Paid up capital not a must for private limited firms
‘The changes are meant to provide a seamless business environment’.
Paid up capital is no more a mandatory condition for the incorporation of a private limited company in the country. The changes to this effect were made to promote entrepreneurship and provide a seamless business environment, two of the most important promises of the Narendra Modi government, a senior official of the Ministry of Corporate Affairs (MCA) has said.
Under the new Companies ( Amendment) Act, 2017, which has recently come into operation, the Centre has removed the mandatory requirement of paid up capital for incorporating a private limited company. A few provisions in the Companies (Amendment) Act, 2017 have important bearing on the working of the Insolvency and Bankruptcy Code, 2016. The Centre notified the Companies (Amendment) Act, 2017 on 3 January this year.
Paid up share capital of a company is the amount of money for which shares are issued to the shareholders and, in turn, the payment is made by the shareholders. The Companies Act 2013 earlier mandated that all private limited companies will have to keep a minimum paid up capital of Rs 1 lakh. This provision meant that Rs 1 lakh worth of mon- ey had to be invested in the company by purchase of the company’s shares to start business.
However, the Companies Amendment Act, 2015 relaxed the minimum paid up capital requirement, but it was not made zero paid up capital and the submission of stamp duty was necessary.
A senior MCA official, who did not wish to be named, told The Sunday Guardian: “Now, under the Companies (Amendment) Act, 2017, entrepreneurs need not deposit Rs 1 lakh in their current bank account of the company and one can start his/her company with any amount of paid up capital. However, the autho- rised capital of Rs 1 lakh is still mandatory for opening a private limited company.”
According to the definition under the Companies Act, the authorised capital of a company is the maximum amount of share capital for which shares can be issued by a company. Currently, Rs 1 lakh initial minimum authorised capital is mandatory. The company at anytime with the shareholders’ approval and by paying additional fee to the Registrar of Companies, can increase its authorised capital.
The new change in the company laws has boosted the pace of opening of private limited companies. Amit Kumar, a chartered ac- countant who claims to register 10 companies monthly, said: “The mandatory paid up capital was making the whole incorporation process cumbersome. Also, provisions under the Companies Act, 2013 were excluding people with no paid up capital from setting up a company and the process was not fair to them.”
The Sunday Guardian has learnt that experts and the Ministry of Law and Justice had cautioned the government on the possible misuse of removal of paid up capital by shell companies, who may use the easy norms to launder money. But the MCA’s assertion is that it would improve India’s ranking in the World Bank’s Ease of Doing Business index.
The government is acting tough on shell companies and there are appropriate laws to deal with this problem. Till now, over 3 lakh companies have been deregistered and around 3.09 lakh directors associated with these companies have been disqualified. Action against these companies was launched as part of the Centre’s fight against black money.
The provision for a minimum paid-up capital was included in the old Act in 2000 to check the practice of shell companies being incorporated without the intention of commencing or doing any business. New India Assurance Co Ltd (NIA) is the largest general insurance company in the country in terms of net worth, domestic gross direct premium, profit after tax and number of branches. It was incorporated in Bombay in 1919 and has been in operation for almost a century now. The company has maintained an excellent market share, with its investment income contributing over 100% to the total income over the last five years. It has one of the highest solvency ratios in the industry, which is much above the regulatory requirement, indicating how financially strong the insurer is in making claim payments. NIA has been rated AAA stable by rating agency Crisil for the last five years, indicating that the company has the highest degree of financial strength to honour its policy holders’ obligations. On the other hand, the claim ratio is higher compared to other general insurance companies, mainly because of higher motor third party and health insurance claims. To improve the performance and reduce the claim ratio, the company has restructured and reprised its health portfolio and taken corrective measures in appointing doctors and third party administrators. In case of motor claims, the company feels that the new Motor Vehicles Act will bring a balance in the adjustment of the claim ratio. One of the key highlights of the company is that it has funded its operations during the last four decades without any external capital infusion, but only through internal accruals. NIA has strong underwriting capabilities, excellent relationship with reputed reinsurers, enabling it to provide a comprehensive range of insurance products, addressing the needs of both individual and commercial customers. Despite significant competition from private sector players like IFFCO Tokio, ICICI Lombard, HDFC Ergo, etc., the company has maintained market leadership in the general insurance industry, particularly in fire, marine, motor and health insurance sectors due to its strong brand equity and excellent relationship with major corporate groups. NIA has also supported various Government of India and state social welfare initiatives like the Pradhan Mantri Fasal Bima Yojana, the Unified Farmers Package Insurance and the Pradhan Mantri Suraksha Bima Yojana. Apart from providing insurance support to the above schemes, it has provided insurance cover to more than 400 million individuals having Rupay cards. The company got its share listed on the Indian stock exchanges in November 2017 with a mega stock issue. There is tremendous scope and untapped opportunity in the general insurance space as despite the size and growth profile, India continues to be an under penetrated market compared to global peers. But with rising income levels and increasing consumption demand, NIA is well positioned to capitalise on the growth potential in the Indian general insurance industry. Investors can accumulate the NIA stock for the long term and expect it to double in the next four-five years’ investment horizon. Rajiv Kapoor is a share broker, certified mutual fund expert and MDRT insurance agent.