Many people believe that once a company is registered in India, it can immediately start business operations. In practice, there is one important confirmation that must be completed first.
Under Section 10A of the Companies Act, 2013, certain companies must confirm that their shareholders have actually invested the money they promised while forming the company. Only after this step is completed can the company properly begin business activities or borrow money.
Let’s understand this rule in simple terms.
Key Takeaways
- Commencement of business confirms that shareholders have paid the money for their shares.
- The declaration is filed by a director using Form INC-20A.
- It must usually be filed within 180 days after company incorporation.
- Companies should not start operations or borrow funds before completing this compliance.
- The rule helps ensure companies are genuine and financially active.
What “Commencement of Business” Means
Imagine you and two friends decide to start a private limited company.
You register the company with the government, and the company legally comes into existence. But at this stage, the government still needs confirmation that the company has received its initial investment.
This confirmation is called commencement of business compliance.
In simple words, the company must officially declare that:
- The shareholders have paid for the shares they agreed to buy
- The company has received this money
Once this declaration is submitted, the company can move forward with normal business activities.
Why Does Section 10A Exist?
From practical experience, many beginners wonder why this step is necessary.
In the past, some companies were created on paper but never actually received any investment. These companies sometimes existed only for record purposes.
To prevent this situation, the law requires confirmation that the share capital has actually been paid by the shareholders.
This ensures the company is genuine and ready to operate.
What Conditions Must Be Completed Before Starting Business?
Before the company can start business activities or borrow money, two things must be done.
1. Verification of Registered Office
The company must confirm its official business address with the Registrar of Companies. This simply means the company provides proof of the office location where official communication and legal notices can be received. This verification requirement comes from Section 12(2) of the Companies Act.
2. Filing Declaration of Share Capital Payment (Form INC-20A)
The second requirement is the key compliance under Section 10A. A director of the company must file a declaration with the Registrar stating that the shareholders have paid the value of the shares they agreed to purchase. This declaration is filed using Form INC-20A.
In practice, the form must be verified by a professional such as:
- a Chartered Accountant (CA)
- a Company Secretary (CS)
- a Cost Accountant
The declaration confirms that the company has received the money for its issued shares. This declaration must be filed within 180 days from the date of incorporation. For most companies, this simply means shareholders transfer the share capital to the company’s bank account, and then the director files the form.
The declaration is submitted to the Registrar of Companies (ROC).
What If the Business Requires Regulatory Approval?
Some businesses in India require approval from regulatory authorities before operating. For example:
- Banking or financial companies may require approval from the Reserve Bank of India (RBI).
- Stock market related businesses may require approval from the Securities and Exchange Board of India (SEBI).
If the company falls into such categories, the approval from the regulator must also be obtained and attached with the declaration.
Time Limit for Filing the Declaration
The company must submit this declaration within 180 days from the date of incorporation.
In simple terms, the company gets about six months after registration to complete this step.
If the company fails to submit this declaration within the allowed time, it may face compliance issues.
Form Used for Filing the Declaration
The declaration is filed using a form called Form INC-20A.
This form is submitted online to the Registrar of Companies through the Ministry of Corporate Affairs (MCA) portal.
Once the form is filed and accepted, the company is considered compliant with the commencement of business requirements.
Example
Let’s look at a small example to understand this better.
Suppose a company called XYZ Networks Private Limited is incorporated.
The founders agree to invest the following amounts:
| Shareholder | Investment |
|---|---|
| Founder A | ₹1,00,000 |
| Founder B | ₹1,00,000 |
| Founder C | ₹1,00,000 |
The total share capital of the company is ₹3,00,000.
Once this money is deposited into the company’s bank account, a director files Form INC-20A confirming that the shareholders have paid for their shares.
After this filing, the company can comfortably start its operations.
When This Requirement Usually Happens in Practice
In real business situations, this declaration is usually filed after the company opens its bank account and the shareholders deposit their investment money.
Many founders complete this step within the first few weeks after incorporation.
For most genuine businesses, it is a routine compliance step handled by the company’s professional or consultant.
What Happens If the Company Does Not File the Declaration?
Sometimes companies forget to complete this compliance. When this happens, the law imposes penalties. The company may be required to pay a fixed penalty of ₹50,000.
Every responsible officer of the company may be required to pay a penalty calculated for each day the delay continues. The penalty works like this:
- ₹1,000 per day of delay
- Maximum penalty up to ₹1,00,000
In practice, this means the longer the delay continues, the higher the penalty becomes, until it reaches the maximum limit.
Can the Registrar Remove the Company from the Register?
Yes, this can happen. If the declaration is not filed within 180 days of incorporation, the Registrar may assume that the company has not started any real business operations. In such situations, the Registrar has the authority to begin the process of removing the company’s name from the register of companies.
This process is known as striking off the company. Interestingly, this action can happen along with penalties at the same time.
Example
Let’s understand this with a practical situation.
Suppose a company named ABC Networks Private Limited was incorporated on 27 June 2023. The company was required to file the declaration within 180 days of incorporation.
However, the directors filed the declaration on 30 January 2024.
This means the filing happened 34 days late.
The penalty calculation would look like this:
| Liable Party | Penalty |
|---|---|
| Company | ₹50,000 |
| Officers in Default | ₹1,000 per day × 34 days = ₹34,000 |
So the total penalty would include:
- ₹50,000 for the company
- ₹34,000 for the responsible officers
This example shows why companies usually complete this filing quickly after incorporation.
Commencement of Business (Section 10A)
| Topic | Explanation |
|---|---|
| Commencement of Business | A company must confirm that shareholders have paid for their shares before starting operations. |
| What is Section 10A | A rule requiring certain companies to confirm share capital payment before starting business |
| Who must follow it | Companies with share capital incorporated after the 2019 amendment |
| Key requirement | Director must file Form INC-20A declaring that shareholders paid for their shares |
| Who Files the Declaration | A director of the company submits the declaration. |
| What the Declaration Confirms | It confirms that all shareholders have paid the money for the shares they agreed to buy. |
| Time Limit | The declaration must usually be filed within about six months from the date of incorporation. |
| Form Used | The declaration is submitted using Form INC-20A. |
| Why This Rule Exists | It helps ensure that companies are genuine and have actually received their initial investment. |
| When It Happens in Practice | Usually done after the company bank account is opened and the share capital is deposited. |
| Additional requirement | Registered office must be verified with the Registrar |
| Company penalty | ₹50,000 if the declaration is not filed |
| Per Officer penalty | ₹1,000 per day of delay, up to ₹1,00,000 |
| Risk of non-compliance | Registrar may remove the company from the register |
Conclusion
Starting a company in India involves a few important compliance steps after incorporation. One of the most important among them is the commencement of business declaration under Section 10A.
This step simply confirms that the shareholders have paid the investment they promised while forming the company. Once the declaration is filed through Form INC-20A, the company can move forward with normal business activities.
For most founders, this is a straightforward process completed soon after opening the company’s bank account and receiving the initial capital.
FAQ: Commencement of Business under Section 10A (Companies Act 2013)
When people start learning about company registration in India, one question often comes up: Can a company start business immediately after incorporation?
These FAQs answer the most common beginner doubts about Commencement of Business under Section 10A, including practical situations founders usually face after registering a company.
What is the commencement of business under the Companies Act 2013?
Commencement of business means the company officially confirms that its shareholders have paid the money they promised to invest when the company was formed. This confirmation is required before the company starts operating or borrowing money. It is a legal compliance step under Section 10A of the Companies Act, 2013.
Is filing INC-20A mandatory for every company in India?
Form INC-20A is required for companies that have share capital. In simple terms, if shareholders agreed to invest money in exchange for shares, the company must confirm that this money has been received. This confirmation is filed with the Registrar of Companies.
What is the time limit to file commencement of business declaration?
The declaration should normally be filed within 180 days from the company’s incorporation date. That means the company gets roughly six months after registration to complete this step.
What happens if a company does not file INC-20A?
If the company does not file the declaration within the allowed time, it may face penalties and compliance issues. In serious cases, the authorities may even consider removing the company from the official register if it appears inactive.
Can a company start business before filing INC-20A?
In practice, the company should not begin formal operations or borrow funds before filing the declaration. The rule exists to ensure the company actually receives its initial capital before starting activities.
Who files the commencement of business declaration?
A director of the company submits the declaration to the Registrar of Companies. The director confirms that all shareholders have paid the value of the shares they agreed to purchase.
Why did the government introduce Section 10A?
From practical experience, this rule helps prevent fake or inactive companies. Earlier, some companies were registered but never received real investment. This declaration ensures the company has genuine shareholders and real capital.
When do companies usually file INC-20A in real life?
Most companies file it after opening the company bank account and depositing the share capital. Once the money is credited, the director can safely file the declaration.
What does “share capital paid by subscribers” mean?
Subscribers are the people who agreed to buy shares when the company was formed. Paying share capital simply means they have transferred the promised investment money to the company.
Can a startup file INC-20A if the share money is still unpaid?
No. The declaration clearly confirms that the share capital has been received. So the shareholders must deposit the money first before filing the form.
Does a one-person company also need to file INC-20A?
Yes, if the company has share capital. Even if there is only one shareholder, the rule still requires confirmation that the share money has been paid.
Is INC-20A related to the company’s registered office?
Yes, indirectly. Before filing the commencement declaration, the company must also confirm its registered office address with the Registrar.
What is a simple example of commencement of business compliance?
Suppose three founders start a company with ₹3,00,000 share capital. After they deposit the money into the company’s bank account, a director files INC-20A confirming the payment. This allows the company to start operations.
Do small businesses and startups also need this compliance?
Yes. Whether it is a small startup or a large company, if it is registered as a company with share capital, this declaration is required.
Is commencement of business the same as company incorporation?
No. Incorporation means the company is legally created. Commencement of business is a separate step confirming the company has received its initial investment.
