What is a Shelf Prospectus? Meaning & Provisions Under the Companies Act, India

What is Form STK-2, and When is it Used?

Form STK-2 is prescribed under Section 248(2) of the Companies Act, 2013, allowing a company to apply for voluntary strike-off. It is used by companies that are:

• Not carrying on any business for the last two consecutive financial years, or
• Have not sought the status of a dormant company, and
• Do not have any outstanding liabilities.

For example, consider a startup that launched operations but never scaled up. Instead of continuing to maintain compliance (like audits, annual filings, and tax submissions) with no business activity, the founders can choose to file Form STK-2 and officially close the company.

What are the Benefits of Filing STK-2?

Filing Form STK-2 provides several benefits:

• Quick and cost-effective closure compared to liquidation.
• Savings on audits and compliance costs that continue even if the company has no operations.
• Faster process – usually completed within a few months.
• Protection of directors and shareholders from future penalties or liabilities.

This makes STK-2 a practical option for small companies and startups that wish to wind up smoothly.

What are the Eligibility Criteria to File STK-2?

Not every company is eligible to file STK-2. The key criteria are:

• Applicable to Private Limited Companies, One Person Companies (OPC), and Unlisted Public Companies.
• The company should have no pending liabilities and must clear all dues before applying.
• The business must not have carried on any activity for at least two consecutive years.
• Board and special resolutions (approved by at least 75% of shareholders) are mandatory.

Companies that are listed, under inspection, or involved in ongoing litigation are not eligible for strike-off.

What Documents Are Required for STK-2?

The following documents must be attached while filing STK-2:

• Board resolution and special resolution approving strike-off.
• Affidavit by directors (Form STK-4) declaring no pending liabilities.
• Indemnity bond by directors (Form STK-3), ensuring liability coverage.
• The company's latest audited financial statements.
• Directors’ PAN, Aadhaar, and digital signatures (DSC).
• Incorporation documents like Certificate of Incorporation, MoA, and AoA.

How to File the STK-2 Form? Step-by-Step Guide

Here’s a step-by-step guide to filing Form STK-2:

1. Board Approval: Conduct a board meeting and pass a resolution for closure.
2. Shareholder Consent: Obtain a special resolution with 75% shareholder approval.
3. Clear Liabilities: Pay off loans, creditors, and statutory dues.
4. Prepare Documents: Collect Forms STK-2, STK-3, STK-4, audited accounts, MoA, AoA, and ID proofs.
5. Online Filing: File Form STK-2 on the MCA portal along with attachments.
6. Pay Government Fee: ₹10,000 is payable at the time of filing.
7. ROC Review: The Registrar verifies documents and issues a public notice.
8. Strike-Off Approval: Once satisfied, the ROC strikes the company name from the register.

Voluntarily Removing Company Name using Form STK-2

Companies can voluntarily apply for strike-off by:

• Clearing all debts and liabilities.
• Passing a special resolution with the approval of at least 75% members.
• Seeking NOC/approval from regulatory bodies (if the company is under their regulation).

Effect of Removing Name from Register of Companies

Once the company’s name is removed under Section 248:

• The company is dissolved and ceases to exist legally.
• The Certificate of Incorporation is cancelled.
• The company cannot carry on any business operations.

However, directors, managers, and shareholders remain liable for any past dues, fraud, or pending obligations as if the company had not been dissolved.

Closing of Company by Filing Form STK-2

The closure process through STK-2 involves:

• ROC verification of pending liabilities.
• Publication of a public notice inviting objections.
• Striking off the company’s name from the register.
• Publishing the strike-off notification in the Official Gazette.

Once published, the company is considered officially dissolved.

What are the Consequences of Not Filing STK-2?

Failing to close an inactive company can lead to several consequences:

• Director disqualification under the Companies Act.
• Heavy penalties and fines for non-filing of annual returns and financial statements.
• Government-initiated strike-off without the company’s consent.
• Restrictions on starting new companies for disqualified directors.
• Continued obligations for tax filings and ROC compliance despite no business activity.

What Challenges Can You Face While Filing STK-2?

Some common challenges include:

• Delays in obtaining tax or GST clearance.
• Errors in affidavits or indemnity bonds.
• Issues with expired DSCs of directors.
• Non-cooperation from shareholders or directors.
• ROC objections due to mismatched or incomplete details.

What is the Cost Involved in STK-2?

The cost of filing Form STK-2 includes:

• Government fee
• Professional charges
• Notary and affidavit charges
• DSC renewal costs, if applicable

Benefits of USA Company Registration

It is highly advisable to go for U.S. incorporation when aiming to raise capital from U.S. investors or penetrate the U.S. market with product sales. Beyond the inherent credibility associated with a U.S. business entity, it instills investor confidence and aligns with U.S. regulatory expectations.

• It boasts a thriving and a diverse business ecosystem, providing access to a vast market, diverse consumer base, and a network of established businesses and startups.
• Companies incorporated in the U.S. often find it easier to attract investment, whether through venture capital, private equity, or public markets.
• It is home to renowned innovation hubs such as Silicon Valley, which fosters creativity, collaboration, and technological advancement. This can be especially beneficial for tech startups and businesses in emerging industries.
• It offers a relatively straightforward process for business incorporation. Many states, like Delaware, have business-friendly regulations and efficient online platforms that facilitate the setup and management of companies.
• While the U.S. tax system is complex, businesses may find advantages in various tax incentives and deductions, especially if structured as certain types of corporations.
• It can serve as a strategic base for international expansion, providing a gateway to both North American and global markets.

Types for Company Registration in USA from India

The United States offers several types of legal structures for businesses, each with its own characteristics and implications. Here are some of the most common types:

•  Single-Person Businesses

•  S Corporations

•  C- Corporations (C-Corp)

•  Limited Liability Companies (LLCs)

•  Non-profit Organizations

Regarding U.S. business structures, two predominant forms of incorporation stand out: Limited Liability Companies (LLCs) and C-Corporations (C-Corps). These structures offer distinct features tailored to diverse business needs and goals.

• If you want lower compliance and small franchise fees: An LLC may be a suitable choice, especially for small businesses or startups with simpler structures and a desire for reduced administrative burdens.
• If you want to raise funds: If the goal is to attract external investment, issue stock, or go public in the future, a C Corporation is often more attractive to investors and provides the necessary flexibility for these activities.

Minimum Requirements to register a company in the U.S.

To register a company in the U.S., several essential criteria must be met.

• Minimum Number of Individuals:
  At least one person is required to register a company in the U.S. This person can act as the sole owner or be part of a group of owners (members or shareholders), depending on the chosen business structure (e.g., LLC, corporation).
• Registered Agent in Delaware:
  If choosing to register the company in Delaware, having a registered agent in the state is a legal requirement. The registered agent is a person or entity designated to receive legal documents, official correspondence, and other important information on behalf of the company.
• U.S. Address:
  A U.S. address is required for official correspondence and legal purposes. This address can be either a physical location (such as a brick-and-mortar office) or a virtual address, depending on the nature of the business and the chosen state of registration.

Documents required for U.S. Incorporation

A succinct breakdown of the documents needed for the initial stages of business registration.

• Name Approval:
  The process for name approval is straightforward. In Delaware, you can perform a real-time search for the desired business name and immediately reserve it if available. This reservation ensures that your chosen business name is secured for your use.
• Director Details:
  Provide details about the directors or members of the company. This typically includes full names, addresses, contact information, and roles or titles within the company.
• Number of Shares and Value Per Share:
  Specify the number of authorized shares the company is allowed to issue. Also, determine the par value or the assigned value to each share.

Process for Company Registration in the USA

Must-Have Documents After Incorporation

Here’s a list of documents that a business typically receives after the registration process:

1. Certificate of Incorporation

• This document, issued by the state authorities, officially recognizes the establishment of the corporation. It includes important details such as the company's name, location, and date of incorporation.

2. EIN (Employer Identification Number)

• The EIN is a unique identifier assigned by the IRS for tax purposes. It typically takes 3 to 4 weeks through standard processing, but an expedited option is available, reducing the timeline to 3 days if you already possess a Social Security Number (SSN).
  This unique identifier, similar to India's PAN (Permanent Account Number), is necessary for various business activities, including opening a bank account, hiring employees, and filing tax returns.

3. Bylaws of the Company (Similar to Articles of Association)

• Bylaws are internal rules that govern the operation and management of the company. They outline procedures for meetings, decision-making, and other essential aspects of corporate governance.
  In some ways, they are similar to the Articles of Association mandated in India.

4. Banking Resolution

• A banking resolution is a formal document that authorizes specific individuals within the company to open and manage bank accounts on behalf of the corporation. It provides clarity and legal authority for banking-related activities.

5. Common Stock Certificate

• Common stock certificates represent ownership in the company. When shares are issued, these certificates are given to shareholders as evidence of their ownership stake in the corporation. They typically include details such as the shareholder's name, the number of shares, and the date of issuance.

Compliances for U.S.- Incorporated Companies

Let's dive into the detailed aspects of compliance for businesses in the US, particularly those with C-Corporation structures and operations in Delaware.

1. Federal Income Tax

• The Federal Income Tax rate of 21% applies to C-corporations in the United States. They are required to file a tax return annually using the IRS Form 1120. This form outlines the corporation's income, deductions, credits, and taxes owed, etc.

2. Withholding Tax and Related Party Transactions Disclosure

• Similar to Tax Deducted at Source (TDS), withholding Tax in the U.S. involves deducting a portion of payments made to non-residents for services, dividends, or interest. Additionally, disclosure of related party transactions is a key compliance requirement, ensuring transparency in financial dealings with affiliated entities.

3. Delaware State Franchise Tax

• Delaware imposes an annual franchise tax on corporations, and the amount varies depending on the type and size of the corporation. The calculation is often based on factors such as authorized shares or assumed par value capital.

4. Delaware State Corporate Income Tax

• In addition to federal taxes, C-Corporations operating within the state of Delaware are subject to state corporate income tax at a rate of 8.7% on income generated within the state.
  To meet state tax obligations, C-Corporations file the Delaware Form 1100, providing detailed information on income, deductions, and other relevant financial data.

5. Other Regulatory Compliances in Delaware

• Beyond tax-related obligations, businesses in Delaware must adhere to additional regulatory requirements. This includes filing an annual report with the Delaware Secretary of State.

In a nutshell, be it India or the U.S., there will be a lot of compliances to keep a record of. By diligently meeting these obligations, you can fulfill legal mandates and contribute to a robust and trustworthy business environment.

Incorporation in U.S. vs India

When expanding operations from India to the United States, a common strategy involves incorporating a new U.S. company, followed by transferring shares from the Indian parent company (which must be a Private Limited Company) to the newly formed U.S. entity. The Indian company would become a subsidiary of the U.S. company, and there is no such limit to the number of subsidiaries an entity can have.

Keep in mind the compliances and FEMA guidelines to be adhered to during this process, which establishes the U.S. company as a subsidiary of its Indian counterpart, creating a legal and financial separation. The benefits of this approach include improved access to U.S. markets, legal autonomy for each entity, and strategic financial advantages.

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*Prices and documents can differ based on the company type.

Understanding Auditor as Per Companies Act 2013

Under the Companies Act, 2013, an auditor is defined as a qualified professional appointed to examine and verify a company's financial statements and records. According to Section 139 of the Act, only an individual Chartered Accountant or a firm of Chartered Accountants registered under the Chartered Accountants Act, 1949, can be appointed as an auditor of a company. If the auditor is a firm, including a Limited Liability Partnership (LLP), the majority of its partners practicing in India must be qualified Chartered Accountants.

The Act emphasizes the importance of auditor independence to ensure unbiased examination of financial records. An auditor must remain free from any financial interest in the company being audited and cannot have business relationships that might compromise their objectivity. This independence requirement is fundamental to maintaining the integrity of the audit process and ensuring that stakeholders receive reliable financial information.

The qualification criteria are stringent to ensure that only professionals with appropriate expertise and ethical standards undertake this crucial responsibility. The Companies Act specifically disqualifies certain individuals from being appointed as auditors, including employees of the company, those indebted to the company beyond a specified limit, and those holding securities in the company or its subsidiaries.

Role of an Auditor under Companies Act

An auditor performs several vital functions within the corporate governance framework as prescribed by the Companies Act, 2013. Their primary role includes:

• Examining the company's financial statements to ensure they provide a true and fair view of the financial position and performance.
  
• Verifying that proper books of account have been maintained by the company as required by law
  
• Assessing the effectiveness of internal financial controls and reporting any weaknesses
  
• Reporting instances of fraud, non-compliance with laws and regulations, or other material weaknesses observed during the audit process
  
• Ensuring that financial statements comply with accounting standards and relevant statutory requirements
  
• Providing an independent opinion on the financial health of the company to protect shareholder interests
  

The auditor's role extends beyond mere number checking; they serve as watchdogs who safeguard stakeholder interests by providing an objective assessment of the company's financial reporting. This independent oversight is crucial for maintaining transparency and building trust among investors, creditors, and other stakeholders.

Appointment of Auditor According to Companies Act, 2013

Section 139 of the Companies Act, 2013 outlines the comprehensive framework for the appointment of auditors. The process begins with the first auditor appointment, which must be completed by the Board of Directors within 30 days from the date of registration of the company. If the Board fails to appoint the first auditor within this timeframe, company members must make the appointment at an Extraordinary General Meeting (EGM) within 90 days.

The first auditor holds office until the conclusion of the company's first Annual General Meeting (AGM). At this first AGM, a subsequent auditor is appointed who shall hold office from the conclusion of that meeting until the conclusion of the sixth AGM. This effectively establishes a tenure of five consecutive years for the auditor appointment.

Before finalizing the appointment, companies must obtain written consent from the proposed auditor, along with a certificate stating that the appointment meets all conditions prescribed under the Act. Additionally, the company must inform the appointed auditor of their appointment and file the appropriate notice with the Registrar of Companies within 15 days of the meeting where the appointment was made.

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Purpose of Appointment of Auditor

The appointment of a company auditor serves several critical purposes within the corporate governance framework. Primarily, auditors protect the interests of shareholders by providing an independent assessment of the company's financial position. They act as vigilant gatekeepers who examine the accounts maintained by directors and report on the company's true financial condition.

Independent auditors provide assurance to stakeholders that the financial statements presented by management accurately reflect the company's financial position and performance. This third-party verification builds confidence among investors, lenders, and regulatory authorities in the reliability of financial reporting.

Additionally, auditor appointments fulfill statutory requirements under the Companies Act, 2013, helping businesses maintain legal compliance. The audit process identifies potential areas of financial risk, inefficiency, or non-compliance, allowing management to address these issues proactively. Through their objective assessment, auditors contribute significantly to improved financial discipline and transparency, which ultimately strengthens corporate governance practices.

Documents Required for Auditors Appointment

For the proper appointment of an auditor, companies must ensure they have the following essential documents:

• Written consent from the proposed auditor agreeing to the appointment
  
• A certificate from the auditor confirming eligibility and compliance with all conditions specified under the Companies Act, 2013
• Board resolution recommending the auditor's appointment to shareholders
  
• Shareholder resolution approving the appointment of the auditor
  
• Form ADT-1 for filing notice of appointment with the Registrar of Companies
  
• Copy of the auditor's Chartered Accountant certification and practice certificate
  
• Declaration of independence from the auditor confirming no conflicts of interest
  
• Letter of engagement outlining the terms of the audit assignment and responsibilities
  

Procedure for the Appointment of Auditor

Eligibility Verification

The appointment process begins with verifying the eligibility of the proposed auditor. Only a practicing Chartered Accountant or a firm of Chartered Accountants can be appointed as an auditor. The company must ensure the auditor doesn't fall under any disqualification criteria specified in Section 141 of the Companies Act, 2013.

Obtaining Consent and Certificate

Before appointment, the company must obtain written consent from the proposed auditor. Additionally, the auditor must provide a certificate stating that the appointment complies with all conditions prescribed under the Act and Rules. This certificate should confirm that the auditor meets independence requirements and has no conflicts of interest that might compromise audit objectivity.

Board Recommendation

The Board of Directors reviews the qualifications and credentials of potential auditors and passes a resolution recommending suitable candidates to shareholders. For the first auditor, the Board directly makes the appointment within 30 days of company registration.

Shareholder Approval

For subsequent auditors, the appointment requires approval from shareholders at the Annual General Meeting. The company includes the auditor appointment as an agenda item in the AGM notice, and shareholders vote on the resolution.

Filing Requirements

After appointment, the company must file Form ADT-1 with the Registrar of Companies within 15 days of the meeting where the appointment was made. This filing formally notifies regulatory authorities about the auditor appointment and includes details about the auditor's term and remuneration.

Communication to Auditor

The company must formally communicate the appointment to the auditor, specifying the tenure and terms of engagement. This communication establishes the official relationship between the company and its auditor for the designated period.

Guidelines for Appointment of Auditor for Different Types of Companies

The appointment process varies depending on the company type, as outlined below:

Changing the Auditor: Special Notice Requirements Under Companies Act

The Companies Act, 2013 establishes specific procedures when changing auditors to ensure transparency and protect auditor independence. A special notice is required in the following circumstances:

• When appointing someone other than the retiring auditor
  
• When explicitly deciding not to reappoint a retiring auditor
  
• When removing an auditor before the expiration of their term
  

The special notice requirement involves:

• Providing notice to the company at least 14 days before the general meeting
  
• The company must immediately forward a copy of this notice to the affected auditor
  
• The auditor has the right to make written representations to the company, which must be circulated to members
  
• The auditor is entitled to be heard at the meeting where the resolution is being considered
  

These provisions ensure that auditor changes are properly scrutinized and that auditors have an opportunity to address any concerns regarding their removal or non-reappointment. This process safeguards against arbitrary dismissals of auditors who may have discovered irregularities or disagreed with management on accounting treatments.

Rotation of an Auditor

The Companies Act, 2013 introduced mandatory auditor rotation to enhance auditor independence and audit quality. This requirement primarily applies to listed companies and certain classes of companies as specified under Section 139(2).

For individual auditors, the maximum term is one period of five consecutive years. For audit firms, the maximum term is two periods of five consecutive years each (totaling ten years). After completing the maximum term, there must be a cooling-off period of five years before the same auditor or audit firm can be reappointed.

Key aspects of auditor rotation include:

• Promotes auditor independence by preventing long-term relationships that might compromise objectivity
  
• Brings fresh perspectives to the audit process, potentially uncovering issues missed by previous auditors
  
• Enhances investor confidence in the integrity of financial statements
  
• Reduces the risk of familiarity threats between auditor and client
  

Companies must plan transitions carefully to ensure smooth handovers between outgoing and incoming auditors, maintaining audit quality throughout the process.

Re-Appointment of Retiring Auditor

A retiring auditor may be re-appointed at the Annual General Meeting provided:

• They are not disqualified for re-appointment under Section 141 of the Act
  
• They have not completed the maximum term allowed under rotation requirements
  
• They have not given notice in writing of their unwillingness to be re-appointed
  
• No special resolution has been passed appointing someone else or specifically providing that the retiring auditor shall not be re-appointed
  

The process for re-appointment typically involves:

• Board recommendation for re-appointment of the retiring auditor
  
• Obtaining fresh written consent and eligibility certificate from the auditor
  
• Placing the re-appointment resolution before shareholders at the AGM
  
• Filing the necessary forms with the Registrar after shareholder approval
  

It's important to note that the Companies (Amendment) Act, 2017 removed the requirement for annual ratification of auditor appointment by members at every AGM when the auditor is appointed for a five-year term.

Removal, Resignation and Replacement of an Auditor

The Companies Act provides specific provisions for handling auditor changes during their term:

• Removal before term completion: Requires special notice, Central Government approval, and a special resolution at a general meeting. The auditor must be given a reasonable opportunity to be heard.
  
• Resignation: An auditor may resign by filing Form ADT-3 with the company and the Registrar, stating reasons for resignation. For listed companies and certain other categories, the auditor must also file with the Comptroller and Auditor General of India.
  
• Casual vacancy: If a vacancy arises due to resignation, the Board of Directors must fill it within 30 days. If the vacancy is due to any other reason, the Board fills it within 30 days, but the appointment must be approved by members at a general meeting within three months.
  
• Replacement procedure: When replacing an auditor, companies must follow due process including obtaining no objection certificates from the outgoing auditor and ensuring proper handover of relevant audit documents.
  

These provisions ensure that auditor changes are transparent, properly documented, and comply with regulatory requirements to maintain audit integrity and independence.

Conclusion

The appointment of an auditor represents a critical aspect of corporate governance under the Companies Act, 2013. By following the prescribed procedures for appointment, rotation, re-appointment, and removal, companies ensure compliance with legal requirements while strengthening financial transparency and accountability. The structured approach to auditor appointments-with specific provisions for different types of companies-helps maintain the independence and effectiveness of the audit function. Businesses must stay informed about these requirements and any legislative updates to ensure proper audit practices, as non-compliance can lead to penalties and reputational damage. Ultimately, a properly appointed independent auditor serves as a safeguard for stakeholder interests and contributes significantly to the overall integrity of corporate financial reporting.

Frequently Asked Questions