What is Winding up of a Company: Process and Modes

What is a Micro Finance Company?

A Micro Finance Company is a financial institution that provides small loans and financial services to low-income individuals, self-employed persons, and small enterprises who lack access to conventional banking services.

These companies play a vital role in empowering economically weaker sections, supporting entrepreneurial initiatives, and fostering local economic development by promoting financial inclusion.

Features of Micro Finance Company

Micro Finance Companies are characterised by:

• Providing small-ticket loans, typically without the need for collateral
  
• Targeting low-income, rural, and unbanked populations
  
• Offering simplified and accessible loan approval processes
  
• Promoting financial literacy and inclusive banking
  

Objectives of Micro Finance Company

The main objectives of an MFC include:

• Promoting financial inclusion for low-income individuals
  
• Empowering women and self-employed entrepreneurs
  
• Supporting small businesses and farming communities
  
• Encouraging savings and responsible financial behaviour
  
• Driving sustainable economic growth in underserved areas
  

Need for Micro Finance Company

There is a growing need for MFCs due to the lack of access to formal credit channels among the financially marginalised. Traditional banks often require credit history and collateral, which many low-income individuals cannot provide.

MFCs bridge this gap by offering unsecured loans and financial products tailored to the needs of small businesses, farmers, and micro-entrepreneurs.

Roles of a Micro Finance Company

Micro Finance Companies perform various functions that support economic empowerment:

• Disbursing microloans to low-income individuals and small enterprises
  
• Offering savings schemes and recurring deposit products
  
• Providing insurance and risk mitigation solutions
  
• Conducting financial literacy and awareness programs
  

Prerequisites for Microfinance Company Registration

A Micro Finance Company (MFC) can be registered either as an NBFC or as a Section 8 Company. The prerequisites vary depending on the type of entity you choose.

Documents Required for Micro Finance Company Registration

Key documents include:

• Identity and address proof of directors
  
• Memorandum and Articles of Association
  
• Business plan and financial projections
  
• RBI approval (for NBFCs)
  
• Certificate of Incorporation (for Section 8 companies)
  
• Net Owned Fund certificate (for NBFCs)
  
• Copy of Auditor’s report
  
• Banker’s report copy
  
• Recent credit report of the directors
  
• Net worth certificate of the directors
  
• Proof of work experience in the financial sector
  
• Tax and statutory compliance documents
  

Micro Finance Company Registration as an NBFC

Given the two different approaches to forming a microfinance company, the registration process for an NBFC-MFI follows a specific set of steps:

1. Company Incorporation:
   The first step is to register your business as either a Public Limited or a Private Limited Company. A private company requires a minimum of 2 members and a capital of ₹1 lakh, while a public company requires at least 7 members.
   
2. Capital Requirement:Next, you must raise the minimum required Net Owned Funds (NOF)- ₹5 crore for most regions.
   
3. Capital Deposit:
   Once the capital is raised, it must be deposited in a bank as a fixed deposit, and a ‘No Lien’ certificate must be obtained from the bank to confirm the funds are unencumbered.
   
4. RBI License Application:
   The company must then apply for an NBFC license by submitting an online application through the RBI’s portal, along with all necessary certified documents. Additionally, a physical copy of the application and documents must be submitted to the RBI’s regional office.
   
5. All documents should be readily available with the company at the time of filing.
   

Micro Finance Company Registration as a Section 8 Company

Alternatively, a Micro Finance company can be registered as a Section 8 Company, which is a not-for-profit entity. The steps involved in this process are:

1. Obtain DSC:
   
2. Begin by applying for the Digital Signature Certificate (DSC) for all proposed directors. The DSC is essential for digitally signing e-forms during the registration process.
   
3. Name Approval:
   
4. Next, apply for name approval using the SPICe+ form. The chosen name should reflect the company's non-profit nature- suggested words include Foundation, Sanstha, or Micro Credit.
   
5. Draft and File MOA & AOA:
   
6. Once the name is approved, prepare the Memorandum of Association (MOA) and Articles of Association (AOA). These must be filed along with the necessary supporting documents.
   
7. Submit Incorporation Documents:
   
8. Finally, all relevant incorporation documents, including Form INC-12, must be filed to obtain the license to operate as a Section 8 company.
   

Micro Finance Company Registration Fees

Registration fees vary based on the chosen structure:

• NBFCs: Government registration charges, RBI license fee, legal and consultancy fees, and compliance setup costs.
  
• Section 8 Companies: Lower fees due to no capital requirement; includes MCA license charges, incorporation costs, and legal consultations.
  

Registration Process of the Company with the RBI

Step 1: Register the Brand Name as a Trademark

Before proceeding with the RBI registration, it’s important to secure your brand identity. Registering your brand name or logo as a trademark under the Trademarks Act, 1999, ensures legal protection and exclusive rights to use the name across India.

Step 2: Incorporate the Company and Obtain a Certificate of Incorporation

Begin by registering your business as a Private Limited or Public Limited Company under the Companies Act, 2013 via the Ministry of Corporate Affairs (MCA) portal.
You will receive a Certificate of Incorporation (CoI) upon approval, which acts as the legal foundation for your microfinance company.

Step 3: Deposit Capital and Obtain No Lien Certificate

Raise the required Net Owned Funds (NOF)—₹5 crore (₹2 crore for northeastern states)—and deposit it as a Fixed Deposit in a scheduled commercial bank. Obtain a No Lien Certificate from the bank, confirming the funds are unencumbered and reserved as per RBI norms.

Step 4: Prepare and Submit the Detailed Project Report (DPR)

Create a robust Detailed Project Report covering your business plan, financial projections, risk management policies, organisational structure, and promoter background.

Step 5: Complete RBI Formalities and Gather Certified Documents

Collect all required documents, including:

• Certificate of Incorporation
  
• MOA & AOA
  
• PAN & TAN
  
• No Lien Certificate
  
• Board resolutions
  
• Audited financials (if available)
  

Step 6: Submit Online Application via RBI's Portal

Access the portal and complete the online NBFC-MFI application. Upload all necessary documents and ensure there are no errors or omissions in the form.

Step 7: Submit a Physical Application to the RBI Regional Office

After the online submission, send a hard copy of your application, including all enclosures and supporting documents, to the Regional Office of the RBI under whose jurisdiction your company falls.

Conclusion

Registering a Micro Finance Company enables you to reach underserved communities while operating within a legal and trusted framework.

Each model has its own advantages. NBFCs are ideal for those looking to operate commercially, access capital markets, and build a for-profit lending institution with high compliance standards. On the other hand, Section 8 Companies are best suited for nonprofit or social enterprise models focused on financial literacy, community development, or charitable micro-lending.

Frequently Asked Questions

Income Tax Return

An Income Tax Return is a document submitted to the Income Tax Department to report your income, deductions, and tax payments for a financial year. There are seven types of ITR forms, including ITR-1, ITR-2, ITR-3, ITR-4, ITR-5, and ITR-6, each applicable to different taxpayers. Filing ITR before the due date is essential to avoid penalties and legal issues.

Applicable ITR Forms for Companies

The type of ITR for a company depends on its structure and income classification. Different business entities must file specific ITR forms to comply with tax regulations:

• ITR-4: Suitable for firms (excluding LLPs) with income up to ₹50 lakhs under Sections 44AD, 44ADA, and 44AE.
  
• ITR-5: Applicable for LLPs and partnership firms, except those required to file ITR-7.
  
• ITR-6: Used by companies that do not claim tax exemptions under Section 11 (income from property used for charitable or religious purposes).
  
• ITR-7: Mandatory for entities filing under Sections 139(4A), 139(4B), 139(4C), and 139(4D), such as trusts and political parties.
  

ITR-4 Form (Sugam) – For Firms Other Than LLPs

ITR-4 is designed for individuals, Hindu Undivided Families (HUFs), and partnership firms (excluding Limited Liability Partnerships) that opt for the presumptive taxation scheme under Sections 44AD, 44ADA, and 44AE. This scheme simplifies tax calculations for small businesses and professionals.

Applicability Criteria:

• Eligible Taxpayers: Individuals, HUFs, and firms (excluding  Limited Liability Partnership) with business or professional income.
  
• Residency Requirement: Only applicable to a resident other than not ordinarily resident.
  
• Income Sources:
  
  • Business income under Section 44AD (small businesses).
    
  • Professional income under Section 44ADA (specified professions).
    
  • Income from goods transportation under Section 44AE.
    

In certain cases, if your business meets specific conditions, you may also need to submit Form 3CA/3CB and Form 3CD for a tax audit.

ITR-5 – For LLPs and Partnerships

ITR-5 is an income tax return form applicable to Limited Liability Partnerships, partnership firms, and other non-individual entities such as Associations of Persons (AOPs), Bodies of Individuals (BOIs), artificial juridical persons, and investment funds.

These entities must file ITR-5 to report their income, deductions, and tax liabilities to the Income Tax Department. Filing this form ensures compliance with tax laws and helps avoid penalties. However, companies required to file ITR-7 cannot use ITR-5 for tax filing.

ITR-6 – For Companies That Are Not Claiming Exemption Under Section 11

ITR-6 is an income tax return form for companies that are not claiming exemptions under Section 11, which applies to income from property held for charitable or religious purposes.

• It is mandatory for private limited companies, public limited companies, and One Person Companies (OPCs).
  
• Not applicable to Limited Liability Partnerships, as they must file ITR-5.
  

Filing ITR-6 accurately is compulsory for all companies that do not qualify for exemptions under Section 11. Timely filing is essential to avoid penalties and ensure compliance.

ITR-7 – For Companies

ITR-7 is an income tax return form for companies, firms, trusts, and other entities required to file returns under Sections 139(4A), 139(4B), 139(4C), and 139(4D) of the Income Tax Act, 1961. It applies to organisations that do not qualify for other ITR categories but must still comply with tax regulations.

Entities Required to File ITR-7:

• Registered charitable or religious trusts
  
• Societies and other institutions for charitable purposes
  
• Educational institutions and universities
  
• Scientific research associations
  
• News agencies
  
• Political parties registered under Section 29A of the Representation of the People Act, 1951
  
• Bodies set up for religious or charitable purposes
  

Filing ITR-7 is essential for these entities to comply with tax laws, report income, and claim applicable exemptions.

Details Required in an ITR Form

The information required in an Income Tax Return form depends on the type of taxpayer and income sources. However, certain key details must be included in all ITR filings.

• Personal Information: Name, PAN, date of birth, contact details, and residential address and other personal details.
  
• Income Sources: Details of salary, business or profession, capital gains, rental income, interest, and other earnings.
  
• Deductions & Exemptions: Deductions and exemptions include the tax benefits you claim under different sections of the Income Tax Act, 1961.
  
• Tax Payments: Information on the taxes you have already paid, such as advance tax, self-assessment tax, and Tax Deducted at Source (TDS).
  
• Foreign Assets & Income: If applicable, disclosure of overseas bank accounts, investments, and earnings.
  

Filing an ITR with correct details ensures timely processing and avoids unnecessary scrutiny from tax authorities.

Important Deadlines for Filing Company ITR

Due Dates for Filing ITR-6

• If audit is required under the Income Tax Act – 31st October of the assessment year.
  
• If a report in Form No. 3CEB (for international transactions) is required – 30th November of the assessment year.
  
• If audit is not required – 31st July of the assessment year.

Due Dates for Filing ITR-7

• For entities not requiring an audit – 31st July of the assessment year.
  
• For entities requiring an audit – 30th September of the assessment year.
  

It is important to note that ITR filing deadlines may change based on updates or extensions announced by the Income Tax Department. You should stay informed about official notifications to avoid missing any revised due dates.

As per Section 234F, a late filing fee of ₹5,000 is applicable if the return is filed after the due date under Section 139(1). However, if the total income is ₹5 lakh or less, the penalty is reduced to ₹1,000.

Common Mistakes to Avoid While Filing Company ITR

Incorrect Form Selection

Selecting the wrong ITR form is one of the most frequent mistakes companies make. The type of ITR form a company must file depends on its structure and nature of operations. ITR-5 is applicable for LLP and partnership firms, whereas ITR-6 is meant for most companies except those claiming exemptions under Section 11. ITR-7 is required for entities like trusts and NGOs. Filing the incorrect form can lead to rejection or discrepancies in tax assessment.

Incomplete Financial Disclosures

A company is required to disclose all sources of income, deductions, and financial transactions in its ITR. Failing to provide complete details of revenue, expenses, capital gains, investments, liabilities, and foreign assets can result in tax penalties or audits. Accurate disclosure ensures that tax authorities have a clear understanding of the company’s financial position.

Missing Audit Report Submission

Companies that meet specific turnover or income thresholds are required to undergo a tax audit as per the Income Tax Act. If a tax audit is applicable, the company must submit the audit report before filing the ITR. Missing this step can lead to legal consequences, penalties, or delays in return processing. It is important to verify whether the company falls under the audit requirement and ensure timely submission of audit reports.

Frequently Asked Questions

What is One Person Company (OPC)?

A One Person Company (OPC) is a company structure in India that allows a single individual to establish a business with limited liability. It provides the benefits of a corporate entity while retaining the simplicity of sole ownership.

Unlike a sole proprietorship, an OPC is a separate legal entity. This means it can own assets, enter into contracts, and protect the owner's personal assets from business liabilities.

OPCs operate under regulatory requirements similar to private limited companies but are tailored for single ownership. Additionally, the member must appoint a nominee to take over the business in case of the owner's incapacity or death.

What is Sole Proprietorship?

A sole proprietorship is a simple business structure, where the business is owned and managed by one individual. This makes it ideal for small businesses or individual entrepreneurs. The meaning of a sole proprietor is essentially someone who is the sole beneficiary of all business profits and is personally liable for any debts incurred by the business. There is no particular Sole Proprietorship Act in India. 

Unlike a One Person Company, a sole proprietorship does not separate the business entity from the owner. This means that all legal, financial and operational responsibilities rest with the proprietor, who has full control over decision-making and retains all profits.

Operating as a sole proprietor allows for flexibility and ease in starting or closing a business. There are minimal regulatory formalities, although certain licences may be required for specific sectors, like medical or food services. 

One Person Company vs Sole Proprietorship

Here is a detailed analysis of the difference between sole proprietorship and one person company:

Sole Proprietorship Advantages and Disadvantages

Advantages of Sole Proprietorship

Quick Decision-Making

With full control, the sole proprietor can make prompt decisions, aiding responsiveness and agility in business operations.

Confidentiality

All business information remains private to the owner, enhancing operational discretion.

Ease of Formation and Low Costs

Starting a sole proprietorship involves fewer legal requirements, keeping setup costs low.

Direct Incentives

The owner retains all profits, providing direct motivation for business success.

Disadvantages of Sole Proprietorship

Unlimited Liability

The proprietor’s personal assets can be used to cover business debts, increasing financial risk.

Limited Access to Capital

Raising funds can be challenging, as sole proprietors often rely on personal savings or small loans.

Lack of Business Continuity

The business may end with the owner's incapacity, death or insolvency, impacting long-term stability.

Limited Specialisation

Managing all aspects of the business alone can hinder growth and focus on key areas.

One Person Company (OPC) Advantages and Disadvantages

Advantages of One Person Company

Limited Liability

The owner's liability is limited to the capital invested, safeguarding personal assets from business debts.

Separate Legal Entity

Being legally distinct enhances the company's credibility and professionalism.

Tax Benefits

OPCs enjoy certain tax benefits, such as lower rates and deductions on business expenses.

Single Ownership with Control

The owner retains full control over operations, simplifying decision-making.

Disadvantages of One Person Company

Limited Funding Options

OPCs cannot raise funds from the public, which may restrict growth opportunities.

Compliance Requirements

Annual filings, account maintenance and meetings are required, adding to operational tasks.

Nominee Requirement

The need for a nominee can be limiting for owners wanting complete control.

Naming Restrictions

"One Person Company" must be part of the company’s name, reducing flexibility in branding.

Frequently Asked Questions: