Filing LLP Form 24: How to Close Your LLP in India

Definition of Company Promoter

A company promoter is a person or entity that undertakes the responsibility of forming a company. As per legal definitions, a promoter is someone who conceives the idea of the business, takes the necessary steps to incorporate the company, and facilitates its registration.

For instance, if an individual drafts the Memorandum of Association (MOA) and Articles of Association (AOA) for a business and secures initial funding, they qualify as a promoter. Promoters can be:

• Individuals (e.g., founders of a startup)
• Groups of people (e.g., a partnership forming a company)
• Organisations (e.g., a holding company promoting a subsidiary)

Who Are the Promoters of a Company?

Promoters can be anyone involved in the process of establishing a company. This includes:

1. Founders – Entrepreneurs or individuals initiating the business idea.
2. Investors – Entities that fund the company’s formation and help in structuring.
3. Professional Firms – Companies that specialise in managing incorporation and initial stages.

It is important to differentiate between named promoters, whose roles are mentioned in legal documents like the prospectus, and unofficial contributors, who may assist without formal recognition.

Types of Promoters of a Company

Promoters can be classified based on their involvement and expertise:

1. Professional Promoters

These are specialists with expertise in company formation. For example, consulting firms or legal advisors assisting in setting up a company.

2. Occasional Promoters

Individuals who promote companies sporadically, typically when they spot a business opportunity, such as a seasoned entrepreneur launching a startup.

3. Financial Promoters

Entities like venture capitalists or investment firms promote businesses by providing initial funding.

4. Entrepreneurial Promoters

Business owners or founders who initiate the company based on their vision and strategy. An example is a tech founder creating a software startup.

Functions of a Promoter

The role of a promoter is multifaceted. Their primary functions include:

1. Identifying a Business Opportunity
   Promoters analyse market trends, identify viable opportunities, and decide on the scope of the business.
2. Preparing Necessary Documentation
   Drafting the MOA, AOA, and other legal documents essential for company registration.
3. Securing Capital and Initial Funding
   Approaching investors or institutions to raise funds for the company.
4. Registering the Company
   Ensuring the company’s incorporation by meeting all legal requirements, such as filing with the Registrar of Companies (RoC).
5. Establishing Operations
   Setting up offices, hiring the initial workforce, and laying out the operational roadmap.

Duties of a Company Promoter

Promoters have critical duties to uphold the integrity and governance of a company. These include:

1. Acting in Good Faith
   They must prioritise the company’s interests over personal gain.
2. Avoiding Conflicts of Interest
   Promoters are obligated to disclose any potential conflicts that may affect the company.
3. Disclosure of Personal Interests
   Any benefits or transactions involving the promoter must be transparently disclosed.
4. Providing Accurate Information
   Misrepresentation of facts during the company’s formation can lead to legal consequences.

Rights of a Promoter

Despite their duties, promoters are entitled to certain rights:

1. Right to Indemnity
   They can claim indemnity for liabilities incurred during company formation.
2. Right to Recover Preliminary Expenses
   Expenses made for incorporation can be reimbursed.
3. Right to Remuneration
   Promoters can receive remuneration for their services, either as cash or shares.

Liability of a Promoter

Promoters may face liabilities in specific scenarios:

• Civil Liability: Misrepresentation or breach of duties can result in compensation claims.
• Criminal Liability: Fraud or deliberate misconduct can lead to prosecution.
• Public Examination: Promoters may be publicly examined in cases of company insolvency.
• Personal Liability: They can be personally held liable for contracts signed before incorporation if the company does not ratify them.

Difference Between Promoters and Directors

Related Read - Who is a Director of a Private Limited Company?

Real-Life Examples of Famous Company Promoters

1. Dhirubhai Ambani (Reliance Industries)

Dhirubhai Ambani, the visionary founder of Reliance Industries, started the company in 1966 as a small polyester trading firm. Through his entrepreneurial spirit, he transformed it into a global conglomerate spanning petrochemicals, textiles, and telecommunications, making Reliance a household name in India.

2. Narayana Murthy (Infosys)

Narayana Murthy, the co-founder of Infosys, played a pivotal role in establishing one of India’s most successful IT companies in 1981. His commitment to transparency, innovation, and customer-centricity positioned Infosys as a global leader in software services and outsourcing.

3. Elon Musk (Tesla, SpaceX)

Elon Musk is a modern-day promoter known for revolutionising industries through Tesla and SpaceX. By promoting electric vehicles and renewable energy with Tesla and pioneering space exploration with SpaceX, Musk has demonstrated how visionary leadership can disrupt traditional industries and redefine the future.

Frequently Asked Questions

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Applicability of Annual Compliance

Annual compliance is mandatory for all types of companies registered in India, including:

• Private Limited Company (Pvt Ltd): Must file annual returns, conduct board meetings, and submit audited financials.
  
  
• One Person Company (OPC): Similar compliance as Pvt Ltd but with certain relaxations in AGM requirements.
  
  
• Public Limited Company: Higher compliance standards due to shareholder involvement and public accountability.
  
  
• Section 8 Company: Must comply with annual filings and governance norms despite being a non-profit.

Benefits of Annual Compliance

• Avoids legal penalties and ensures smooth business operations
• Maintains good standing with regulatory authorities
• Builds trust with investors, clients, and stakeholders
• Improves creditworthiness for bank loans and funding
• Facilitates a smooth exit or sale of the business in the future

Registrar Related Compliance

Financial Statements

Every company must prepare three core financial statements:

• Income Statement: Shows the company’s profitability over a financial year.
• Balance Sheet: Presents the company’s assets, liabilities, and equity.
• Cash Flow Statement: Details the inflow and outflow of cash.

Financial statements must be prepared within 6 months from the end of the financial year and filed with the ROC via Form AOC-4. All companies must audit their accounts with a chartered accountant. Failure to file financial statements can result in penalties of ₹100 per day of delay.

Annual General Meeting (AGM)

An AGM is a yearly meeting applicable under Section 96 of the Companies Act, 2013,  of shareholders to discuss and approve the company’s financial statements, appoint auditors, and make key business decisions.

• First AGM: Within 9 months of the end of the first financial year
• Subsequent AGMs: Within 6 months from the end of the financial year (but not later than 15 months from the last AGM)

Auditor’s Appointment

Under the Companies Act, 2013, every company in India must appoint an auditor within a specific timeline. The first auditor is appointed shortly after incorporation, and future appointments happen during the Annual General Meeting (AGM). 

• First Auditor: Appointed by the Board of Directors within 30 days of incorporation
• Subsequent Auditors: Appointed in AGM for a term of 5 years

File Form ADT-1 with ROC within 15 days of the appointment. If no auditor is appointed, the ROC can step in, and penalties under Section 450 apply- ₹25,000 on the company and ₹5,000 on each officer in default.

Annual Returns

Under the Companies Act, 2013, every company registered in India must file certain forms with the Registrar of Companies (RoC) each year, regardless of whether it’s making a profit, breaking even, or inactive.

The key filings include:

• Form MGT-7: Annual return with details of shareholders, directors, and company structure.
• Form AOC-4: Filing of audited financial statements.
• Form ADT-1: Auditor appointment details.

These filings must be submitted within the prescribed timelines, failing which companies can face hefty penalties, ranging from ₹50,000 to ₹5 lakhs, and in some cases, even imprisonment for responsible officers. 

DIR-3 KYC

Every director must file DIR-3 KYC annually with the Ministry of Corporate Affairs (MCA). This filing requires basic information such as your name, address, PAN, Aadhaar, email ID, mobile number, and OTP verification. There are two types of filings:

• DIR-3 KYC Form: For first-time filers or directors who need to update any details.
• DIR-3 KYC Web: For directors with no changes in their information from the previous year.

The due date is September 30th every year. Missing this deadline will automatically deactivate your Director Identification Number (DIN) and result in a late filing fee of ₹5,000 to reactivate it.

Income Tax Return (ITR)

In India, ITR filing is mandatory for companies, regardless of turnover or income status. An ITR includes details of your company’s income, expenses, tax liability, deductions claimed, and taxes paid. 

Even if your company is new or inactive, filing a nil return is still compulsory. Non-compliance can attract fines under Section 234F of the Income Tax Act and impact your company’s credibility with banks, investors, and regulators. It is generally filed in ITR-6 format for companies (except Section 8 companies claiming exemption)

Other Non-RoC Compliances

Apart from ROC-related filings, companies must also meet financial, tax, and labour law compliances, including:

• Tax-related: GST returns, TDS returns, TCS, Advance Tax, Professional Tax
• Labour-related: ESIC, PF returns, Shops & Establishment filings
• Other sector-specific filings, depending on industry regulations

Frequently Asked Questions (FAQs)

What is an LC (Letter of Credit)?

A Letter of Credit (LC) is a document issued by a bank that guarantees payment to a seller on behalf of a buyer, provided that certain conditions are met. This financial instrument ensures payment security and mitigates risks associated with cross-border transactions. The issuance of an LC involves specific conditions, like the submission of required documents, which the bank reviews before releasing funds. It provides bank guarantees and incurs fees that are essential for its operation.

Examples of Letters of Credit

International Trade Example: A U.S. company wants to buy machinery from an Indian exporter. The U.S. company requests its bank to issue an LC to the Indian exporter. Once the exporter ships the machinery and presents the required documents to their bank, they receive payment from the issuing bank, ensuring trust and mitigating payment risk.

Domestic Transaction Example: A large retail chain uses an LC to purchase inventory from a local supplier. The LC guarantees that the supplier will receive payment as soon as they fulfill the delivery conditions outlined in the agreement.

Basics of a Letter of Credit Transaction

Applicant

The buyer who requests the LC from their bank. They initiate the process by applying for the LC and specifying the terms and conditions of the trade.

Beneficiary

The seller who receives payment through the LC. They must present all required documents correctly to receive payment.

Issuing Bank

The bank that issues the LC on behalf of the applicant. They verify the buyer's creditworthiness and commit to making the payment when conditions are met.

Negotiating Bank

The negotiating bank in LC that examines documents presented by the beneficiary and facilitates payment. They ensure all paperwork matches LC requirements perfectly.

The process begins when the applicant approaches their issuing bank for an LC. The issuing bank then coordinates with the negotiating bank to establish terms and verify documents before releasing any funds.

Importance of Letters of Credit

Secure Payments

They ensure that sellers receive payments without requiring advance payments, reducing risk for both parties involved in the letter of credit.

Facilitate Cross-Border Transactions

LCs simplify complex international transactions by providing a standardised payment mechanism across different countries.

Secure Business Funding

They provide businesses with necessary funding while verifying creditworthiness, helping companies maintain healthy cash flow.

Financial Assurance

LCs offer security when buyers cannot pay, acting as a guarantee backed by reliable banking institutions.

Advantages of Letters of Credit

Ease International Trade: Simplifies complex transactions across borders by providing a structured framework for payment and documentation.

Foster Global Business Connections: Builds trust between trading partners by removing payment uncertainty and providing bank-backed guarantees.

Provide Flexibility: Customisable terms to suit various transaction needs, including payment timing, shipping requirements, and document presentation.

Parties to Documentary Credit

Commercial/Trade Parties: The buyer and seller form the core of the transaction, initiating and completing the trade deal.

Banks: Issuing and advising banks serve as intermediaries ensuring secure payment and proper documentation.

Related Entities: Shipping lines and insurers support the transaction by handling logistics and risk management aspects.

Types of a Letter of Credit

Sight Credit

A Sight Credit allows instant payment upon presenting the correct documents, providing immediate access to funds for sellers. For example, if a businessman needs quick access to cash after shipping goods, they can use this type of credit.

Acceptance Credit/Time Credit

Acceptance or Time Credit involves bills that are accepted upon presentation and paid on specified due dates. This type allows sellers to receive payments after a set period.

Revocable Letter of Credit

A Revocable Letter of Credit can be canceled or modified by the issuing bank without beneficiary consent, which limits its reliability in ensuring secure transactions.

Irrevocable Letter of Credit

An Irrevocable Letter of Credit guarantees payment once certified by the exporter’s bank. This type provides security for international transactions and is often preferred by exporters due to its reliability.

Confirmed Letter of Credit

A Confirmed Letter of Credit involves both issuing and confirming banks. The confirming bank guarantees payment to the beneficiary, holding equal liability as the issuing bank, ensuring that payments will be honored upon proper presentation.

Back-to-Back Letter of Credit

This type involves issuing a second LC based on the security provided by the first LC. It is commonly used to secure payments for suppliers in international trade transactions.

Transferable Letter of Credit

A Transferable Letter of Credit allows the primary beneficiary to transfer credit partially or fully to another beneficiary, typically a supplier. However, once transferred, the second beneficiary cannot transfer it further.

Restricted Letter of Credit

A Restricted Letter of Credit specifies a particular bank responsible for payment, limiting its scope compared to unrestricted LCs. This type is often used when specific banks are preferred due to their reliability.

Revolving Letter of Credit

A Revolving Letter of Credit allows reuse after payments or drawings are made. This flexibility is beneficial for businesses requiring multiple shipments or ongoing transactions under one credit arrangement.

Precautions to be Taken

Verify Bank Reliability: The issuing bank must be reliable and well-known to both parties of the letter of credit. This helps minimise risks and ensures the LC will be honored when presented.

Local Bank Verification: It's essential to advise through an Indian bank and confirm the authenticity of the LC. The local bank can verify the legitimacy of the foreign bank and ensure all documents meet local regulations.

Clarify Financial Terms: Make sure to clearly establish who covers all bank charges and confirm freight payment terms as specified in contract agreements. This prevents disputes and unexpected costs during the transaction process.

Import Export Code

The Import Export Code (IEC) is a mandatory document required for all businesses involved in international trade. This code streamlines customs clearance, enables duty benefits, and ensures regulatory compliance. Through platforms like Razorpay Rize, businesses can obtain their IEC within 6-7 days which makes the process efficient and straightforward.

Frequently Asked Questions