March 11, 2024 | CA B K Goyal & Co LLP

Clawback provision

Business / CA Bhuvnesh Goyal / March 11, 2024

Clawback is a provision under which money that’s already been paid out must be returned to the employer or the firm. This is a special contractual clause, used mostly in financial firms, for money paid for services to be returned under special circumstances or events as stated in the contract. Clawbacks involve a penalty, making them different from simple repayments or refunds. The primary aim of such a provision is to prevent managers from using incorrect accounting information. According to research, after the provision of clawback is included, investors develop more confidence in a firm’s financial statements. Before 2005, clawback provisions in Fortune 100 companies were lower than 3%, but rose dramatically, to 82%, by 2010. The provision of clawback is aimed at striking a balance between economic and community development and corporate welfare. It is mostly used in securing tax incentives, abatements, refunds, and grants. What Is a Clawback? A clawback is a contractual provision whereby money already paid to an employee must be returned to an employer or benefactor, sometimes with a penalty.Many companies use clawback policies in employee contracts for incentive-based pay like bonuses. They are most often used in the financial industry. Most clawback provisions are non-negotiable. Clawbacks are typically used in response to misconduct, scandals, poor performance, or a drop in company profits. How Do Clawbacks Work? There is a big business headed by a Chief Executive Officer (CEO). The annual reports of the company show that the CEO worked hard to keep the company profitable. So, the company wants to reward his efforts and a contract is signed, stating that if the sales of the company increase by at least 10% within the next two years, then the CEO will be paid a bonus of $200,000. In the corporate financial statement, it shows that the company registered a profit of 13% in the two years and as a result, the CEO is rewarded with the promised amount. After an audit of the company, it is found that the profits were over-reported and the profit was actually 9.5% and not 13% as stated in the previous report. In a situation like that, under the clawback provision, the company can take back the bonus amount previously paid out to the CEO. Depending on the specific clawback clause, the CEO may also have to pay a penalty because the original financial reports submitted were flawed. Uses of Clawback Provisions Medicaid recovery: Medicaid is allowed to recover the money paid for the healthcare of a Medicaid recipient who has died and therefore obviously no longer needs the care. All states aim to recover Medicaid money spent in advance on long-term care such as nursing homes. Mortgage lending: Most banks use clawback provisions to recover money from unprofitable home loans. Life insurance: In case of cancellation of a policy, a provision of clawback might require the benefits and payments previously received to be repaid. Executive pay agreements: If there is any breach of an agreement by an executive, and he or she goes on to work for a competitor or a rival company within a certain number of months as stated in the contract, then the executive might be required to reimburse the company that previously employed them, according to the provisions of clawback. Pensions: Pensions can be clawed back if it is found that there has been some fraudulent activity and suppression or adulteration of information. Dividends: Under certain circumstances, such as bankruptcy, dividends can be clawed back. Government contracts: If the contractor has failed to meet specified quality standards or if the requirements of the contract are not fulfilled, then the provision of clawback may be exercised upon the contractors. Clawback Provisions in the Financial Recovery Act (FRA) Clawback provisions received more attention from authorities and regulators following the Global Financial Crisis of 2008. A ruling on clawback provisions was issued as a part of the Dodd-Frank Financial Reform Legislation by the Securities and Exchange Commission in July 2015. According to the ruling, companies need to institute clawback provisions against executive compensation that is due to intentional over-reporting. Executives can also be asked to return stock options exercised or bonuses received if the profits of the company do not match the specified levels. FAQs What is a clawback option? A clawback option is a contractual provision that allows an employer or organization to recover previously paid compensation or benefits from an employee under specific circumstances. When are clawback options typically implemented? Clawback options are often implemented in situations where an employee’s performance or behavior negatively impacts the organization or if there is a financial restatement due to errors or misconduct. What triggers a clawback provision? Common triggers for clawback provisions include financial restatements, violation of ethical or legal standards, intentional misconduct, or a significant decline in an individual’s performance. Practice area’s of B K Goyal & Co LLP Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code | Forensic Accounting and Fraud Detection | Section 8 Company | Foreign Company | 80G and 12A Certificate | FCRA Registration |DGGI Cases | Scrutiny Cases | Income Escapement Cases | Search & Seizure | CIT Appeal | ITAT Appeal | Auditors | Internal Audit | Financial Audit | Process Audit | IEC Code | CA Certification | Income Tax Penalty Notice u/s 271(1)(c) | Income Tax Notice u/s 142(1) | Income Tax Notice u/s 144 |Income Tax Notice u/s 148 | Income Tax Demand Notice | Psara License | FCRA Online Company Registration Services in major cities of India Company Registration in Jaipur | Company Registration in Delhi | Company Registration in Pune | Company Registration in Hyderabad | Company Registration in Bangalore

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Rajasthan Farm Loan Waiver Scheme

Government Schemes / CA Bhuvnesh Goyal / March 11, 2024

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Registration as a Startup

Government Schemes / CA Bhuvnesh Goyal / March 11, 2024

The Government of India started a new initiative of Startup Scheme in 2016. Its primary objective is to promote the growth of the start-ups in India. Under this scheme, the government’s main motive is to robust the start-ups in India as they want to create jobs for others instead of job seekers. It is under the control of the Department for Industrial Policy and Promotion (DPIIT). India is experiencing a significant rise in the number of Startups, with the government actively encouraging and assisting young entrepreneurs in establishing their ventures. These Startups play a crucial role in stimulating the country’s economy. What is a Startup in India? A startup is a new initiative to start a business in which you can start a small business with a single or group of people in India. In this, you can start a business of another item, product, or service that is unique from others and it allows creating something new and innovative for their startup business. Startup-India is a good initiative to develop the Indian economy. The objective of the Startup India Scheme The Startup India Scheme aims to foster a thriving startup culture and establish a robust and inclusive ecosystem that encourages innovation and entrepreneurship in India. mproved infrastructure, which includes the establishment of good centers. Streamlined facilitation of Intellectual Property Rights (IPR), making the process of patent filing more accessible. Creating a favorable regulatory environment that encompasses tax benefits, simplified compliance procedures, streamlined company setup, and efficient mechanisms. Aiming to enhance funding opportunities for Startups. Providing an extensive networking database for entrepreneurs and other stakeholders involved in the Startup ecosystem. What is Startup? A startup is a business that introduces innovative products or services to address existing problems or needs within society. It may also revamp an existing product or service, improving it to offer a better solution. The essence of a startup lies in its commitment to bringing fresh ideas and creative solutions to the market. What distinguishes it from other new companies is that a startup offers a novel product or service that is not currently available elsewhere in the same manner. The driving force behind startups is innovation and the pursuit of growth and development. The following features fall under the Startup-India: Company Age: The company’s incorporation does not exceed 10 years. Type of Company: If you want to enjoy the start-up scheme benefits then your company must be a Private Limited Company under the Company Act 2013 or a Limited Liability company registered under the Act 2008 or registered under the Indian Partnership Act, 1932 as a Partnership Firm. Turnover capital : The company’s yearly turnover shall not exceed Rs.100 crore. A new business company: In this startup scheme, the company needed to be new and didn’t restructure any existing entity to avail of the DPIIT Certificate of Recognition. Unique and creative innovation: The startup should have unique and creative ideas from other companies. The business should generate revenue and employ the people. Benefits of Startup India Registration: Startups that have required the DPIIT Certificate of Recognition can enjoy various benefits, which are as follows: Self-Certification: Once you get the DPIIT Certificate of Recognition, Startups can self-certify their compliance with Three Environmental Laws and Nine Labour Laws. Start-Up Patent Application: Recognized Startups are entitled to pay only 80% of the fees for patents, trademarks, copyrights, and designs. Additionally, they can avail of fast-track processing for their patent applications. Simplified Regulations for Government Purchasing: Startups managed by the DPIIT can showcase their products on the government e-marketplace. Easy winding up of Company: As per the Insolvency and Bankruptcy Code, 2016, Startups can complete the process of winding up their company within 90 days from the date of applying for insolvency. Funds: Startups are eligible for Rs. 10,000 crore funds from Alternative Investment Funds. Rs. 2,000 crore of Credit Guarantee Fund: Over four years, Startups have the opportunity to access a credit guarantee fund provided by the National Credit Guarantee Trust Company or SIDBI. Tax Exemptions: Upon getting the Certificate of Recognition, Startups can apply for tax exemption under Section 80 IAC of the Income Tax Act. Documents Required For Startup India Registration The required documents for Startup India Registration include: Incorporation/Registration Certificate of your Startup Proof of funding, if applicable Authorization letter of the owner of the company, LLP, or partnership firm Proof of concept, such as a pitch deck, website link, or video (for Startups in the validation, early traction, or scaling stage) Details of patents and trademarks, if any List of awards or certificates of recognition, if received PAN Number (Permanent Account Number) Process of Startup India Registration Step 1: Incorporate Your Business- The first step is to incorporate your business as a Private Limited Company, Partnership firm, or Limited Liability Partnership (LLP). This involves following the standard procedures for business registration, such as submitting the registration application and obtaining the Certificate of Incorporation or Partnership registration. Step 2: Register with Startup India- After incorporating your business, the next step is to register it as a startup. The process is straightforward and can be completed online. To begin, visit the Startup India website and click the ‘Register’ button. Provide your name, email ID, and mobile number, and create a password, then click ‘Register.’ Next, enter the OTP (One-Time Password) sent to your email and provide additional details, such as the type of user, name, and startup stage. Click on the ‘Submit’ button to create your Startup India profile. By completing this Registration, your business will be recognized as a startup under the Startup India scheme, making it eligible for various benefits and support. Step 3: Obtain DPIIT Recognition- After creating the Startup India website profile, the next crucial step is to obtain recognition from the Department for Promotion of Industry and Internal Trade (DPIIT). This recognition offers startups access to various benefits, such as high-quality intellectual property services, relaxation in public procurement norms, self-certification for labor and environmental laws, easy winding up of the company, access to Fund of Funds, and tax exemption for three consecutive years, including tax exemption on investments

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Section 185 of Companies Act, 2013

Companies Act 2013 / CA Bhuvnesh Goyal / March 11, 2024

When the Companies Act, of 1956 was in effect, public companies may offer loans, guarantees, and securities if they acquired prior authorization from the Central Government. The companies used to borrow cash and pass them on to subsidiaries and other related companies via inter-corporate loans. When it came to complying with the terms of the loan arrangement, however, the holding companies used to back down, leaving the subsidiaries in the lurch. Section 185 of the Companies Act, 2013 went into effect to prevent the exploitation of subsidiaries. The Companies Act, 2013(Act) makes provisions relating to the granting of loans to company directors. Section 185 of the Act sets out the conditions and restrictions on the provision of loans to directors. Each company must comply with the conditions outlined in this section before making a loan or providing a guarantee or security in connection with any loan. This section also provides for the penalty of the company, the defaulting manager, and the directors who grant loans in contravention of the conditions set out in this section. Understanding Section 185 Section 185 of the Companies Act, 2013 imposes specific limitations on the issuing of loans to Directors in order to monitor their performance. Prior to the Amendment The old Section 185 banned firms from extending any loan and/or providing any security or guarantee in regard to a loan taken out by the company’s directors or any other person in whom the director had an interest. Penalties were only authorized if a company or any beneficiary of such a loan, security, or guarantee was found to be in violation. After the Amendment Section 185 of the Companies Act (as amended by the Companies (Amendment) Act, 2017): Limits the restriction on loans, advances, and the like to Directors of the company or its holding company, or any partner of such Director, or any firm in which such Director or relative is a partner. Allows the company to make a loan, guarantee a loan, or provide security in connection with a loan to any person or entity in which any of the Directors is interested, subject to the following conditions: – The Company passing a Special Resolution in a General Meeting (approval of at least 75% of the members is required). – Loans must be used strictly for the borrowing company’s primary business activity. The penalty requirements of Section 185 (4) of the Act now extend to an officer in default of the company, in addition to the Company (which includes any Director, Manager or KMP or any person in accordance with whose directions BODs are accustomed to act). To avoid confusion as to whether the provision of section 186, which begins with the words “without prejudice to other provisions”, can exclude section 185, the new section omits the words “unless otherwise provided by law”. This new section allows companies to issue loans, guarantees, and securities to organizations in which directors are involved in certain situations, subject to the prior approval of shareholders by special resolution and on the condition that the loans are used by the borrower for the main business of the company. The interest rate referred to in section 185(3) clause (b) is under the rate established in Section 186, Paragraph 7 of the Act. Before the amendment, it was “interest at a rate not lower than the bank rate declared by the Reserve Bank of India”. The scope of penalties has been widened and as a result, the duties of each company’s “director” (as set out in Section 2(59) of the Act) have been increased to ensure that all loans, protection, and guarantees compliance with the provisions of the Act in which a company defaulter liable for criminal acts and may also be liable for criminal liability. A special wrong of violation of regulations when using a loan was also added to the list of crimes under this section. Loan for Directors Loans can be granted to the directors subject to certain situations. According to Section 185 of the Companies Act, 2013, a company may not provide loans directly or indirectly, including any loans represented by credit cards. To any of its directors Any person in whom the director of the lending company is interested, or To provide any security in respect of loans taken by a director or any such person Section 185 of the Companies Act, 2013 read with Act 10 of the Companies (Board Meetings and Powers) Act 2014 provides that a company may not guarantee or lend to directors or any other person related to a director of the company. The rules and the above provisions clearly state that a director must not engage in any activity that is personally beneficial to him. Loan to any interested person of the director The company may make loans including any loan represented by book debt or give guarantee or provide a guarantee in respect of any loan made to any person in which the company’s director is interested. Section 185(2) allows the company under certain conditions to provide loans to any person in whom one of the executives is interested. The conditions that must be met for the provision of loans or the provision of guarantees or security to a person in whom the director is interested are the adoption of a special resolution of the general meeting and the fact that the credit company uses the loans provided for its main business activity. The explanatory memorandum to the notification of the general meeting at which such a resolution to grant a loan is passed should contain full details of the loans or guarantees granted or the security provided and the purpose for which the loan or guarantee or security is proposed used by the person receiving the loan. The statute establishes a list of persons who are considered to be persons in whom any of the company’s executives have an interest. The Company may grant loans or provide a guarantee or security only to such persons. They are- Any private company to which the lending company’s director is a

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National company law tribunal

Companies Act 2013 / CA Bhuvnesh Goyal / March 11, 2024

The National Company Law Tribunal or NCLT is a quasi-judicial body in India adjudicating issues concerning companies in the country. It was formed on June 1, 2016, as per the provisions of the Companies Act 2013 (Section 408) by the Indian government. National Company Law Tribunal is the outcome of the Eradi Committee. NCLT was intended to be introduced in the Indian legal system in 2002 under the framework of Companies Act, 1956 however, due to the litigation with respect to the constitutional validity of NCLT which went for over 10 years, therefore, it was notified under the Companies Act, 2013. It is a quasi-judicial authority incorporated for dealing with corporate disputes that are of civil nature arising under the Companies Act. However, a difference could be witnessed in the powers and functions of NCLT under the previous Companies Act and the 2013 Act. The constitutional validity of the NCLT and specified allied provisions contained in the Act were re-challenged. Supreme Court had preserved the constitutional validity of the NCLT, however, specific provisions were rendered as a violation of the constitutional principles. NCLT works on the lines of a normal Court of law in the country and is obliged to fairly and without any biases determine the facts of each case and decide with matters in accordance with principles of natural justice and in the continuance of such decisions, offer conclusions from decisions in the form of orders. The orders so formed by NCLT could assist in resolving a situation, rectifying a wrong done by any corporate or levying penalties and costs and might alter the rights, obligations, duties or privileges of the concerned parties. The Tribunal isn’t required to adhere to the severe rules with respect to appreciation of any evidence or procedural law. Major Functions of NCLT Registration of Companies- The new Companies Act, 2013 has enabled questioning the legitimacy of companies because of specific procedural errors during incorporation and registration. NCLT has been empowered in taking several steps, from cancelling the registration of a company to dissolving any company. The Tribunal could even render the liability or charge of members to unlimited. With this approach, NCLT can de-register any company in specific situations when the registration certificate has been obtained by wrongful manner or illegal means under section 7(7) of the Companies Act, 2013. Transfer of shares- NCLT is also empowered to hear grievances of rejection of companies in transferring shares and securities and under section 58- 59 of the Act which were at the outset were under the purview of the Company Law Board. Going back to Companies Act, 1956 the solution available for rejection of transmission or transfer were limited only to the shares and debentures of a company but as of now the prospect has been raised under the Companies Act, 2013 and the now covers all the securities which are issued by any company. Deposits- The Chapter V of the Act deals with deposits and was notified several times in 2014 and Company Law Board was the prime authority for taking up the cases under said chapter. Now, such powers under the chapter V of the Act have been vested with NCLT. The provisions with respect to the deposits under the Companies Act, 2013 were notified prior to the inception of the NCLT. Unhappy depositors now have a remedy of class actions suits for seeking remedy for the omissions and acts on part of the company that impacts their rights as depositors. Power to investigate- As per the provision of the Companies Act, 2013 investigation about the affairs of the company could be ordered with the help of an application of 100 members whereas previously the application of 200 members was needed for the same. Moreover, if a person who isn’t related to a company and is able to persuade NCLT about the presence of conditions for ordering an investigation then NCLT has the power for ordering an investigation. An investigation which is ordered by the NCLT could be conducted within India or anywhere in the world. The provisions are drafted for offering and seeking help from the courts and investigation agencies and of foreign countries. Freezing assets of a company The NCLT isn’t just empowered to freezing the assets of a company for using them at a later stage when such company comes under investigation or scrutiny, such investigation could also be ordered on the request of others in specific conditions. Converting a public limited company into a private limited company Sections 13-18 of the Companies Act, 2013 read with rules control the conversion of a Public limited company into the Private limited company, such conversion needs an erstwhile confirmation from the NCLT. NCLT has the power under section 459 of the Act, for imposing specific conditions or restrictions and might subject granting approvals to such conditions. FAQs What is the role of the National Company Law Tribunal? As the NCLT is established under the Companies Act, 2013, it has the role to settle disputes in relation to the companies. It also handles the structures and laws of the companies. What is the difference between a tribunal and a court? ribunal is the Quasi-judicial body with the power to try cases of special matter which are conferred on them by statutes. The court is a part of the traditional judicial system whereby judicial powers are derived from the state. Practice area’s of B K Goyal & Co LLP Income Tax Return Filing | Income Tax Appeal | Income Tax Notice | GST Registration | GST Return Filing | FSSAI Registration | Company Registration | Company Audit | Company Annual Compliance | Income Tax Audit | Nidhi Company Registration| LLP Registration | Accounting in India | NGO Registration | NGO Audit | ESG | BRSR | Private Security Agency | Udyam Registration | Trademark Registration | Copyright Registration | Patent Registration | Import Export Code | Forensic Accounting and Fraud Detection | Section 8 Company | Foreign Company | 80G and 12A Certificate | FCRA Registration |DGGI

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