Another move of the Ministry to curb FEMA Violations at Inception.. - MMJC

Introduction:

Ministry of Corporate Affairs (MCA) has amended Companies (Incorporation) Rules, 2014, wherein Form INC-9 i.e. Declaration to be given by Subscribers and First Directors at the time of incorporation and Form INC-32 (SPICe+) to be filed for incorporation has got modified to enforce the amendment made in FEMA (Non-Debt Instruments) Rules, 2019 in April 2020 which were introduced for curbing opportunistic takeovers/acquisitions of Indian Companies.

Background:

Recently MCA has registered cases against the companies with Chinese nationals as promoters and/or directors which recorded suspicious transactions and/or dubious credentials. To address certain loopholes in the Companies Act, 2013, the MCA, on 5 May, 2022, had amended the format of the share transfer deed (SH-4) as well as the format of offer letter cum application form PAS-4 wherein declarations were added to be taken from transferees of / subscribers to shares of companies which takes care of FEMA Compliances while the transfer of existing shares as well as the issuance of new shares.

In continuation of this initiative, MCA also amended Incorporation Rules and put restrictions at the time of inception itself so that these checks could be done at the incorporation level too. Accordingly, additional declarations are added in the format of INC-9 and Form INC-32 SPICe+.

Declarations introduced in Form INC-9

The new declaration states about whether before subscribing of shares, prior Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 is required? If such prior approval was required, then copy of approval is required to be attached. If such prior approval was not applicable, then confirmation that approval is not required is to be given in Form INC-9.

Who should give a declaration:

• Authorized person of non-individual first subscriber(s)
• Individual first subscriber(s)
• Individual first subscriber(s) cum director

Declarations introduced in Form SPICe+ (INC-32)

The new declaration in this form states about whether a person seeking an appointment as a director is a national of a country that shares a land border with India? If yes, then whether necessary security clearance from the Ministry of Home Affairs, Government of India is taken? The declaration also says that a copy of the security clearance is attached with the form.

So, in case the nationality of proposed director belongs to any country which shares a land border with India, a Security clearance from the Ministry of Home Affairs is required to be obtained and the same is to be attached with the form. This declaration is applicable to even those proposed directors who are not subscribers to the memorandum and articles of association of a proposed company.

Who should give a declaration:

• Proposed Directors (irrespective of whether they are subscribers to the memorandum and articles of association of the proposed company or not)

Conclusion:

MCA has shielded against probable violations under FEMA by introducing declarations in Form INC-9 and SPICE+ (Incorporation) to avoid mishaps in the future pursuant to cases of violation of FEMA in the process of registration of new companies.

Relevant Links:

Our Newsletter on amendment w.r.t. change in format of SH-4 and PAS-4 (Part B) can be accessed on following Link:

https://www.mmjc.in/mmjc-insights/mmjc-insights-dated-20-may-2022/

Link of Notification: https://egazette.nic.in/WriteReadData/2022/235912.pdf