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India introduces new rules to ease burdens of failing startups

NEW rules will make it easier, faster and cheaper for failed Indian start-ups to shut up shop by getting their name taken off the corporate register.

Any company that has not commenced business operations within a year of incorporation or hasn’t been carrying out business for two years without applying to be treated as a dormant company can be struck off the register by the Registrar of Companies (RoC).

But now changes to the Companies Act, 2016, allow companies to apply to the RoC to remove them on the same grounds after clearing their liabilities and obtaining consent of at least 75 percent of shareholders.

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This will allow entrepreneurs to avoid the time consuming process of a voluntary winding up, which requires a shareholder and creditor meeting and the appointment of a liquidator. Applying for removal involves an application fee of 5,000 rupees (US$73.50) plus related costs, but a winding up can cost many times that much, according to the Times of India.

Under the old Companies Act there was a Fast Track Exit (FTE) Scheme but it was issued as a government circular and so wasn’t binding, Anita P Basrur, partner at chartered accountants Sudit K Parekh & Co., told TOI. Now the provisions are part of the Companies Act.

“Thus they carry more authority or weight before other authorities, say the central or state tax authorities,” Basrur said.

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Once an application has been received the RoC issues a public notice and notifies the central and state tax authorities to check for objections. After 30 days, if there is no objection the RoC strikes off the name.

Unlike with a winding up though, directors and key officers remain liable for any outstanding liabilities. So start-ups need to be sure they have cleared their books before going down this route.