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Importance of Corporate Secretarial Services in Small and Medium Sized Businesses

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Importance of Corporate Secretarial Services in Small and Medium Sized Businesses

Author – Ms. Jhansi Rani
Email id – jhansi@simplybiz.in

Introduction

Corporate Secretarial Services or activities refers to the administrative & compliance functions under specified laws within a business that ensure good corporate governance. Corporate governance provides a system for best practices for businesses and ensures the long-term success of the business, protects shareholder rights, and balances the interests of all stakeholders.
All organizations either big or small must ensure good corporate governance which can achieved through efficient, timely and well managed Corporate Secretarial functions. This article helps you understand the importance of Corporate Secretarial Services in Small and Medium sized businesses.

(I) What are Small and Medium Businesses (SMB’s)?

Businesses are generally categorized into Small, Medium and Large businesses based on its size. Small and Medium sized businesses most often operate as Limited Liability Partnerships (LLP) or Company structure. The categorization of a company as an SMB depends mainly on the following parameters-

  1. Amount of Capital Invested
  2. Assets owned by the entity
  3. Turnover or Annual Revenue
  4. Nature and Scale of Business Operations
  5. Management Vision and Business Objectives
  6. Number of Employees or workforce
  7. Market Capitalization

On a broader level and for practical purpose, we find companies having the entity structure as a Private Limited Company with revenue in the range of Rs. 1 crore to Rs. 3 crore and employee count of less than 200 are Small & Medium Business.

(II) What are the Corporate Secretarial Compliances? What does it encompass (broadly)?

Entities incorporated in a particular jurisdiction are governed by the laws or statute that are there in force and they need to adhere to a wide range of rules, regulations and standards that govern business and industry, from time to time.

Every company incorporated in India is governed by the provisions of Companies Act. The Limited Liability Act makes provision for the formation and regulation of Limited Liability Partnerships. Foreign Exchange Management Act consolidates and amends laws regulating foreign exchange in India. The Establishment & Employment related laws mainly cover social welfare legislation enacted with the objective of protecting the interest of the employees and providing certain benefits to them and regulating the operations of establishments. The compliance of all these laws is mandatory for operating any business.

Of the diverse set of laws and regulations applicable to small and medium-sized businesses, here are some of the laws falling within the purview of Corporate Secretarial Compliance: 

(1) Companies Act:

The Companies Act 2013 regulates the formation and functioning of corporations or companies in India. The broad scope of work under Companies Act encompasses:

  1. Board Management – Documentation & process for convening of Board Meetings for decision making by the Board and changes in the Board constitution.
  2. Shareholder Management – Documentation & process for convening of General Meetings for seeking members approval
  3. Compliances & Reporting to the Regulator on event based compliances and Annual compliances
  4. Maintenance of Records – Maintenance of Secretarial records including Minutes, Statutory Books etc.
  5. Audit and other certifications as required under the Act

(2) Foreign Exchange Management Act (FEMA):

Foreign Direct Investment made in an Indian Entity, mandates compliance under FEMA and RBI regulations and any failure   to report and file necessary documents with the Reserve Bank of India shall lead to compounding of offences and late submission fees.

The Broad reporting’s under FEMA can be categorized as under:

  1. Reporting for Issue of shares to non-resident,
  2. Reporting on transfer of shares and other eligible securities between residents and non-residents and vice- versa
  3. Reporting for loans availed by an Indian entity from a non-resident lender in the form of External Commercial Borrowing
  4. Reporting for Overseas Direct investment made outside India by way of contribution to the capital or subscription to the Memorandum of a foreign entity or by way of purchase of existing shares of a foreign entity
  5. Filing of an Annual return on Foreign Liabilities and Assets in the event of Foreign Direct Investment(FDI) & submission of Annual Performance report in case of any Overseas Direct Investment(ODI) by a resident to the Authorized Dealer.

(3) NBFC Compliances:

NBFC Compliance is a mandatory requirement for all the registered Non-Banking Financial Companies. Some of the major compliances are categorized below:

  1. Application and Registration for license.
  2. Filing e-forms and periodic returns (Quarterly, Half yearly & Annual) with RBI.
  3. Intimation to RBI regarding change in information relating to address, telephone Nos and email id etc., of registered office of the entity or directors or the auditors.

(III) Why is it essential for such businesses to be compliant?

Compliance is important for Small and Medium sized businesses as much as it is for Large and Multinational Companies. Good Corporate Governance demands compliances level that match the intentions of legislature, expectations of stakeholders and requirements of Regulators. Handling statutory and legal compliance can become a big challenge for small and medium sized businesses. However, it is necessary for an entity to be compliant in order to avail the following benefits at various levels-

  1. Protects investor’s wealth and enhances credibility of the entity with the investors and banks in securing investments, loans etc.
  2. Enjoy healthy returns in the form of employee retention, customer’s loyalty, public respect towards the organization and also provides greater shareholders returns.
  3. Better Brand image and reputation, which in turn helps to secure stronger market capitalization.
  4. Helps in avoiding penalties, both monetary and imprisonment.
  5. Cost savings by avoiding delay filing fees, fines and minimizing litigation.
  6. Improved operations and higher productivity

(IV) What are the implications of Non-compliance?

The implications of non-compliance with laws and regulations can be significant and severe. The risk of non-compliance would include the following:

  1. Unnecessary interruptions in business operations and revenue loss.
  2. Punitive actions resulting in Show cause notices, Fines, Penalties against the Company or Officials.
  3. Civil actions and other lawsuits against the entity.
  4. Attachment of Property and Bank Accounts by the Regulatory Authorities.
  5. Criminal actions resulting in imprisonment of the promoters and Officers in default.
  6. Closure or Winding up of business activities.
  7. Public embarrassment and reputational damage to the Company.

(V) Should the compliances be managed in-house or outsourced?

Small & Medium sized entities generally have limitation of funds and team capabilities and with these limitations, adhering to the laws and monitoring the compliance becomes a major challenge. The lack in expertise and skills of the inhouse team to handle various compliance requirements can be overcome by way of outsourcing the same. Outsourcing will ensure that a competent, experienced and professional team handles compliance management in a timely and effective manner. Given below are some of the benefits of outsourcing compliance management:

  1. It saves time and reduces burden on the management personnel.
  2. Enables the business owners to focus on core business operations.
  3. Ensures the expert level of compliance management.
  4. Cost effective compared to hiring the in-house professionals.

(VI) Conclusion

Understanding the need and the importance of Corporate Secretarial compliance, it is inevitable for small and medium-sized businesses to have a proper compliance management process in place either inhouse or outsourced. The consequences of non-compliance have an adverse impact on the business so it would be ideal to identify a right partner who will diligently and pro-actively manage the compliances.

If you wish to seek ongoing compliance support, SimplyBiz is the right partner for you. Our Corporate Secretarial services are matched to the best industry practices and meet the highest standards of Corporate Governance.

SimplyCorp is a solution that offers comprehensive and end-end management of Corporate Governance & Secretarial Compliances covering all stages of the entity life cycle. Outsourcing the Corporate Secretarial services to SimplyCorp will remove cumbersome statutory compliance management functions from your internal teams’ workload and help them focus on their core business functions, be agile, and be capable of responding to new challenges.

Please write to us if you want to know more on the scope of work to our Product Head – Vaishali Vohra at the mail ID vaishali@simplybiz.in or SimplyCorp@simplyBiz.in

The article has been authored by Ms. Jhansi Rani from our SimplyCorp team.

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