Incorporation of Company and
2 Matters Incidental Thereto
Question 34
A group of five professionals decided to start a private limited company in the anti-drone solutions sector
under the name Ddrone Pvt. Ltd. in April 2025. The company wants to have its registered office in Mumbai.
On April 2, 2025, it applied for name reservation through RUN (Reserve Unique Name) and received approval
on April 6, 2025. On May 15, 2025, due to a delay in documentation, the SPICe+ (Simplified Proforma for
Incorporating Company Electronically) Plus (INC-32) form for incorporation was filed after 39 days from
the date of name reservation.
The company proposed two directors, one Indian resident and one foreign national residing in the U.S.
The foreign director did not have a DIN, and his passport was notarized but not apostilled. The company’s
registered office address was not finalized at the time of filing INC-32.
The Memorandum of Association (MoA) and Articles of Association (AoA) were signed electronically, but
one subscriber used a digital signature of a third party (his consultant), with verbal consent.
Based on the above facts and applicable provisions of the Companies Act, 2013, answer the following
questions:
(i) Was the name Ddrone Pvt. Ltd. still valid when INC-32 was filed on May 15, 2025?
(ii) Is it mandatory to provide the company’s registered office address at the time of incorporation? What
is the time limit to furnish it otherwise?
(iii) What are the consequences if the company fails to file the declaration for commencement of business
within the prescribed time, and fails to carry on any business or operations?
[Jan’26 – 5 Marks]
Answer
(i) As per section 4 of the Companies Act, 2013, upon receipt of an application the Registrar may, on the
basis of information and documents furnished along with the application, reserve the name for a period
of twenty days from the date of approval or such other period.
In the given question, the company received the approval on 6 April 2025. The approval is valid for 20
days, however, the company filed SPICe+ after 39 days, which falls outside the prescribed period of
20 days. Hence, the name Ddrone Pvt. Ltd. will not be valid when INC- 32 was filed on 15 May 2025.
(ii) As per Section 12(1) of the Companies Act, 2013, a company shall, within thirty days of its incorporation
and at all times thereafter, have a registered office capable of receiving and acknowledging all
communications and notices as may be addressed to it.
1.1
As per Section 12(2), a company shall furnish to the Registrar verification of its registered office
within a period of thirty days of its incorporation.
Hence, it is not mandatory to provide the company’s registered office address at the time of
incorporation.
(iii) As per section 10A of the Companies Act, 2013,
• A company having a share capital shall not commence any business or exercise any borrowing
powers unless, a declaration is filed by a director within a period of 180 days of the date of
incorporation of the company in such form and verified in such manner as may be prescribed, with
the Registrar that every subscriber to the memorandum has paid the value of the shares agreed
to be taken by him on the date of making of such declaration.
• If any default is made in complying with the above requirements, the company shall be liable to
a penalty of fifty thousand rupees and every officer who is in default shall be liable to a penalty
of one thousand rupees for each day during which such default continues but not exceeding an
amount of one lakh rupees.
• Where no declaration has been filed with the Registrar within a period of one hundred and eighty
days of the date of incorporation of the company and the Registrar has reasonable cause to
believe that the company is not carrying on any business or operations, he may, initiate action for
the removal of the name of the company from the register of companies under Chapter XVIII.
1.2
Prospectus and Allotment of
3 Securities
Question 14
Examine the validity of the following statement referring to the provisions of the Companies Act, 2013
and/or Rules: “The Articles of Association of X Ltd. contained a provision that upto 4% of issue price of’
the shares may be paid as underwriting commission to the underwriters. The Board of Directors of X Ltd.
decided to pay 5% underwriting commission.
[MTP April 2019, ICAI Module, May 2019 – 3 marks]
Answer
Relevant Provision:
Section 40(6) of the Companies Act 2013, provides that a company may pay commission to any person in
connection with the subscription or procurement of subscription to its securities, whether absolute or
conditional, subject to the number of conditions which are prescribed under Companies (Prospectus and
Allotment of Securities) Rules, 2014.
Under the Companies (Prospectus and Allotment of Securities) Rules, 2014 the rate of commission paid or
agreed to be paid shall not exceed, in case of shares, five percent (5%) of the price at which the shares are
issued or a rate authorised by the articles, whichever is less.
In the given problem, the articles of X Ltd. have prescribed 4% underwriting commission but the directors
decided to pay 5% underwriting commission.
Conclusion:
Therefore, the decision of the Board of Directors to pay 5% commission to the underwriters is invalid.
1.3
Declaration and Payment of
8 Dividend
Question 22
ABC Ltd., a listed company in the Indian manufacturing sector, has concluded its financial year ended 31st
March 2025. The company is now considering declaring a final dividend of ₹3 per equity share, with a face
value of ₹10 per share. Before proceeding, the Board of Directors seeks to ensure that the proposed
dividend complies with all relevant provisions of the Companies Act, 2013, particularly those related to
the permissible sources and conditions for dividend distribution. The summarized financial position of the
company for FY 2024–25 is as follows:
• Revenue from operations amounts to ₹10,000 lakhs, and
• Other income contributes an additional ₹1,000 lakhs, bringing the total income to ₹11,000 lakhs.
• The company has incurred expenses (excluding depreciation) of ₹8,000 lakhs, and provided for
depreciation of ₹1,200 lakhs, as per Schedule II of the Companies Act.
• The resulting profit before tax (PBT) stands at ₹1,800 lakhs, with a tax provision of ₹450 lakhs,
leading to a net profit after tax (PAT) of ₹1,350 lakhs.
In addition to current year earnings, ABC Ltd. has accumulated retained earnings of ₹2,000 lakhs from
previous financial years and holds free reserves (excluding any revaluation reserves) of ₹500 lakhs. The
company has 100 lakh equity shares, and the total proposed dividend payout amounts to ₹300 lakhs (i.e., ₹3
per share).
Based on the above information, analyse whether ABC Ltd. is eligible to declare dividends under the following
scenarios in compliance with the Companies Act, 2013:
1. Out of the current year’s profits.
2. Out of the accumulated profits of previous years only.
Support your answer with appropriate provisions and calculations under the Companies Act, 2013.
[Jan’26 – 5 Marks]
Answer
According to Section 123(1)(a) of the Companies Act, 2013, no dividend shall be declared or paid by a
company for any financial year except:
(i) out of the profits of the company for that year arrived at after providing for depreciation in accordance
with the provisions of Schedule II, or
(ii) out of the profits of the company for any previous financial year or years arrived at after providing for
depreciation in accordance with the provisions of that sub-section and remaining undistributed, or
(iii) out of both.
1.4
As per the third proviso of the above sub-section, where, owing to inadequacy or absence of profits in any
financial year, any company proposes to declare dividend out of the accumulated profits earned by it in
previous years and transferred by the company to the free reserves, such declaration of dividend shall not
be made except in accordance with such rules as may be prescribed in this behalf:
Provided also that no dividend shall be declared or paid by a company from its reserves other than free
reserves.
As per the facts of the questions and the provisions of the Companies Act, 2013:
1) In terms of the provision of Section 123(1)(a), ABC Limited has adequate profits in the current year (₹
1,350 lakhs) after providing for depreciation, to pay the proposed dividend of ₹ 300 lakhs. Hence, the
Company is eligible to pay the requisite dividend out of current year profits.
2) In terms of the same provision of Section 123(1)(a), the Company can also utilise its past accumulated
retained earnings of ₹ 2,000 lakhs and free reserves of ₹ 500 lakhs from previous financial years
for declaring dividends of ₹ 300 lakhs even without utilising its current year’s profits provided that
depreciation has been appropriately accounted for, and since the current year’s profits are not
inadequate, the above proviso will not be applicable. Hence, the Company is eligible to pay the requisite
dividend out of accumulated profits and reserves of the previous financial years.
1.5
9 Accounts of Companies
Question 30
Chicago Bricks Inc. is a company incorporated in Chicago, USA in the year 1985 engaged in the manufacture
of cement and related products. On 10.04.2022, it commenced manufacture in India through its branch,
engaged in the manufacture of fly-ash bricks used in construction of buildings and other infrastructural
projects throughout the country. The operations of the branch have been growing in a fast pace.
The turnover of the branch as on 31.03.2025 since its commencement are:
Financial Year Turnover
FY 2022-23 ₹ 75 Crore
FY 2023-24 ₹ 65 Crore
FY 2024-25 ₹ 85 Crore
As per the data available, the branch works based on 20% net-profit margin.
The branch is opposing the above view and has submitted that although the CSR provisions are applicable in
the present case but there was no requirement to constitute a CSR Committee and the above CSR functions
can be discharged by the Board of Directors themselves.
Considering the provisions of the Companies Act,2013, whether Chicago Bricks Inc. is correct in the view
as to non-applicability of formation of CSR Committee in this case?
[Sept’25 – 5 marks]
Answer
As per the facts given in the question, we have to answer whether Chicago Bricks Inc. (advised through
its Director Mr. Ramesh) is correct as to applicability of formation of the CSR Committee or as to non-
applicability of formation of the CSR Committee (by the Indian branch) is correct.
The question can be answered by analysing the provisions of section 135(1), 135(5) and 135(9) of the
Companies Act, 2013 read with Rule 3(1) of the Companies (Corporate Social Responsibility Policy) Rules,
2014.
According to section 135(1) of the Companies Act, 2013, every company having net worth of rupees five
hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore
or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility
Committee of the Board consisting of three or more directors, out of which at least one director shall be
an independent director. Provided that where a company is not required to appoint an independent director
under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or
more directors.
1.6
As per Rule 3(1) of the Companies (Corporate Social Responsibility Policy) Rules, 2014, every company
including its holding or subsidiary, and a foreign company defined under clause (42) of section 2 of the Act
having its branch office or project office in India, which fulfils the criteria specified in section 135 (1) of
the Act shall comply with the provisions of section 135 of the Act and these rules.
According to section 135(5), the Board of every company referred to in sub-section (1), shall ensure that
the company spends, in every financial year, at least 2% of the average net profits of the company made
during the three immediately preceding financial years, or where the company has not completed the
period of three financial years since its incorporation, during such immediately preceding financial years, in
pursuance of its Corporate Social Responsibility Policy.
According to section 135(9), where the amount to be spent by a company under sub-section (5) does not
exceed fifty lakh rupees, the requirement under sub-section (1) for constitution of the Corporate Social
Responsibility Committee shall not be applicable and the functions of such Committee provided under this
section shall, in such cases, be discharged by the Board of Directors of such company.
In terms of the above provisions of section 135(1) of the Companies Act, 2013 read with Rule 3(1) of
the Companies (Corporate Social Responsibility Policy) Rules, 2014, the provisions of section 135 will be
applicable to the Indian Branch of Chicago Bricks Inc. since the branch has earned a net profit of ₹ 17 crore
[20% of ₹ 85 crore] in the immediately preceding financial year (2024-2025), although its turnover was less
than the stipulated ₹1,000 crore during the same period.
In terms of the above provisions of section 135(5), we can calculate the amount to be spent by the branch,
which will be at least two per cent. of the average net profits of the company made during the three
immediately preceding financial years.
2% of [(20% of ((75+65 + 85)/3)] = ₹ 15 crore] i.e. ₹ 30 lakh.
In terms of the above provisions of section 135(9), since the amount to be spent by the Indian Branch of
Chicago Bricks Inc. under sub-section (5) does not exceed fifty lakh rupees, the requirement under sub-
section (1) for constitution of the Corporate Social Responsibility Committee shall not be applicable and the
functions of such Committee provided under this section shall, in such cases, be discharged by the Board
of Directors of the Indian Branch (company).
Therefore, the view of Chicago Bricks Inc. is not correct as to applicability of formation of the CSR
Committee in this case and the functions of such Committee be discharged by the Board of Directors of
the Indian Branch (company).
1.7