Asset Reconstruction Companies (ARCs): Business Model

What is a Certificate of Commencement of Business?

The Certificate of Commencement of Business is a mandatory legal document that certain companies in India must obtain before they start their business activities. It is issued by the Registrar of Companies (ROC) under the Companies Act of 2013, and applies specifically to public and private companies limited by shares.

Beyond legal compliance, this certificate also plays a big role in establishing trust. It shows investors, banks, and stakeholders that your company has met all foundational requirements and is operating within the bounds of the law. It also helps prevent fraudulent incorporations by ensuring that companies follow due process from the start.

Significance of Commencement of Business Certificate

The Certificate of Commencement of Business serves multiple purposes:

• Legal Authorisation: It acts as formal approval for a company to start its operations.
  
• Regulatory Compliance: Ensures adherence to the provisions of the Companies Act of 2013.
  
• Prevention of Fraud: Minimises the risk of shell companies or fraudulent incorporations.
  
• Credibility: Enhances trust with investors, financial institutions, and stakeholders.
  
• Access to Funds: Allows the company to exercise borrowing powers and raise capital legally.
  

Commencement of Business under Companies Act 2013 – Old Act and Procedure

Under the Companies Act, 2013, companies with share capital cannot begin operations immediately after incorporation. While companies without share capital may commence business right after receiving the Certificate of Incorporation, those with share capital must secure a Certificate of Commencement of Business as per Section 11 of the Act and Rule 24 of the Companies (Incorporation) Rules, 2014.

This requirement is applicable to all newly formed public and private companies with share capital, highlighting the importance of meeting initial capital commitments and completing registration protocols before beginning operations or seeking external financing.

Position Under Erstwhile Companies Act, 1956

Previously, the Companies Act of 1956 governed the commencement of business for companies in India. Under this law, only public companies with share capital were required to obtain a Certificate of Commencement of Business. Private companies, on the other hand, were exempt and could begin operations immediately after incorporation.

The 2013 Act introduced more stringent rules, bringing private companies with share capital under the same requirements to enhance transparency and accountability.

Certificate of Commencement of Business Under Companies Act 2013

To obtain this certificate under the current law, companies must meet two critical requirements:

1. Declaration by a Director: The director must declare that every subscriber to the memorandum has paid for the shares they subscribed to.
   
2. Registered Office Verification: The company must file verification of its registered office with the ROC.
   

Only after fulfilling these conditions can the company apply for the certificate and begin lawful operations.

Eligibility Criteria for Commencement of Business Certificate

The Certificate of Commencement of Business (COB) is mandatory for the following categories of companies:

• Companies Incorporated on or after November 2, 2018: Any company registered after this date is required to obtain the COB Certificate within 180 days from the date of incorporation.
  
• Companies with Share Capital: Regardless of industry or business type, all companies with share capital must apply for and secure the COB Certificate before starting operations.
  

Which Company is Not Required to File a Certificate of Commencement of Business?

The following categories of companies are exempt from filing for the Certificate of Commencement of Business. These include:

• Companies Incorporated Before November 2, 2018: This exemption applies to companies that were established prior to the implementation of the Companies (Amendment) Ordinance, 2018, specifically before November 2, 2018.
  
• Companies Registered After November 2, 2018, Without Share Capital: Companies that were incorporated after November 2, 2018, but do not have a share capital structure, meaning they haven’t issued any shares, are also exempt from obtaining the COB Certificate.
  

Documents Required to Obtain Commencement of Business Certificate in India

To apply for the Certificate of Commencement of Business, companies must submit the following documents:

• Form INC-20A: A declaration filed by a director.
  
• Board Resolution: Approving the commencement of business.
  
• Proof of Capital Subscription: Evidence that all subscribers have paid their share value.
  
• Registered Office Proof: Utility bill or rental agreement confirming office address.
  
• Certificate of Incorporation: Issued by the ROC.
  

Application Process for Commencement of Business Certificate

Here’s a detailed walkthrough:

1. Log in to the MCA Portal
   Visit the official website of the Ministry of Corporate Affairs (MCA). Log into the MCA portal using your registered credentials (User ID and Password). If you are not registered yet, you must create an account first.
   
2. Navigate to the e-Filing Section
   After logging in, go to the 'MCA Services' tab and select the 'e-Filing' option. This section contains all the necessary forms and submission options for company-related filings.
   
3. Download and Fill out Form INC-20A
   Locate and download Form INC-20A- the specific form used for the Declaration of Commencement of Business. Carefully fill in all the required details, such as company information, paid-up share capital details, and confirmation of compliance with registration requirements.
   
4. Select the Correct Corporate Identification Number (CIN)
   Enter and double-check the Corporate Identification Number (CIN) of your company. This number uniquely identifies your company and ensures the form is linked to the right entity.
   
5. Attach the Required Documents
   Upload the necessary supporting documents, which typically include:
   
   • The director’s declaration that the subscribers have paid all share capital
     
   • Proof of registered office verification (such as a utility bill, rent agreement, or ownership document)
     
6. Select the Correct Corporate Identification Number (CIN)
   Enter and double-check the Corporate Identification Number (CIN) of your company. This number uniquely identifies your company and ensures the form is linked to the right entity.
   
7. Submit the Form and Pay the Prescribed Fee
   Once the form and attachments are ready, submit them through the portal. Pay the applicable government fee based on your company's authorised share capital. The payment can usually be made online through various options available on the MCA portal.
   
8. Receive the Service Request Number (SRN)
   After successful submission, the system will generate a Service Request Number (SRN). Save this number carefully, it will help you track the status of your application and any future correspondence regarding your Certificate of Commencement of Business.
   

Time Limit for Filing the Declaration of Commencement of Business

As per Section 11 of the Companies Act, 2013, the declaration must be filed within 180 days from the date of incorporation. Failure to do so can lead to:

• Penalties for the company and its officers.
  
• Potential strike-off from the ROC register
  

Form INC-20A

Form INC-20A is the declaration form filed to confirm the commencement of business. It must be signed by a director and certified by a professional (CA/CS/CWA). The form includes:

• Company details
  
• Paid-up capital confirmation
  
• Registered office address verification
  

Fee For Filing Form 20A and Receiving Commencement of Business Certificate

The fee for filing Form INC-20A depends on the company's authorised share capital:

Consequences of Not Filing Certificate of Commencement of Business

Failing to file Form INC-20A within the 180-day window leads to:

• Penalty of ₹50,000 for the company.
  
• ₹1,000 per day penalty for each defaulting officer, up to ₹1 lakh.
  
• ROC may strike off the company’s name if it remains inactive under Section 11(3).
  

Conclusion

Obtaining the Certificate of Commencement of Business is a critical step that validates your company's readiness to operate in India’s regulatory landscape. For public and private companies with share capital, understanding and complying with this requirement ensures legal clarity, business credibility, and uninterrupted growth. By following the correct process, submitting the necessary documents, and meeting deadlines, companies can avoid heavy penalties and begin their entrepreneurial journey on the right foot.

Frequently Asked Questions

HR Policy for Startups- An Overview

In the rush of building a product and acquiring customers, many Indian startups often overlook the importance of formal HR policies. However, these policies are not just about bureaucracy or paperwork. They are tools to ensure consistency, fairness, and legal compliance.

HR policies balance employee rights and company objectives. They prevent arbitrary decision-making, reduce disputes, and clarify expectations for both employers and employees. They also provide frameworks for discipline, rewards, grievance redressal, and professional conduct, creating a workplace where talent can thrive.

While startups face constraints in time, budget, and HR resources, basic HR policies can go a long way in promoting stability, scalability, and a positive employer brand.

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Related Read: Templates for Startup Founders

Why HR Policies for Startups in India are Crucial?

Here’s why every Indian startup should prioritise HR policies from day one:

• Builds a consistent work culture: Written HR policies foster consistency across teams and leadership, even as the company grows or experiences turnover.
  
  
• Reduces misunderstandings: Policies help resolve or prevent conflicts between employees and employers by clearly communicating rights, responsibilities, and processes.
  
  
• Protects against legal risks: Indian labour laws, workplace safety regulations, and anti-harassment laws require compliance; having HR policies ensures your startup stays compliant.
  
  
• Drives employee morale and loyalty: Transparent policies around leave, performance, and compensation demonstrate that the company cares for its people, fostering trust and engagement.
  
  
• Defines company values and culture: HR policies codify expected behaviour and ethics, reinforcing the cultural DNA you want your startup to embody.
  
  
• Streamlines core HR functions: HR teams can better manage recruitment, onboarding, training, payroll, and performance reviews when guided by clear policy frameworks.

Kickstart your entrepreneurial journey with ease. Register your startup with Rize and get expert support every step of the way.

Major HR Policies for Startups

Here are the key HR policies that Indian startups should prioritise:

Leave Policy

A Leave Policy outlines the various types of leave employees can avail themselves of, including:

• Casual leave
• Sick leave
• Paid time off (PTO)
• Maternity/Paternity leave
• Public holidays

Clearly define leave eligibility, accrual, approval processes, and encashment rules to avoid confusion.

Menstrual Leave Policy

Many progressive startups in India now include a Menstrual Leave Policy offering additional flexibility to female employees. Typically, this includes:

• A set number of days of paid leave per month or year specifically for menstrual health.
• A simple, stigma-free process to request this leave.

Performance Management, Appraisal, Rewards & Recognition Policy

A well-defined Performance Management Policy ensures that employees understand how their work is evaluated and rewarded. Include:

• Goal-setting frameworks (OKRs, KPIs)
• Appraisal cycles and review processes
• Criteria for promotions and salary hikes
• Recognition mechanisms (awards, bonuses, public appreciation)

Code of Conduct

A Code of Conduct defines acceptable behaviour and ethical standards at the workplace. Cover aspects such as:

• Professionalism and respect
• Anti-discrimination
• Anti-bribery and corruption
• Use of company property
• Conflict of interest
• Disciplinary actions for violations

Employee Joining and Exit Policies

Clearly outline onboarding and offboarding procedures:

• Documents and verification required upon joining
• Probation period terms
• Notice period during resignation or termination
• Final settlement process
• Exit interviews and knowledge transfer

Salary and Other Perks

Document your Salary and Benefits Policy, including:

• Salary structure (CTC breakup)
• Frequency of salary payment
• Statutory benefits (PF, ESIC, gratuity)
• Voluntary benefits (insurance, wellness programs, stock options)
• Reimbursement policies (travel, meals, etc.)

Sexual Harassment in the Workplace Policy

It is mandatory under the POSH Act, 2013, for Indian companies with 10 or more employees to have an Anti-Sexual Harassment Policy. The policy should:

• Define sexual harassment
• Outline the complaints process
• Establish the Internal Complaints Committee (ICC)
• Ensure confidentiality and protection for complainants

Regular Working Hours

A Working Hours Policy defines:

• Standard working hours
• Flexible working options, if any
• Remote work guidelines
• Overtime policies (if applicable)
• Break and meal times

Related Read: Startup India Scheme: Eligibility Criteria and Benefits

 Frequently Asked Questions

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