extended priority sector lending facilities to traders as well. Catch up with updates from SEBI, RBI, DGFT & IT. Check out the statutory due dates as you mark your calendar for compliances. Don’t miss out on the language tips from Balaji, English language teacher.
I am thankful to CS Ramaswami Kalidas, author of the book “The Law and Practice Relating to COMPANY MEETINGS” (Bloomsbury publication) for penning the article “Vignettes from the law and Practice relating to Meetings of the Board and Committees constituted by it”. A critical analysis of the provisions relating to board meetings, both under the Companies Act as well as SEBI Listing Regulations, it gives a peek into his deliberations elaborated in detail in the book.
I keep receiving feedback from many of you on my email but I urge you to use the Disqus option at the bottom of this newsletter. Sign in as guest and start expressing. For any previous issues of Samhita and the readers’ feedback, please visit http://www.sharadasc.com/resource-center/.
Vignettes from the law and Practice relating to Meetings of the Board and Committees constituted by it
CS. Ramaswamy Kalidas, an eminent Company Secretary and author of the book “The Law and Practice relating to Company Meetings” has analysed the provisions w.r.t. Law and practices relating to company meeting. Part I of the 2-part article titled “Vignettes from the Law and Practice relating to Company Meetings”, was carried in last issue of Samhita . As a continuation, Part II is carried in the attached article. The article contains an analysis of various topics including first Board Meeting of the company within 30 days of incorporation, relevance of 7 clear days’ notice for Board Meetings, whether a director can waive the notice for a meeting etc.
The article is packed with insights and detailed analysis of many crucial aspects relating to Board and committee meetings. Happy reading!
Trading included in MSME definition
Ministry of MSME vide its Office Memorandum dated 02.07.2021 has revised the definition of MSME to include Retail and Wholesale trade for the limited purpose of Priority Sector Lending and registration on Udyam Registration Portal. Accordingly, RBI vide circular dated 07.07.2021 has allowed following activities to be eligible for Priority Sector Lending:
Wholesale and retail trade and repair of motor vehicles and motorcycles
Wholesale trade except of motor vehicles and motorcycles
Retail trade except of motor vehicles and motorcycles
Earlier only enterprises engaged in the business of manufacture of goods or rendering of services were permitted UAM registration. With the widening of the definition to include trading, bank lending schemes will now cover MSME traders also.
Extended time for Udyam Registration
The Ministry of MSMEs vide Notification dated 16.06.2021 notified that all existing Entrepreneurs Memorandum (EM) Part II and Udyog Aadhaar Memorandum (UAMs) registrations obtained till 30.06.2020 shall remain valid till 31.12.2021.
RBI vide its circular dated 25.06.2021 has aligned its provisions accordingly to recognise the existing registrations.
Declaration of dividends by NBFCs
To infuse greater transparency and uniformity in practice of declaration of dividends by NBFCs, RBI has prescribed guidelines for the same vide Circular dated 24.06.2021. The guidelines shall be applicable for declaration of dividend from the profits of the financial year ending 31.03.2022 onwards. The Circular includes guidelines under following headings:
Board oversight - total dividend proposed for the financial year should not exceed the ceilings specified in these guidelines.
Eligibility criteria- minimum prudential requirements.
Quantum of dividend payable- proposed dividend shall include both dividend on equity shares and compulsorily convertible preference shares.
Reporting system – to be done within fortnight of dividend declaration.
Extended due date – IEC updation for FY 2021-22
Currently, every IEC holder is required to update their details electronically every year between April and June. If there are no changes in the details the same is also required to be confirmed online.
Vide Notification dated 01.07.2021, DGFT has granted extension till 31.07.2021 to update such details without levy of any fee for the month of July.
Issue of benefits / scrips on hold
Vide Trade Notice dated 08.07.2021, DGFT has notified that issuance of benefits / scrips under MEIS (Merchandise Exports from India Scheme), SEIS (Service Exports from India Scheme), ROSL (Rebate of State Levies) and ROSCTL (Rebate of State & Central Taxes and Levies) Schemes shall be on hold temporarily due to change in allocation procedure. No fresh applications would be allowed to be submitted online during this period.
Additional disclosure to SE by Cos undergoing CIRP
National Stock Exchange in consultation with SEBI released a Guidance Note on 09.07.2021, listing following additional disclosures to be made by companies undergoing Corporate Insolvency Resolution Process (CIRP) under LODR Regulations:
Atleast 2 working days prior intimation about the date of hearing where NCLT would be considering the Resolution Plan.
Disclosure of the approval of resolution plan to be made to the Exchange on oral pronouncement or otherwise of the Order on immediate basis and not later than 30 minutes.
The Resolution Professional shall inform through the Exchange platform any impact on the existing holders / investors of listed securities on areas such as status of listing, the value of holding of existing holders, write off/ cancellation/ extinguishment of existing equity shares/ preference shares/ debentures, etc. without any payment to such holders, where applicable.
Capital gains on Goodwill with depreciation
CBDT, through Income tax Amendment (19th Amendment), Rules, 2021 has inserted a new Rule 8AC in the Income-tax Rules, 1962 to prescribe the Rules for Computation of short term capital gains and written down value under section 50 where depreciation on Goodwill has been obtained.
Finance Act 2021 amended the provisions of Income Tax Act, 1961 (“Act”) to disallow depreciation on the goodwill of a business or a profession. Depreciation of self-generated goodwill is not allowed under the Income Tax Act. With this amendment, depreciation on acquired or purchased Goodwill of a business or profession cannot be claimed from 01.02.2021. Goodwill is expressly excluded from the block of ‘Intangible Assets’. Further, a deduction for the amount paid for acquiring Goodwill shall be allowed on sale of Goodwill.
As per the amendments, depreciation will not be available on Goodwill from AY 2021-22. On sale or transfer of Goodwill, capital gain income will arise and the amount paid for acquiring the goodwill will be allowed as deduction. Further, the WDV as on 01.04.2020 will be the cost of acquisition of the Goodwill in case depreciation is claimed thereon by the assessee. Hence, the depreciation already claimed and allowed on Goodwill will not be reversed or requires any adjustment.
Guidelines u/s 45 and 9B of IT Act
Guidelines under section 9B (taxation of stock in trade received from partner of firm) and sub-section (4) of section 45 of the Income-tax Act, 1961 (taxation of capital gains of firm in certain circumstances) have been issued. Please refer to the circular for details.