NCERT Class 11 Business Studies PDF

FORMATION OF A COMPANY 163 PART-II Corporate Organisation, Finance and Trade 2019-20 164 BUSINESS STUDIES...

FORMATION OF A COMPANY 163 PART-II Corporate Organisation, Finance and Trade 2019-20 164 BUSINESS STUDIES CHAPTER 7 FORMATION OF A COMPANY LEARNING OBJECTIVES After studying this chapter, you should be able to: specify the important stages in the formation of a company; describe the steps involved in each stage of company formation; specify the documents to be submitted to the registrar of companies; and state the need of certificate of incorporation and certificate to commence business. 2019-20 FORMATION OF A COMPANY 165 Avtar, a brilliant automobile engineer, has recently developed a new carburettor in his factory which he is running as a sole proprietor. The new carburettor can cut down petrol consumption of a car engine by 40 percent. He is now thinking of producing it on a large scale for which he requires a large amount of money. He is to evaluate different forms of organisations for doing the business of manufacturing and marketing his carburettor. He decides against converting his sole proprietorship to partnership as the requirement of funds for the project is large and the product being new, there is a lot of risk involved. He is advised to form a company. He wants to know about the formalities required for the formation of a company. 7.1 INTRODUCTION formalities and procedures. To fully understand the process one can divide Modern day business requires large the formalities into three distinct stages, amount of money. Also, due to which are: (i) Promotion; (ii) increasing competition and fast Incorporation and (iii) Subscription of changing technological environment, capital. the element of risk is increasing. As a It may, however, be noted that these result, the company form of stages are appropriate from the point organisation is being preferred by more of view of formation of any kind of and more business firms, particularly company. Private company as against for setting up medium and large sized organisations. the public limited company is prohibited The steps which are required from to raise funds from public, it does not the time a business idea originates to need to issue a prospectus and complete the time, a company is legally ready to the formality of minimum subscription. commence business are referred to as In the next section, we shall discuss stages in the formation of a company. the stages in the formation of a Those who are taking these steps and company in detail. the associated risks are promoting a company and are called its promoters. 7.2.1 Promotion of a Company The present chapter describes in Promotion is the first stage in the some details the stages in the formation formation of a company. It involves of a company and also the steps conceiving a business idea and taking required to be taken in each stage so an initiative to form a company so that that a fair idea about these aspects can practical shape can be given to be made. exploiting the available business opportunity. Thus, it begins with 7.2 FORMATION OF A COMPANY somebody having discovered a potential Formation of a company is a complex business idea. Any person or a group activity involving completion of legal of persons or even a company may have 2019-20 166 BUSINESS STUDIES discovered an opportunity. If such a company registered and obtain the person or a group of persons or a necessary certificate enabling the company proceeds to form a company, company to commence business. then, they are said to be the promoters Thus, the promoters perform various of the company. functions to bring a company into A promoter is said to be the one who existence. undertakes to form a company with reference to a given project and to set it Functions of a Promoter going and who takes the necessary The important functions of promoters steps to accomplish that purpose. may be listed as below: Thus, apart from conceiving a business (i) I d e n t i f i c a t i o n o f b u s i n e s s opportunity the promoters analyse its opportunity: The first and foremost prospects and bring together the men, activity of a promoter is to identify a materials, machinery, managerial business opportunity. The abilities and financial resources and set opportunity may be in respect of the organisation going. producing a new product or service or As per section 69, a promoter making some product available means a person through a different channel or any (a) Who has been named as such in a other opportunity having an prospectus or is identified by the investment potential. Such company in the annual return opportunity is then analysed to see its referred to in section 92; or technical and economic feasibility. (b) Who has control over the affairs of (ii) Feasibility studies: It may not be the company, directly or indirectly feasible or profitable to convert all whether as a shareholder, director identified business opportunities into or otherwise; or real projects. The promoters, therefore, (c) In accordance with whose advice, undertake detailed feasibility studies directions or instructions the Board to investigate all aspects of the business of Directors of the company is they intend to start. Depending upon accustomed to act. However, it is the nature of the project, the following provided that nothing in this sub- feasibility studies may be undertaken, clause shall apply to a person who with the help of the specialists like is acting merely in a professional engineers, chartered accountants etc., capacity. to examine whether the perceived After thoroughly examining the business opportunity can be profitably feasibility of the idea, the promoters exploited. assemble resources, prepare necessary (a) Technical feasibility: Sometimes documents, give a name and perform an idea may be good but various other activities to get a technically not possible to execute. 2019-20 FORMATION OF A COMPANY 167 It may be so because the required that developing townships is very raw material or technology is not lucrative. It may turn out that the easily available. For example, in our required funds are in several crores earlier story suppose Avtar needs of rupees, which cannot be a particular metal to produce the arranged by floating a company by carburettor. If that metal is not the promoters. The idea may be produced in the country and abandoned because of the lack of because of poor political relations, financial feasibility of the project. it can not be imported from the (c) Economic feasibility: Sometimes country which produces it, the it so happens that a project is project would be technically technically viable and financially unfeasible until arrangements are feasible but the chance of it being made to make the metal available profitable is very little. In such cases from alternative sources. as well, the idea may have to be (b) Financial feasibility: Every abondoned. Promoters usually take business activity requires funds. the help of experts to conduct these The promoters have to estimate the studies. It may be noted that these fund requirements for the identified experts do not become promoters business opportunity. If the just because they are assisting the required outlay for the project is so promoters in these studies. large that it cannot easily be Only when these investigations arranged within the available throw up positive results, the means, the project has to be given promoters may decide to actually up. For example, one may think launch a company. Name Clause A name is considered undesirable in the following cases: (a) If it is identical with or too closely resembles the name of an existing company (b) If it is misleading. It is so considered if the name suggests that the company is in a particular business or it is an association of a particular type when it is not true (c) If it is violative of the provisions of ‘The Emblem and Names (Prevention of Improper Use) Act 1950, as given in the schedule to this Act. This schedule specifies, inter alia, the name, emblem or official seal of the UNO and its bodies like WHO, UNESCO etc. Government of India, State Governments, President of India or Governer of any State, the Indian National Flag. The Act also prohibits use of any name which may suggest patronage of Government of India, or any state government or any local authority 2019-20 168 BUSINESS STUDIES (iii) Name approval: Having decided with the Registrar of Companies. The incorporate to a company, the names and addresses of shareholders promoters have to select a name for it and the number of shares allotted to and submit, an application to the each is submitted to the Registrar in a registrar of companies of the state in statement called return of allotment. which the registered office of the (vi) P r e p a r a t i o n o f n e c e s s a r y company is to be situated, for its documents: The promoter takes up approval. The proposed name may be steps to prepare certain legal approved if it is not considered documents, which have to be undesirable. It may happen that submitted under the law, to the another company exists with the same Registrar of the Companies for getting name or a very similar name or the the company registered. These preferred name is misleading, say, to documents are Memorandum of suggest that the company is in a Association, Articles of Association and particular business when it is not true. Consent of Directors. In such cases the proposed name is not accepted but some alternate name may Documents Required to be be approved. Therefore, three names, Submitted in order of their priority are given in the application to the Registrar of A. Memorandum of Association: Companies. (Proforma INC1 is given at Memorandum of Association is the the end of the Book). most important document as it (iv) Fixing up Signatories to the defines the objectives of the Memorandum of Association: company. No company can legally Promoters have to decide about the undertake activities that are not members who will be signing the contained in its Memorandum of Memorandum of Association of the Association. As per section 2(56) proposed company. Usually the people of The Companies Act, 2013 signing memorandum are also the first “memorandum” means the Directors of the Company. Their written memorandum of association of a consent to act as Directors and to take company as originally framed or as up the qualification shares in the altered from time to time in company is necessary. pursuance of any previous (v) Appointment of professionals: company law or of this Act. The Certain professionals such as Memorandum of Association mercantile bankers, auditors etc., are contains different clauses, which are appointed by the promoters to assist given as follows: them in the preparation of necessary (i) The name clause: This clause documents which are required to be contains the name of the company with 2019-20 FORMATION OF A COMPANY 169 which the company will be known, clause of the memorandum. It which has already been approved by defines the purpose for which the the Registrar of Companies. company is formed. A company is (ii) Registered office clause: This not legally entitled to undertake an clause contains the name of the state, activity, which is beyond the objects in which the registered office of the stated in this clause. The main company is proposed to be situated. objects for which the company is The exact address of the registered formed are listed in this sub- office is not required at this stage but clause. It must be observed that an the same must be notified to the act which is either essential or Registrar within thirty days of the incidental for the attainment of the incorporation of the company. main objects of the company is (iii ) O b j e c t s c l a u s e : T h i s i s deemed to be valid, although it may probably the most important not have been stated explicitly. Respective forms for Memorandum of Association 1. Table A MOA of a company limited by shares 2. Table B MOA of a company limited by guarantee and not having share capital 3. Table C MOA of a company limited by guarantee and not having share capital 4. Table D MOA of an unlimited company and not having share capital 5. Table E MOA of an unlimited company and having share capital Respective forms for Articles of a Company 6. Table F AOA of a company limited by shares 7. Table G AOA of a company limited by guarantee and having share capital 8. Table H AOA of a company limited by guarantee and not having share capital 9. Table I AOA of an unlimited company and having share capital 10. Table J AOA of an unlimited company and not having share capital 2019-20 170 BUSINESS STUDIES (iv) Liability clause: This clause A copy of a Memorandum of limits the liability of the members to the Association is given at the end of the amount unpaid on the shares owned chapter. by them. B. Articles of Association: Articles of For example, if a shareholder has Association are the rules regarding purchased 1000 shares of `10 each internal management of a company. and has already paid ` 6 per share, his/ These rules are subsidiary to the her liability is limited to ` 4 per share. Memorandum of Association and Thus, even in the worst case, hence, should not contradict or he/she may be called upon to pay exceed anything stated in the ` 4, 000 only. Memorandum of Association. (v) Capital clause: This clause According to section 2(5) of The specifies the maximum capital which Companies Act, 2013, ‘articles’ the company will be authorised to raise means the article of association of a through the issue of shares. The company as originally framed or as authorised share capital of the altered from time to time or applied proposed company along with its in pursuance of any previous division into the number of shares company law or of this Act. The having a fixed face value is specified in articles of a company shall be in this clause. For example, the respective forms as specified in Table authorised share capital of the F, G, H, I and J in schedule I as may company may be ` 25 lakhs with be applicable to such company. divided into 2.5 lakh shares of ` 10 However, the companies are free to each. The said company cannot issue make their own articles of association share capital in excess of the amount which may be contrary to the clauses mentioned in this clause. of Table F,G,H,I,J and in that case The signatories to the articles of association as adopted by Memorandum of Association state their the company shall apply. intention to be associated with the C. Consent of Proposed Directors: company and give their undertaking to Apart from the Memorandum and subscribe to the shares mentioned Articles of Association, a written against their names. The memorandum consent of each person named as a of a company shall be in respective director is required confirming that forms specified in Tables A, B, C, D and they agree to act in that capacity and E in Schedule I as may be applicable undertake to buy and pay for to such company. qualification shares, as mentioned in The Memorandum of Association the Articles of Association. must be signed by at least seven D. Agreement: The agreement, if any, persons in case of a public company which the company proposes to and by two persons in case of a private enter with any individual for company. appointment as its Managing 2019-20 FORMATION OF A COMPANY 171 Qualification Shares To ensure that the directors have some stake in the proposed company, the Articles usually have a provision requiring them to buy a certain number of shares. They have to pay for these shares before the company obtains Certificate of Commencement of Business. These are called Qualification Shares. The Articles generally contains the following matters: 1. Exclusion wholly or in part of Table F. 2. Adoption of preliminary contracts. 3. Number and value of shares. 4. Issue of preference shares. 5. Allotment of shares. 6. Calls on shares. 7. Lien on shares. 8. Transfer and transmission of shares. 9. Nomination. 10. Forfeiture of shares. 11. Alteration of capital. 12. Buy back. 13. Share certificates. 14. Dematerialization. 15. Conversion of shares into stock. Incorporation of Companies and Matters Incidental Thereto 16. Voting rights and proxies. 17. Meetings and rules regarding committees. 18. Directors, their appointment and delegations of powers. 19. Nominee directors. 20. Issue of Debentures and stocks. 21. Audit committee. 22. Managing director, Whole-time director, Manager, Secretary. 23. Additional directors. 24. Seal. 25. Remuneration of directors. 26. General meetings. 27. Directors meetings. 28. Borrowing powers. 29. Dividends and reserves. 30. Accounts and audit. 31. Winding up. 32. Indemnity. 33. Capitalisation of reserves. 2019-20 172 BUSINESS STUDIES Director or a whole time Director or all the contracts which are entered by Manager is another document them, for the company before its which is required to be submitted incorporation, in case the same are not to the Registrar for getting the ratified by the company later on. Also company registered under the Act. promoters are not the trustees of E. Statutory Declaration: A the company. declaration stating that all the legal Promoters of a company enjoy a requirements pertaining to fiduciary position with the company, registration have been complied which they must not misuse. They with is to be submitted to the can make a profit only if it is disclosed Registrar with the above mentioned but must not make any secret profits. documents for getting the company In the event of a non-disclosure, the registered under the law. This company can rescind the contract statement can be signed by an and recover the purchase price paid advocate or by a Chartered to the promoters. It can also claim Accountant or a Cost Accountant damages for the loss suffered due to or a Company Secretary in practice the non-disclosure of material who is engaged in the formation of information. a company and by a person named Promoters are not legally entitled in the articles as a director or to claim the expenses incurred in the manager or secretary of the promotion of the company. However, company. the company may choose to F. Receipt of Payment of fee: Along reimburse them for the pre- with the above-mentioned incorporation expenses. The company documents, necessary fees has to be may also remunerate the promoters paid for the registration of the for their efforts by paying a lump sum company. The amount of such fees amount or a commission on the shall depend on the authorised purchase price of property purchased share capital of the company. through them or on the shares sold. The company may also allot them Position of Promoters shares or debentures or give them an Promoters undertake various activities option to purchase the securities at a to get a company registered and get it future date. to the position of commencement of 7.2.2 Incorporation business. But they are neither the agents nor the trustees of the company. After completing the aforesaid They can’t be the agents as the formalities, promoters make an company is yet to be incorporated. application for the incorporation of Therefore, they are personally liable for the company. The application is to be 2019-20 FORMATION OF A COMPANY 173 filed with the Registrar of Companies 3. Written consent of the proposed of the state within which they plan to directors to act as directors and establish the registered office of the an undertaking to purchase company. The application for qualification shares. registration must be accompanied 4. The agreement, if any, with the with certain documents about which proposed Managing Director, we have already discussed in the Manager or whole-time director. previous sections. These may be 5. A copy of the Registrar’s letter briefly mentioned again: approving the name of the 1. The Memorandum of Association company. duly stamped, signed and 6. A statutory declaration affirming witnessed. In case of a public that all legal requirements for company, at least seven members registration have been complied must sign it. For a private with. This must be duly signed. company however the signatures 7. A notice about the exact address of two members are sufficient. of the registered office may also The signatories must also give be submitted along with these information about their address, documents. However, if the same occupation and the number of is not submitted at the time of shares subscribed by them. incorporation, it can be 2. The Articles of Association duly submitted within 30 days of the stamped and witnessed as in case receipt of the certificate of of the Memorandum. However, as stated earlier, a public company incorporation. may adopt Table A, which is a 8. Documentary evidence of payment model set of Articles, given in the of registration fees. Companies Act. In that case a The Registrar upon submission of statement in lieu of the prospectus the application along with the required is submitted, instead of Articles documents has to be satisfied that the of Association. documents are in order and that all the Preliminary Contracts During the promotion of the company, promoters enter into certain contracts with third parties on behalf of the company. These are called preliminary contracts or pre-incorporation contracts. These are not legally binding on the company. A company after coming into existence may, if it so chooses, decide to enter into fresh contracts with the same terms and conditions to honour the contracts made by the promoters. Note that it cannot ratify a preliminary contract. A company thus cannot be forced to honour a preliminary contract. Promoters, however, remain personally liable to third parties for these contracts. 2019-20 174 BUSINESS STUDIES statutory requirements regarding the a company. Imagine, what would registration have been complied with. happen to an unsuspecting party with However, it is not his duty to carry out which the company enters into a a thorough investigation about the contract, if it is later found that the authenticity of the facts mentioned in incorporation of the company was the documents. improper and hence invalid. Therefore, When the Registrar is satisfied, the legal situation is that once a about the completion of formalities Certificate of Incorporation has been for registration, a Certificate of issued, the company has become a Incorporation is issued to the company, legal business entity irrespective of any which signify the birth of the company. flaw in its registration. The Certificate The certificate of incorporation may of Incorporation is thus conclusive therefore be called the birth certificate evidence of the legal existence of the of the company. company. Some interesting examples With effect from November 1, 2000, showing the impact of the the Registrar of Companies allots a conclusiveness of the Certificate of CIN (Corporate Identity Number) to Incorporation are as under: the Company. (a) Documents for registration were filed on 6th January. Certificate of Effect of the Certificate of Incorporation was issued on 8th Incorporation January. But the date mentioned on the Certificate was 6th January. A company is legally born on the date It was decided that the company printed on the Certificate of was in existence and the contracts Incorporation. It becomes a legal entity signed on 6th January were with perpetual succession on such considered valid. date. It becomes entitled to enter into (b) A person forged the signatures valid contracts. The Certificate of of others on the Memorandum. Incorporation is a conclusive evidence The Incorporation was still of the regularity of the incorporation of considered valid. Director Identification Number (DIN) Every Individual intending to be appointed as director of a company shall make an application for allotment of Director Identification Number (DIN) to the Central Government in prescribed form along with fees. The Central Government shall allot a Director Identification Number to an application within one month from the receipt of the application. No individual, who has already been allotted a Director Identification Number, shall apply for, obtain or possess another Director Identification Number 2019-20 FORMATION OF A COMPANY 175 Thus, whatever be the deficiency in and must not conceal any material the formalities, the Certificate of information from the potential Incorporation once issued, is a investors. This is necessary for conclusive evidence of the existence of protecting the interest of the investors. the company. Even when a company Prior approval from SEBI is, therefore, gets registered with illegal objects, the required before going ahead with birth of the company cannot be raising funds from public. questioned. The only remedy available (ii) Filing of Prospectus: A copy of is to wind it up. Because the Certificate the prospectus or statement in lieu of of Incorporation is so crucial, the prospectus is filed with the Registrar Registrar has to go very carefully before of Companies. A prospectus is ‘any issuing it. document described or issued as a On the issue of Certificate of prospectus including any notice, Incorporation, a private company can circular, advertisement or other immediately commence its business. It document inviting deposits from the can raise necessary funds from public or inviting offers from the friends, relatives or through private public for the subscription or arrangement and proceed to start purchase of any securities of, a body business. corporate’. In other words, it is an invitation to the public to apply for 7.2.3 Capital Subscription securities (shares, debentures etc.) of A public company can raise the the company or to make deposits in required funds from the public by the company. Investors make up means of issue of securities (shares and their minds about investment in a debentures etc.). For doing the same, company primarily on the basis of the it has to issue a prospectus which is information contained in this an invitation to the public to subscribe document. Therefore, there must not to the capital of the company and be a mis-statement in the prospectus undergo various other formalities. The and all material significant following steps are required for raising information must be fully disclosed. funds from the public: (iii) A p p o i n t m e n t o f B a n k e r s , (i) SEBI Approval: SEBI (Securities Brokers, Underwriters: Raising funds and Exchange Board of India) which is from the public is a stupendous task. the regulatory authority in our country The application money is to be received has issued guidelines for the disclosure by the bankers of the company. The of information and investor protection. brokers try to sell the shares A public company inviting funds from by distributing the forms and the general public must make adequate encouraging the public to apply for the disclosure of all relevant information shares. If the company is not 2019-20 176 BUSINESS STUDIES Difference between Memorandum of Association and Articles of Association Basis of Memorandum of Articles of Difference Association Association Objectives Memorandum of Association Articles of Association are defines the objects for which rules of internal the company is formed. management of the company. They indicate how the objectives of the company are to be achieved. Position This is the main document This is a subsidiary of the company and is document and is subordinate to the subordinate to both the Companies Act. Memorandum of Association and the Companies Act. Relationship Memorandum of Association Articles define the defines the relationship of relationship of the the company with outsiders. members and the company. Validity Acts beyond the Acts which are beyond Memorandum of Association Articles can be ratified by are invalid and cannot be the members, provided ratified even by a unanimous they do not violate the vote of the members. Memorandum. Necessity Every company has to file a It is not compulsory for a Memorandum of Association. public ltd. company to file Articles of Association. It may adopt Table F of The Companies Act, 2013 reasonably assured of a good public the issue. Appointment of underwriters response to the issue, it may appoint is not necessary. underwriters to the issue. Underwriters (iv) Minimum Subscription: In undertake to buy the shares if these order to prevent companies from are not subscribed by the public. They commencing business with inadequate receive a commission for underwriting resources, it has been provided that the 2019-20 FORMATION OF A COMPANY 177 company must receive applications for (vi) Allotment of Shares: Till the time a certain minimum number of shares shares are alloted, application money before going ahead with the allotment received shoud remain in a seperate of shares. According to the Companies bank account and must not be used Act, this is called the ‘minimum by the company. In case the number of subscription’. As per the SEBI shares allotted is less than the number Guidelines the limit of minimum applied for, or where no shares are subscription is 90 per cent of the size allotted to the applicant, the excess application money, if any, is to be of the issue. Thus, if applications returned to applicants or adjusted received for the shares are for an towards allotment money due from amount less than 90 per cent of the them. Allotment letters are issued to the issue size, the allotment cannot be successful allottees. ‘Return of made and the application money allotment’, signed by a director or received must be returned to the secretary is filed with the Registrar of applicants. Companies within 30 days of allotment. (v) Application to Stock Exchange: A public company may not invite An application is made to at least one public to subscribe to its securities stock exchange for permission to deal (shares, debentures etc.). Instead, it in its shares or debentures. If such can raise the funds through friends, permission is not granted before the relatives or some private expiry of ten weeks from the date of arrangements as done by a private closure of subscription list, the company. In such cases, there is no allotment shall become void and all need to issue a prospectus. A money received from the applicants ‘Statement in Lieu of Prospectus’ is will have to be returned to them within filed with the Registrar at least three eight days. days before making the allotment. One Person Company With the implementation of The Companies Act, 2013, a single person could constitute a company, under the One Person Company (OPC) concept. The introduction of OPC in the legal system is a move that would encourage corporatisation of micro businesses and entrepreneurship. In India, in the year 2005, the JJ Irani Expert Committee recommended the formation of OPC. It had suggested that such an entity may be provided with a 2019-20 178 BUSINESS STUDIES simpler legal regime through exemptions so that the small entrepreneur is not compelled to devote considerable time, energy and resources on complex legal compliance. One Person Company is a company with only one person as a member. That one person will be the shareholder of the company. It avails all the benefits of a private limited company such as separate legal entity, protecting personal assets from business liability and perpetual succession. Characteristics (1) Only a natural person who is an Indian citizen and resident in India- (a) Shall be eligible to incorporate a One Person Company; (b) Shall be a nominee for the sole member of a One Person Company. Explanation – For the purposes of this rule, the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one calendar year. (2) No person shall be eligible to incorporate more than a One Person Company or become nominee in more than one such company. (3) Where a natural person, being member in One Person Company in accordance with this rule becomes a member in another such Company by virtue of his being a nominee in that One Person Company, such person shall meet the eligibility criteria specified in sub rule (2) within a period of one hundred and eighty days. (4) No minor shall become member or nominee of the One Person Company or can hold share with beneficial interest. (5) Such Company cannot be incorporated or converted into a company under section 8 of the Act. (6) Such Company cannot carry out Non-Banking Financial Investment activities including investment in securities of anybody corporates. (7) No such company can convert voluntarily into any kind of company unless two years have expired from the date of incorporation of One Person Company, except threshold limit (paid up share capital) is increased beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore rupees. 2019-20 FORMATION OF A COMPANY 179 “SCHEDULE I” (See sections 4 and 5) Table A MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY SHARES 1st The name of the company is “.......................................... Limited/Private Limited”. 2nd The registered office of the company will be situated in the State of.................. 3rd (a) The objects to be pursued by the company on its incorporation are:-.................................................................................................................................................................................................................................................. (b) Matters which are necessary for furtherance of the objects specified in clause 3 (a) are:-.................................................................................................................................................................................................................................................. 4th The liability of the member(s) is limited and this liability is limited to the amount unpaid, if any, on the shares held by them. 5th The share capital of the company is................................................................... rupees, divided into........................ shares of........................ rupees each. 6th We, the several persons, whose names and addresses are subscribed, are desirous of beingformed into a company in pursuance of this memorandum of association, and we respectively agree to take the number of shares in the capital of the company set against our respective names:- Names, addresses, No. of shares Signature Signature, names descriptions and taken by each of subscriber addresses, occupations of descriptions and subscribers occupations of witnesses A.B. of................ Merchant..................... Signed before me: Signature............... C.D. of................ Merchant..................... Signed before me: Signature............... E.F. of................ Merchant..................... Signed before me: Signature............... 2019-20 180 BUSINESS STUDIES G.H. of............... Merchant..................... Signed before me: Signature.............. I.J. of................ Merchant..................... Signed before me: Signature.............. K.L. of................ Merchant..................... Signed before me: Signature.............. M.N. of............... Merchant..................... Signed before me: Signature.............. Total shares taken: 7th I, whose name and address is given below, am desirous of forming a company in pursuance of this memorandum of association and agree to take all the shares in the capital of the company (Applicable in case of one person company):- ___________________________________________________________________________________ Names, addresses, Signature of subscribed Signature, name, address, occupations of description and occupation Subscribers of witness ___________________________________________________________________________________ 8 th Shri/Smt......................................, son/daughter of......................................, resident of.................................................................... aged...................... years shall be the nominee in the event of death of the sole member (Applicable in case of one person company) Dated...................................... The day of...................................... 2019-20 FORMATION OF A COMPANY 181 Key Terms Promotion Memorandum of Association Articles of Association Prospectus Incorporation Capital subscription Commencement of Business SUMMARY There are two stages in the formation of a private company, promotion and incorporation. A public company has to undergo capital subscription stage to begin operations. 1. Promotion: It begins with a potential business idea. Certain feasibility studies e.g., technical, financial and economic, are conducted to determine whether the idea can be profitably exploited. In case, the investigations yield favourable results, promoters may decide to form the company. Persons who conceive the business idea, decide to form a company, take necessary steps for the same, and assume associated risks, are called promoters. Steps in Promotion i. Approval of company’s name is taken from the Registrar of Companies ii. Signatories to the Memorandum of Association are fixed iii. Certain professionals are appropriated to assist the promoters iv. Documents necessary for registration are prepared Necessary Documents a. Memorandum of Association b. Articles of Association c. Consent of proposed directors d. Agreement, if any, with proposed managing or whole time director e. Statutory declaration 2. Incorporation: An application is made by promoters to the Registrar of Companies alongwith necessary documents and registration fee. The Registrar, after due scrutiny, issues certificate of incorporation. The certificate of incorporation is a conclusive evidence of the legal existence of the company. 3. Capital Subscription: A public company raising funds from the public needs to take following steps for fundraising: 2019-20 182 BUSINESS STUDIES (i) SEBI approval; (ii) File a copy of prospectus with the Registrar of Companies; (iii) Appointment of brokers, bankers and underwriters etc.; (iv) Ensure that minimum subscription is received; (v) Application for listing of company’s securities; (vi) Refund/adjust excess application money received; (vii) Issue allotment letters to successful applicants; and (viii) File return of allotment with the Registrar of Companies (ROC). A public company, raising funds, raising funds from friends/relatives (not public) has to file a statement in lieu of prospectus with the ROC at least three days before allotment of shares and returns of allotment after completing the allotment. As per the SEBI guidelines, minimum subcription has to be 90% of the shares to be issued to be public. Preliminary Contracts: Contracts signed by promoters with third parties before the incorporation of company. Provisional Contracts: Contracts signed after incorporation but before commencement of business. EXERCISES Multiple Choice Questions 1. Minimum number of members to form a private company is (a) 2 (b) 3 (c) 5 (d) 7 2. Minimum number of members to form a public company is (a) 5 (b) 7 (c) 12 (d) 21 3. Application for approval of name of a company is to be made to (a) SEBI (b) Registrar of Companies (c) Government of India (d) Government of the State in which Company is to be registered 2019-20 FORMATION OF A COMPANY 183 4. A proposed name of Company is considered undesirable if (a) It is identical with the name (b) It resembles closely with of an existing company the name of an existing company (c) It is an emblem of Government (d) In case of any of the above of India, United Nations etc. 5. A prospectus is issued by (a) A private company (b) A public company seeking investment from public (c) A public enterprise (d) A public company 6. Stages in the formation of a public company are in the following order (a) Promotion, Commencement (b) Incorporation, Capital of Business, Capital Subscription, Promotion Subscription, Incorporation, (c) Promotion, Incorporation, (d) Capital Subscription, Capital Subscription, Promotion, Incorporation, 7. Preliminary Contracts are signed (a) Before the incorporation (b) After incorporation but before capital subscription (c) After incorporation but before (d) After commencement of commencement of business business 8. Preliminary Contracts are (a) binding on the Company (b) binding on the Company, if ratified after incorporation (c) binding on the (d) not binding on the Company, after incorporation Company True/False Answer Questions 1. It is necessary to get every company incorporated, whether private or public. 2. Statement in lieu of prospectus can be filed by a public company going for a public issue. 3. A company can commence business after incorporation. 4. Experts who help promoters in the promotion of a company are also called promoters. 5. A company can ratify preliminary contracts after incorporation. 2019-20 184 BUSINESS STUDIES 6. If a company is registered on the basis of fictitious names, its incorporation is invalid. 7. ‘Articles of Association’ is the main document of a company. 8. Every company must file Articles of Association. 9. If a company suffers heavy issues and its assets are not enough to pay off its liabilities, the balance can be recovered from the private assets of its members. Short Answer Questions 1. Name the stages in the formation of a company. 2. List the documents required for the incorporation of a company. 3. What is a prospectus? Is it necessary for every company to file a prospectus? 4. Briefly explain the term ‘Return of Allotment’. 5. At which stage in the formation of a company does it interact with SEBI. Long Answer Questions 1. What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them. 2. Explain the steps taken by promoters in the promotion of a company. 3. What is a ‘Memorandum of Association’? Briefly explain its clauses. 4. Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’ 5. What is the meaning of ‘Certificate of Incorporation’? 6. Discuss the stages of formation of a company? Project/Assignment Find out from the office of the Registrar of Companies, the actual procedure for formation of companies. Does it match with what you have studied. What are the obstacles which companies face in getting themselves registered. 2019-20