CHAPTER 7
FORMATION OF A COMPANY
We have already studied that formation of a company is lengthy process, in this chapter we will study the details of stages formation of a company.
In formation of a company following stages are involved.
1. Promotion of a company.
2. Incorporation.
3. Subscription of capital.
4. Commencement of business.
Q. What do you mean by Promotion of a Company?
Ans. Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity.
Q. Who is promoter?
Ans. A promoter is said to be the one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose.
Q. What are the function of a promoter?
or
What are the step of a promotion of a company?
Ans. (i) Identification of business opportunity:
The first and foremost activity of a promoter is to identify a business opportunity. The opportunity may be in respect of producing a new product or service or making some product available through a different channels.
(ii) Feasibility studies:
The promoters undertake detailed investigation in many aspects of the business with the help of the specialists like engineers, chartered accountants etc., to examine whether the perceived profitability of business opportunity.
It includes:
(a) Technical feasibility.
(b) Financial feasibility.
(c) Economic feasibility.
(iii) Name approval:
Having decided to launch a company, the promoters have to select a name for it and submit, an application to the registrar of companies.
(iv) Fixing up Signatories to the Memorandum of Association:
Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company. The signatories are the 1st direction of the company.
(v) Appointment of professionals:
Certain professionals such as mercantile bankers, auditors etc., are appointed by the promoters to assist them in the preparation of necessary documents.
(vi) Preparation of necessary documents:
Following are the necessary documents:
A. Memorandum of Association.
B. Articles of Association.
C. Prospectus.
A. Memorandum of Association:
It is a official charter of the company. it defines the objectives of the company. No company can legally undertake activities that are not contained in its Memorandum of Association.
Memorandum of Association contains:
(i) The name clause:
The clause contains the name of the company with which the company will be known, which has already been approved by the Registrar of Companies.
(ii) Registered office clause: This clause contains the name of the state, in which the registered office of the company is proposed to be situated. The same must be notified to the Registrar within thirty days of the incorporation of the company.
(iii) Objects clause:
This is probably the most important clause of the memorandum. It defines the purpose for which the company is formed.
The object clause is divided into two sub clauses, which are:
*The main objects.
* Other objects.
(iv) Liability clause: This clause limits the liability of the members to the amount unpaid on the shares owned by them.
For example: Indrajit is holding 500 share of Rs. 10 each.
He had already paid Rs. 8 per shares. In case of failure of company to pay debts. Indrajit will contribute only Rs. 1000.
500 X 10 = 5000
(-)500 X 8 = (4000)
------------
1000
------------
(v) Capital clause:
This clause specifies the maximum capital which the company will be authorized to raise through the issue of shares. The authorized share capital of the proposed company along with its division into the number of shares having a fixed face value is specified in this clause.
(vi) Association clause:
In this clause, the signatories to the Memorandum of Association state their intention to be associated with the company and also give their consent to purchase qualification shares.
The Memorandum of Association must be signed by at least seven persons in case of a public company and by two persons in case of a private company.
B. Articles of Association:
Articles of Association are the rules regarding internal management of a company. A public limited company may adopt Table A which is a model set of articles given in the Companies Act 2013.
Main content of Articles of Association are:
1) The amount of share capital and different types of share. (Equity and preference)
2) Rights of share holder.
3) Procedure of transfer of share.
4) Procedure for forfeiture of share.
5) Procedure for reissue of share, etc.
Q. What is the difference between Memorandum of Association and Articles of Association?
Incorporation
After completing the aforesaid formalities, promoters make an application for the incorporation of the company. The application is to be filed with the Registrar of Companies of the state within which they plan to establish the registered office of the company.
Now following documents are required:
1. Memorandum of Association.
2. Articles of Association.
3. Written consent of the proposed directors.
4. A copy of the Registrar’s letter approving the name of the company.
5. A statutory declaration affirming that all legal requirements for registration have been complied with.
6. This must be signed by an advocate of a High court or Supreme Court or a signatory to the Memorandum of Association or a Chartered Accountant or Company Secretary in whole time practice in India.
Q. What is Certificate of Incorporation?
Ans. When the registrar is satisfied about the completion of formalities for registration, a certificate of incorporation is issued to the company.
The birth certificate of the company.
CIN - Corporate Identity Number.
The Certificate of Incorporation is a conclusive evidence of the regularity of the incorporation of a company.
Capital Subscription
Private company starts its work after getting its certificate of incorporation.
A public company can raise the required funds from the public by means of issue of shares and debentures. For this purpose prospectus is issued.
following steps are required for raising funds from the public:
(i) SEBI Approval:
SEBI (Securities and Exchange Board of India) which is the regulatory authority in our country has issued guidelines for the disclosure of information and investor protection.
A prospectus is ‘any document described or issued as a prospectus including any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of, a body corporate’.
All significant information must be fully disclosed.
Commencement of Business:
In this stage, a public company applies to the Registrar of Companies for the issue of Certificate of Commencement of Business.
The following documents are required:
1. A declaration that shares payable in cash have been subscribed for and allotted.
2. A declaration that every director has paid in cash for his/her share.
3. A declaration that no money is payable or liable to become payable to the applicants.
4. A statutory declaration that the above requirements have been complied with. If above thing are found satisfactory, a ‘Certificate of Commencement of Business’ will be issued. This certificate is conclusive evidence that the company is entitled to do business.
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FORMATION OF A COMPANY
We have already studied that formation of a company is lengthy process, in this chapter we will study the details of stages formation of a company.
In formation of a company following stages are involved.
1. Promotion of a company.
2. Incorporation.
3. Subscription of capital.
4. Commencement of business.
Q. What do you mean by Promotion of a Company?
Ans. Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity.
Q. Who is promoter?
Ans. A promoter is said to be the one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose.
Q. What are the function of a promoter?
or
What are the step of a promotion of a company?
Ans. (i) Identification of business opportunity:
The first and foremost activity of a promoter is to identify a business opportunity. The opportunity may be in respect of producing a new product or service or making some product available through a different channels.
(ii) Feasibility studies:
The promoters undertake detailed investigation in many aspects of the business with the help of the specialists like engineers, chartered accountants etc., to examine whether the perceived profitability of business opportunity.
It includes:
(a) Technical feasibility.
(b) Financial feasibility.
(c) Economic feasibility.
(iii) Name approval:
Having decided to launch a company, the promoters have to select a name for it and submit, an application to the registrar of companies.
(iv) Fixing up Signatories to the Memorandum of Association:
Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company. The signatories are the 1st direction of the company.
(v) Appointment of professionals:
Certain professionals such as mercantile bankers, auditors etc., are appointed by the promoters to assist them in the preparation of necessary documents.
(vi) Preparation of necessary documents:
Following are the necessary documents:
A. Memorandum of Association.
B. Articles of Association.
C. Prospectus.
A. Memorandum of Association:
It is a official charter of the company. it defines the objectives of the company. No company can legally undertake activities that are not contained in its Memorandum of Association.
Memorandum of Association contains:
(i) The name clause:
The clause contains the name of the company with which the company will be known, which has already been approved by the Registrar of Companies.
(ii) Registered office clause: This clause contains the name of the state, in which the registered office of the company is proposed to be situated. The same must be notified to the Registrar within thirty days of the incorporation of the company.
(iii) Objects clause:
This is probably the most important clause of the memorandum. It defines the purpose for which the company is formed.
The object clause is divided into two sub clauses, which are:
*The main objects.
* Other objects.
(iv) Liability clause: This clause limits the liability of the members to the amount unpaid on the shares owned by them.
For example: Indrajit is holding 500 share of Rs. 10 each.
He had already paid Rs. 8 per shares. In case of failure of company to pay debts. Indrajit will contribute only Rs. 1000.
500 X 10 = 5000
(-)500 X 8 = (4000)
------------
1000
------------
(v) Capital clause:
This clause specifies the maximum capital which the company will be authorized to raise through the issue of shares. The authorized share capital of the proposed company along with its division into the number of shares having a fixed face value is specified in this clause.
(vi) Association clause:
In this clause, the signatories to the Memorandum of Association state their intention to be associated with the company and also give their consent to purchase qualification shares.
The Memorandum of Association must be signed by at least seven persons in case of a public company and by two persons in case of a private company.
B. Articles of Association:
Articles of Association are the rules regarding internal management of a company. A public limited company may adopt Table A which is a model set of articles given in the Companies Act 2013.
Main content of Articles of Association are:
1) The amount of share capital and different types of share. (Equity and preference)
2) Rights of share holder.
3) Procedure of transfer of share.
4) Procedure for forfeiture of share.
5) Procedure for reissue of share, etc.
Q. What is the difference between Memorandum of Association and Articles of Association?
Incorporation
After completing the aforesaid formalities, promoters make an application for the incorporation of the company. The application is to be filed with the Registrar of Companies of the state within which they plan to establish the registered office of the company.
Now following documents are required:
1. Memorandum of Association.
2. Articles of Association.
3. Written consent of the proposed directors.
4. A copy of the Registrar’s letter approving the name of the company.
5. A statutory declaration affirming that all legal requirements for registration have been complied with.
6. This must be signed by an advocate of a High court or Supreme Court or a signatory to the Memorandum of Association or a Chartered Accountant or Company Secretary in whole time practice in India.
Q. What is Certificate of Incorporation?
Ans. When the registrar is satisfied about the completion of formalities for registration, a certificate of incorporation is issued to the company.
The birth certificate of the company.
CIN - Corporate Identity Number.
The Certificate of Incorporation is a conclusive evidence of the regularity of the incorporation of a company.
Capital Subscription
Private company starts its work after getting its certificate of incorporation.
A public company can raise the required funds from the public by means of issue of shares and debentures. For this purpose prospectus is issued.
following steps are required for raising funds from the public:
(i) SEBI Approval:
SEBI (Securities and Exchange Board of India) which is the regulatory authority in our country has issued guidelines for the disclosure of information and investor protection.
A prospectus is ‘any document described or issued as a prospectus including any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of, a body corporate’.
All significant information must be fully disclosed.
Commencement of Business:
In this stage, a public company applies to the Registrar of Companies for the issue of Certificate of Commencement of Business.
The following documents are required:
1. A declaration that shares payable in cash have been subscribed for and allotted.
2. A declaration that every director has paid in cash for his/her share.
3. A declaration that no money is payable or liable to become payable to the applicants.
4. A statutory declaration that the above requirements have been complied with. If above thing are found satisfactory, a ‘Certificate of Commencement of Business’ will be issued. This certificate is conclusive evidence that the company is entitled to do business.
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