Bank Financing -- Overdraft Limit i.e. OD Limit........(Series 2)

Meaning of Overdraft Limit:

Overdraft (abbreviated as OD) Limit is a short term loan based on “Pay on Demand” concept. OD limit fulfills the short term requirement of funds for business concern as well as individual concern. In OD Limit, Bank or Financial Institution (known as lender) provide the facility to withdraw excess amount up to the OD Limit sanctioned by them.  In this situation the account is said to be "overdrawn". Therefore, OD account can have debit as well as credit balance also.

Lender transfers the sanctioned amount into OD Account from which borrower can withdraw funds as per its business as well as personal requirements. Therefore, under such financing scheme borrower is liable to pay interest only on the amount he has utilized on average basis during the month.

Security and margin for OD Limit: - Borrower is required to provide Security such as Residential/ Commercial property for availing OD limit. Lender shall provide the OD limit after deducting margin on the value of security i.e. 40% or 50% which may vary from lender to lender.

Apart from above mentioned security, lender also takes personal guarantee of the borrower and guarantor.

Calculation of Eligibility: - The amount of loan shall be calculated on the basis of Last two or three year income as shown in the Income tax return of the borrower or value of security after deducting margin, whichever is lower.

Benefits of OD Limit as compared to other forms of working capital financing :-

•      In OD limit borrower is not required to route its business transaction through the OD limit account       maintained with the lender.
•    Borrower shall not be required to submit stock, debtor and creditor statement to lender on monthly     basis.
•     In case of Cash credit arrangement of financing, lender will calculate drawing power limit (also             known as DP limit). Borrower is allowed to withdraw lower of DP limit or sanctioned amount             whearas in case of OD limit borrower is allowed to withdraw full amount of limit sanctioned as per      his  requirement.

n    In my next blog I shall write about difference between CC and OD limit.

For any queries you may drop a mail on aashish@akvassociate.com

CA  Aashish Gupta 

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Authorisation for use of DSC by professionals

Greetings Folks,

Now is the era of digitization wherein all the paperwork have been shifted to digital form. Such initiatives are taken under Prime Minister’s Digital India scheme with a view to promote Green India initiative. As professionals we are also knowingly or unknowingly part of the scheme since most of our work has shifted to computer media like filing of Income tax returns, ROC returns etc.

Now a days, most of the returns and documents that are required to be filed under statute should be filed electronically after being authenticated by affixing digital signature (abbreviated as DSC). Since most of the return filing work is done by the professionals therefore clients usually keep their DSC with the professionals in their safe custody. Since as per the provisions of Information Technology Act, 2008 any document required to be signed by any person if digitally signed by him will also be acceptable. Therefore, it cast a lot of responsibility and threats to the professionals who keep the DSC of their clients and affix the same on the returns and documents on their behalf.

As a result, professionals with a view to safeguard themselves from the risk of misuse of DSC should obtain authorization letters from their clients to authenticate documents using their DSC so that in case any problem or situation arises professionals can use that authority letters as a safeguard against proceedings. Sample format is as under (same can be modified as per needs)-

                                                                                                                                                                Date:

          To,

          …………………………………

          Chartered Accountants

     SUB: Authority to use Digital Signature for filing…………………form / return with ROC/Income tax department

             Dear Sir,

             The company is required to file …………….form /return with Registrar of Companies/Income tax Department for A.Y……………….. as per the statutory requirements of the act. I have been authorized vide resolution no. …………. passed in a board meeting/ annual general meeting dated……………….. to sign and submit the form with department authorities. I have read and understood the particulars of return/forms and the same are correct and fair.

             Therefore, I authorize you to use my digital signature certificate for affixing the same on the return/form and submit the same on my behalf to government authority.

            (SIGNATURE)

            (NAME)

            (ADDRESS)

With increasing trend of frauds it is advisable that professionals should obtain the authorization well in advance. In case of any other assistance you may contact at my mail mahershi@akvassociate.com.

Thanx.

NON-PROFIT ORGANISATIONS AND ITS BENEFITS

A.)   MEANING

A nonprofit organization (NPO, also known as a non-business entity) is an organization that uses its surplus revenues to further achieve its purpose or mission, rather than distributing its surplus income to the organization's directors (or equivalents) as profit or dividends.

The nonprofit landscape is highly varied, although many people have come to associate NPOs with charitable organizations. Although charities do comprise an often high profile or visible aspect of the sector, there are many other types of nonprofits.

Although NPOs are permitted to generate surplus revenues, they must be retained by the organization for its self-preservation, expansion, or plans. NPOs have controlling members or a board of directors. Many have paid staff including management, whereas others employ unpaid volunteers and even executives who work with or without compensation (occasionally nominal).

Designation as a nonprofit does not mean that the organization does not intend to make a profit, but rather that the organization has no 'owners' and that the funds realized in the operation of the organization will not be used to benefit any owners. The extent to which an NPO can generate surplus revenues may be constrained or use of surplus revenues may be restricted.

 

B.)    BENEFITS OF ESTABLISHING NON-PROFIT ORGANISATIONS

 

1.)   Identification

A non-profit organization is a group that raises money or performs deeds for a specific cause or set of causes. For instance, an organization that uses its revenues to feed the homeless or educate children is a non-profit. The organization receives revenue by soliciting donations from the community or selling items to raise money for the cause.

2.)   Purpose

A non-profit does not operate in an effort to build wealth or revenue for the benefit of the owner, directors or shareholders. The main goal of a non-profit is to generate funds and volunteer assistance to help further its chosen cause. A non-profit organization can also act as a publicity vehicle to bring more attention to an issue in the community.

3.)   Considerations

While just about anyone can start a non-profit organization by simply taking up a cause, it's beneficial to file for official non-profit status with the state and federal government. The Internal Revenue Service requires non-profits to seek 501(c) classification in order to file as a charitable tax-exempt groups. Many states require an organization to register as either a corporation, fund, foundation or trust in order to operate as a state-recognized non-profit. In Texas, groups can register as non-profit corporations or unincorporated non-profit associations.

4.)   Benefits

One of the main benefits of running a non-profit organization is that you have an opportunity to assist the community via funds and volunteer work . Because the organization is tax-exempt, it does not have to pay taxes on the money it raises. Additionally, registered non-profits have limited liability under the law when it comes to debts; the owners and organizers are not personally responsible for business debts with a few exceptions. Non-profits also have access to government-sponsored and private grants and loans that for-profit companies do not. Another benefit of running a non-profit is that, like a standard for-profit business, it helps create paid jobs.

TYPES OF NON PROFIT ORGANISATIONS IN INDIA

1.Trusts
The public charitable trust is a possible form of not-for-profit entity in India.  Typically, public charitable trusts can be established for a number of purposes, including the relief of poverty, education, medical relief, provision of facilities for recreation, and any other object of general public utility.  Indian public trusts are generally irrevocable.  No national law governs public charitable trusts in India, although many states (particularly Maharashtra, Gujarat, Rajasthan, and Madhya Pradesh) have Public Trusts Acts. 

2.Societies 
Societies are membership organizations that may be registered for charitable purposes.  Societies are usually managed by a governing council or a managing committee.  Societies are governed by the Societies Registration Act 1860, which has been adapted by various states.  Unlike trusts, societies may be dissolved.   

3.Section 8 Companies 
A section 8 company is a company with limited liability that may be formed for "promoting commerce, art, science, religion, charity or any other useful object," provided that no profits, if any, or other income derived through promoting the company's objects may be distributed in any form to its members. 

By CA Shivani Agarwal

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One Person Company - A new concept to be familiarized with

Greetings Folks,

“One Person Company” (abbreviated as OPC) is a new concept introduced u/s 2(62) of the Companies Act 2013. Such concept has been introduced so that those proprietors who wish to carry out their business in systematic manner can do so by incorporating a OPC. As the name suggests, a one person company is formed with only one person as its member. Since such companies have only one member, these companies enjoy certain privileges or exemptions as compared to other companies.

Salient Features:

a. A One Person Company can be incorporated as a private limited company only.

b. There can have only one member at any point of time.

c. OPC may have only one director.

d. The words “One Person Company” must be mentioned in brackets below the name of the company.

e. Exemption is available from holding Board Meetings (in case of only one director) and General Meetings.

Special Provisions and Exemptions available to a One Person Company:

Incorporation and related matters (Refer Sections 3, 4, 12)

a. An OPC is incorporated as a private limited company with only one person as its member.

b. The memorandum of OPC shall indicate the name of the other person, who shall, in the event of the member’s death or his incapacity to contract become the member of the company (known as nominee).

c. Prior written consent from the other person should be obtained and the consent should be filed with Registrar of Companies at the time of incorporation along with the memorandum and Articles.

d. Person is entitled to withdraw his consent and in that case member is required to nominate some other person.

e. Member of OPC may at any time change the name of such other person by indicating it in the memorandum or by giving notice in such manner as may be prescribed. Such change should be intimated to the company by the member and the company in turn will intimate to the Registrar.

f. Any such change in the name of the person shall not be deemed to be an alteration of the memorandum.

g. The words ‘‘One Person Company’’ shall be mentioned in brackets below the name of such company, wherever its name is printed, affixed or engraved.

h. Only natural persons can become member of OPC.

Annual Return

(Refer Section 92)

The annual return of an OPC shall be signed by the company secretary, or where there is no company secretary, by the director of the company.

General Meetings

(Refer Section 122)

a. The provisions of Section 98 and Sections 100 to 111, more specifically given below, shall not apply to a OPC.

b. Provisions regarding calling of an Extra-Ordinary General Meeting by the Board or Tribunal do not apply to a OPC.

c. All provisions regarding annual general meetings like notice period, contents of notice, explanatory statement, quorum requirements, proxies, voting etc. do not apply to a OPC.

d. It shall be sufficient compliance if all resolutions, ordinary or special, required to be passed by an OPC at any general meeting, are communicated by the member to the company and entered in the minutes book, signed and dated by the member and such date shall be deemed to be the date of the meeting for all the purposes under this Act.

Board of Directors and Board Meetings

(Refer Sections 149, 152 and 173):

a. A OPC needs to have minimum of one director. It can have directors up to a maximum of fifteen which can also be increased by passing a special resolution as in case of any other company.

b. If the Articles of Association do not contain the name of the first director, member of the one person company will be deemed to be the first director till the time director(s) is duly appointed by following provisions of law.

c. For the purposes of holding Board Meetings, in case of a one person Company which has only one director, it shall be sufficient compliance if all resolutions required to be passed by such a Company at a Board meeting, are entered in the minutes-book, signed and dated by the member and such date shall be deemed to be the date of the Board Meeting for all the purposes under this Act.

d. For other One Person Companies, atleast one Board Meeting must be held in each half of the calender year and the gap between the two meetings should not be less than ninety days.

Financial Statements

(Refer Sections 134 and 137)

a. The financial statements of a one person company can be signed by one director alone.

b. Board’s report to be annexed to financial statements may only contain explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.

c. Cash Flow Statement is not a mandatory part of financial statements for a One Person Company. [Section 2(40)]

d. Financial statements of a one person company needs to be filed with the Registrar, after they are duly adopted by the member, within 180 days of closure of financial year along with all necessary documents.

Contract by a One Person Company

(Refer Section 193):

In case a One Person Company enters into any contract, not in the ordinary course of business, with its sole member who is also a director, then such contract must:

- either be in writing, or

- entered in the Memorandum, or

- recorded in the minutes of the meeting held for the first time after entering of the contract

In case of any queries you may contact me on mahershi@akvassociate.com,

CA Mahershi Vijayvergia

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Bank Financing – Cash Credit i.e. CC……….(Series 1)

Meaning of Cash Credit:

Cash credit (abbreviated as CC) is a short term loan based on “Pay on Demand” concept. CC limit fulfill the working capital requirement which is required to run day to day operation in a business concern.  In this system, Bank or Financial Institution (known as lender) maintains a CC Account for their borrower just like current account.

Lender transfers the sanctioned amount into CC Account from which borrower can withdraw funds as per its business requirements. Therefore, under such financing scheme borrower is liable to pay interest only on the amount he has utilized on average basis during the month. Borrower can’t withdraw total sanctioned amount at a time rather he utilizes the sanctioned amount for payment of business dues. Moreover, borrower is also not allowed to utilize funds from CC account exceeding drawing power which is calculated by adding stock, debtors and after deducting creditors.

Security for Cash Credit: - Borrower is required to provide two types of securities for availing CC limit:- 

Primary Security:- The lender lend money against the security of stock and book debt of the business concern after deduction some margin. However, for the purpose of security obsolete stock and debtors exceeding 90 days are excluded.

Collateral security: - The lender is also required to give collateral security such as Residential/ Commercial property. However, in case of limits below 1 Cr. i.e. CGTMSE scheme collateral security is not required since limit amount is secured by CGTMSE coverage.

Collateral security coverage shall be less than or equal to CC limit as per norms of the lender which can differ from case to case.

Apart from above mentioned securities, lender also take personal guarantee of the borrower and guarantor.

Drawing Power calculation: - Drawing Power is calculated after deducting margin from “Stock less Creditors + Book Debts” for the last month/quarter. Lender have a practice of updating drawing power based on monthly/quarterly closing stock, book debt and trade creditors’ statement submitted by the business concern. Borrower shall be allowed to withdraw sanctioned limit or Drawing Power whichever is lower only.

Example for Calculating Drawing Power:-                              (Amt In lacs)          

Particulars as on 31.03.2015	Amount
Stock	50.00
Creditors	15.00
Total Debtors	70.00
Out of above debtors >90 Days	10.00

Margin on stock: 25%        Margin on Debtors: 50%             Sanctioned Limit: 60 Lacs

       Drawing Power Calculation:-                                                 (Amt In lacs)          

Particulars as on 31.03.2015	Amount
Stock	50.00
Less: Creditors	15.00
Paid Stock	35.00
Less:- 25% Margin	8.75
Eligible Stock for the purpose of DP calculation	26.25
Debtors	70.00
Less:- Debtors >90 Days	10.00
Debtors allowed	60.00
Less: 50% Margin	30.00
Eligible Debtors for the purpose of DP calculation	30.00
Total DP on Stock + debtors	56.25
Allowed Withdrawal Sanctioned Limit or DP whichever is lower	56.25

In my next blog I shall be writing about Bank Overdraft Limit. For any queries you may drop a mail on aashish@akvassociate.com

CA  Aashish Gupta 

CONVERSION OF COMPANY INTO LLP

 LLP:

LLP is a unique form of legally recognized corporate entity, which integrates the features of both the Limited Corporations and the Traditional Partnership Firms. As it is a unique Hybrid Combination of both Company and Partnership, LLP is especially suitable for small to medium-sized business enterprises and professionals particularly.

KEY BENEFITS:

1. One of the most important reasons for the conversion of a Company into a Limited Liability Partnership is derived from the Income Tax Act. The Income Tax Act, 1961 provides for  payment of Dividend Distribution Tax by the Company, but a Limited Liability Partnership (i.e. LLP) would not liable to pay Dividend Distribution Tax.

2. There is no limit on number of partners in the LLP.

3. Minimal compliance with the ROC (i.e. Registrar of Company) and lower cost.

4. No Capital Gain Tax: No Capital gain tax shall be charged on transfer of property from the company to LLP, if the conditions stipulated in the Section 47(xiiib) of the Income Tax Act 1961, are fulfilled.

5. Carry forward and set off losses and unabsorbed depreciation of the company is deemed to be loss/depreciation of successor LLP the previous year in which conversion was effected, thus such loss can be carried for further 8 years in the hands of the successor LLP, if the conditions stipulated in the Section 47(xiiib) of the Income Tax Act 1961, are fulfilled.

PROCESS OF CONVERSION OF COMPANY INTO LLP

A. OBTAIN DIN:

Earlier there was concept of DPIN, which has been abolished therefore. Now obtain DIN for those designated partners who don’t posses DIN already.

B. BOARD MEETING:

·         Call meeting of Board of Directors.

·         Pass Resolution for Conversion of Company into LLP.

·         Pass Resolution to authorize any director to Apply for Name of LLP.

·          

APPLICATION FOR NAME AVAILABILITY:

File e-form LLP-1 with ROC.

Attachments: Board Resolution passed by the Company approving the conversion into LLP shall be attached with the aforesaid form.

C. Obtain name Approval Certificate from ROC.

D. DRAFTING OF LIMITED LIABILITY PARTNERSHIP AGREEMENT:

Contents of Agreement are:

·         Name of LLP

·         Name of Partners & Designated Partners

·         Form of contribution

·         Profit Sharing ratio

·         Rights & Duties of Partners

·         Proposed Business

·         Rules for governing the LLP

It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same needs to field in e-form 3 within 30 days of incorporation but in order to avoid any dispute between the partners as to the terms & conditions of the agreement after the conversion into LLP.

E. FILLING OF INCORPORATION DOCUMENTS: File E-Form- 2 with ROC along with following ATTACHMENTS:

·         Proof of Address of Registered office of LLP.

·         Subscription sheet signed by the promoters.

·         (Notice of Consent & Appointment of Designated Partners with their personal details)

·         Detail of LLP(s) and/ or company(s) in which partner/ designated partner is a director/ partner

F. FILLING OF APPLICATION FOR CONVERSION:

File E-FORM- 18 with ROC along with following ATTACHMENTS:

·         Statement of shareholders.

·         Incorporation Documents & Subscribers Statements in Form 2 filed electronically.

·         Statement of Assets and Liabilities of the company duly certified as true and correct by the auditor.

·         List of all the Secured creditors along with their consent to the conversion.

·         Approval of the governing council (In case of professional private limited companies)

·         NOC from Income Tax authorities and Copy of acknowledgement of latest income tax return.

·         Approval from any other body/authority as may be required.

·         Particulars of pending proceedings from any court/Tribunal etc.

G. After all formalities and filings been complied by the applicants and approved by the Ministry, REGISTRAR OF LLP TO ISSUE A CERTIFICATE OF REGISTRATION in Form No. 19 as to conversion of the LLP. The Certificate of Registration issued shall be the conclusive evidence of conversion of the LLP.

H. FILLING OF E-FORM-3:

This form provides information in respect to the LLP Agreement entered into between the partners.

ATTACHMENT: LLP Agreement

I. CERTIFICATE OF INCORPORATION as LLP from ROC.

J. FILLING OF E-FORM-14: (INTIMATION TO ROC)

After Receiving Incorporation Certificate Limited liability partnership to file within 15 (fifteen) days of the date of registration, information to the concerned Registrar of Companies with which it was registered under the provisions of the Companies Act, 2013 (1 of 2013) about the conversion and of the particulars of the limited liability partnership in within 15 days of conversion into LLP.

ATTACHMENTS OF E-FORM 14

·         Copy of Certificate of Incorporation of LLP formed.

·         Copy of incorporation document submitted in Form 2

By CA Shivani Agarwal For more details contact- shivani@akvassociate.com