Corporate Organisation, Finance and Trade

Part-II

Corporate Organisation, Finance and Trade

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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.

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159FORMATION OF A COMPANY

7.1 introduCtion

Modern day business requireslarge amount ofmoney. Also, dueto increasing competition and fastchanging technological environment,the element of risk is increasing.As a result, the company form oforganisationisbeingpreferredbymoreandmorebusinessfirms,particularlyforsettingupmediumandlargesizedorganisations.

Thestepswhicharerequiredfromthetimeabusinessideaoriginatestothetime,acompanyislegallyreadytocommencebusinessarereferredtoasstagesintheformationofacompany.Thosewhoaretakingthesestepsandtheassociatedrisksarepromotingacompanyandarecalleditspromoters.

The present chapter describesin some details the stages in theformationofacompanyandalsothesteps required to be taken in eachstagesothata fair ideaabouttheseaspectscanbemade.

7.2 Formation oF a Company

Formationofacompanyisacomplexactivity involving completion of legal

formalities and procedures. To fullyunderstandtheprocessonecandividethe formalities into three distinctstages,which are: (i) Promotion; (ii)Incorporation and (iii) Subscriptionofcapital.

Itmay, however, be noted thatthese stages are appropriate fromthepointofviewofformationofanykindofcompany.Privatecompanyasagainst the public limited companyis prohibited to raise funds frompublic, it does not need to issue aprospectusandcompletetheformalityofminimumsubscription.

In the next section, we shalldiscussthestagesintheformationofacompanyindetail.

7.2.1 Promotion of a Company

Promotion is the first stage in theformation of a company. It involvesconceivingabusinessideaandtakingan initiative to form a company sothat practical shape can be givento exploiting the available businessopportunity. Thus, it begins withsomebody having discovered apotentialbusinessidea.Anypersonoragroupofpersonsorevenacompany

Avtar,abrilliantautomobileengineer,hasrecentlydevelopedanewcarburettorinhisfactorywhichheisrunningasasoleproprietor.Thenewcarburettorcancutdownpetrolconsumptionofacarengineby40percent.Heisnowthinkingofproducingitonalargescaleforwhichherequiresalargeamountofmoney.Heistoevaluatedifferentformsoforganisationsfordoingthebusinessofmanufacturingandmarketinghiscarburettor.Hedecidesagainstconvertinghissoleproprietorshiptopartnershipastherequirementoffundsfortheprojectislargeandtheproductbeingnew,thereisalotofriskinvolved.Heisadvisedtoformacompany.Hewantstoknowabouttheformalitiesrequiredfortheformationofacompany.

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160 BUSINESS STUDIES

mayhavediscoveredanopportunity.Ifsuchapersonoragroupofpersonsor a company proceeds to form acompany,then,theyaresaidtobethepromotersofthecompany.

Apromoterissaidtobetheonewhoundertakes to forma companywithreferencetoagivenprojectandtosetitgoingandwhotakesthenecessarysteps to accomplish that purpose.Thus,apartfromconceivingabusinessopportunitythepromotersanalyseitsprospectsandbringtogetherthemen,materials, machinery, managerialabilitiesandfinancial resourcesandsettheorganisationgoing.

As per section 69, a promotermeansaperson(a)Whohasbeennamedassuch in

a prospectus or is identified bythecompanyintheannualreturnreferredtoinsection92;or

(b)Whohascontrolovertheaffairsofthecompany,directlyorindirectlywhetherasashareholder,directororotherwise;or

(c) Inaccordancewithwhoseadvice,directions or instructions theBoardofDirectorsofthecompanyisaccustomedtoact.However,itisprovidedthatnothinginthissub-clauseshallapplytoapersonwhoisactingmerely inaprofessionalcapacity.After thoroughly examining the

feasibilityof the idea, thepromotersassembleresources,preparenecessarydocuments,giveanameandperformvarious other activities to get acompany registered and obtain thenecessary certificate enabling the

company to commence business.Thus,thepromotersperformvariousfunctions to bring a company intoexistence.

Functions of a Promoter

Theimportantfunctionsofpromotersmaybelistedasbelow:( i ) Identification of business opportunity: Thefirst and foremostactivityofapromoteristoidentifyabusinessopportunity.Theopportunitymaybeinrespectofproducinganewproduct or service ormaking someproductavailablethroughadifferentchannel or any other opportunityhavinganinvestmentpotential.Suchopportunity is then analysed to seeitstechnicalandeconomicfeasibility.(ii) Feasibility studies: Itmay notbefeasibleorprofitabletoconvertallidentifiedbusinessopportunitiesintorealprojects.Thepromoters,therefore,undertakedetailedfeasibilitystudiestoinvestigateallaspectsofthebusinesstheyintendtostart.Dependinguponthenatureoftheproject,thefollowingfeasibilitystudiesmaybeundertaken,with the help of the specialists likeengineers, chartered accountantsetc.,toexaminewhethertheperceivedbusinessopportunitycanbeprofitablyexploited.( a) Technical feasibility:Sometimes

anideamaybegoodbuttechnicallynot possible to execute. Itmaybe so because the required rawmaterialortechnologyisnoteasilyavailable. For example, in ourearlierstorysupposeAvtarneeds

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a particular metal to producethe carburettor. If that metalis not produced in the countryand because of poor politicalrelations, it cannot be importedfromthecountrywhichproducesit,theprojectwouldbetechnicallyunfeasibleuntilarrangementsaremadetomakethemetalavailablefromalternativesources.

(b) Financial feasibility: Everybusiness activity requires funds.The promoters have to estimatethe fund requirements for theidentifiedbusinessopportunity.Iftherequiredoutlayfortheprojectis so large that it cannot easilybe arrangedwithin the availablemeans,theprojecthastobegivenup. For example, onemay thinkthatdevelopingtownshipsisverylucrative. It may turn out thatthe required fundsare in severalcroresofrupees,whichcannotbe

arrangedbyfloatingacompanybythe promoters. The ideamay beabandonedbecauseofthelackoffinancialfeasibilityoftheproject.

( c) Economic feasibility:Sometimesit so happens that a project istechnically viable and financiallyfeasiblebutthechanceofitbeingprofitable is very little. In suchcasesaswell,theideamayhavetobeabondoned.Promotersusuallytakethehelpofexpertstoconductthese studies. It may be notedthattheseexpertsdonotbecomepromoters just because they areassisting the promoters in thesestudies.Only when these investigations

throw up posit ive results, thepromoters may decide to actuallylaunchacompany.(iii) Name approval:Havingdecidedincorporate to a company, thepromotershave toselectaname for

Name Clause

Anameisconsideredundesirableinthefollowingcases: (a) If it is identicalwith or too closely resembles the name of an existing

company (b) Ifitismisleading.Itissoconsideredifthenamesuggeststhatthecompany

isinaparticularbusinessoritisanassociationofaparticulartypewhenitisnottrue

(c) Ifitisviolativeoftheprovisionsof‘TheEmblemandNames(PreventionofImproperUse)Act1950,asgiveninthescheduletothisAct.Thisschedulespecifies,interalia,thename,emblemorofficialsealoftheUNOanditsbodieslikeWHO,UNESCOetc.GovernmentofIndia,StateGovernments,President of India orGoverner of any State, the IndianNational Flag.TheActalsoprohibitsuseofanynamewhichmaysuggestpatronageofGovernmentofIndia,oranystategovernmentoranylocalauthority

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it and submit, anapplication to theregistrar of companies of the stateinwhich the registered office of thecompany is to be situated, for itsapproval. The proposed namemaybe approved if it is not consideredundesirable. It may happen thatanother company exists with thesame name or a very similar nameorthepreferrednameismisleading,say,tosuggestthatthecompanyisinaparticularbusinesswhen it isnottrue.Insuchcasestheproposednameis not accepted but some alternatenamemay be approved. Therefore,threenames,inorderoftheirpriorityare given in the application to theRegistrar of Companies. (ProformaINC1isgivenattheendoftheBook).(iv) Fixing up Signatories to the Memorandum of Association: Promoters have to decide about themembers who will be signing theMemorandum of Association of theproposedcompany.Usuallythepeoplesigningmemorandum are also thefirstDirectorsoftheCompany.TheirwrittenconsenttoactasDirectorsandtotakeupthequalificationsharesinthecompanyisnecessary.(v) Appointment of professionals: Certain professionals such asmercantilebankers,auditorsetc.,areappointedbythepromoterstoassisttheminthepreparationofnecessarydocumentswhichare required tobewiththeRegistrarofCompanies.ThenamesandaddressesofshareholdersandthenumberofsharesallottedtoeachissubmittedtotheRegistrarinastatementcalledreturnofallotment.

(vi) Preparation of necessary documents: The promoter takesup steps to prepare certain legaldocuments,whichhavetobesubmittedunderthelaw,totheRegistraroftheCompanies for getting the companyregistered. These documents areMemorandumofAssociation,ArticlesofAssociationandConsentofDirectors.

Documents Required to be Submitted

A. Memorandum of Association: Memorandum of Association isthe most important documentas itdefines theobjectivesof thecompany.Nocompanycanlegallyundertake activities that are notcontained in itsMemorandumofAssociation. As per section 2(56)of The Companies Act, 2013“memorandum” means thememorandum of association ofa company as originally framedor as altered from time to timein pursuance of any previouscompany law or of this Act. TheMemorandum of Associationcontains different clauses,whicharegivenasfollows:

(i) The name clause: This clausecontains the name of the companywithwhichthecompanywillbeknown,whichhasalreadybeenapprovedbytheRegistrarofCompanies.(ii) Registered office clause: Thisclausecontainsthenameofthestate,inwhich the registered office of thecompany isproposedtobesituated.The exact address of the registeredoffice is not required at this stage

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butthesamemustbenotifiedtotheRegistrar within thirty days of theincorporationofthecompany.(iii) Objects clause:Thisisprobablythe most important clause of thememorandum.Itdefinesthepurposefor which the company is formed.A company is not legally entitled toundertakeanactivity,whichisbeyondtheobjectsstatedinthisclause.Themainobjects forwhichthecompanyisformedarelistedinthissub-clause.Itmustbeobservedthatanactwhichis either essential or incidental fortheattainmentofthemainobjectsofthe company is deemed to be valid,

althoughitmaynothavebeenstatedexplicitly.(iv) Liability clause: This clauselimits the liability of thememberstotheamountunpaidonthesharesownedbythem.

Forexample,ifashareholderhaspurchased 1000 shares of `10 eachandhasalreadypaid ` 6per share,his/her liability is limited to`4pershare.Thus,evenintheworstcase,he/shemay be called upon to pay`4,000only.(v) Capital clause: This clausespecifiesthemaximumcapitalwhichthe company will be authorised to

Respective forms for Memorandum of Association

1. TableA MOAofacompanylimitedbyshares

2. TableB MOA of a company limited by guarantee and not havingsharecapital

3. TableC MOA of a company limited by guarantee and not havingsharecapital

4. TableD MOAofanunlimitedcompanyandnothavingsharecapital

5. TableE MOAofanunlimitedcompanyandhavingsharecapital

Respective forms for Articles of a Company

6. TableF AOAofacompanylimitedbyshares

7. TableG AOAofacompanylimitedbyguaranteeandhavingsharecapital

8. TableH AOAofacompanylimitedbyguaranteeandnothavingsharecapital

9. TableI AOAofanunlimitedcompanyandhavingsharecapital

10. TableJ AOAofanunlimitedcompanyandnothavingsharecapital

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raise through the issue of shares.The authorised share capital of theproposed company along with itsdivision into the number of shareshavingafixedfacevalueisspecifiedinthisclause.Forexample,theauthorisedsharecapitalofthecompanymaybe`25lakhswithdividedinto2.5lakhsharesof̀ 10each.Thesaidcompanycannotissuesharecapitalinexcessoftheamountmentionedinthisclause.

ThesignatoriestotheMemorandumofAssociationstatetheirintentiontobeassociatedwiththecompanyandgive their undertaking to subscribeto the shares mentioned againsttheirnames.ThememorandumofacompanyshallbeinrespectiveformsspecifiedinTablesA,B,C,DandEinScheduleIasmaybeapplicabletosuchcompany.

TheMemorandumof Associationmust be signed by at least sevenpersonsincaseofapubliccompanyandbytwopersonsincaseofaprivatecompany.

A copy of a Memorandum ofAssociationisgivenattheendofthechapter.B. Articles of Association:Articlesof

Associationaretherulesregardinginternalmanagementofacompany.Theserulesaresubsidiary to theMemorandumof Association andhence, should not contradict orexceed anything stated in theMemorandumofAssociation.

According to section 2(5) of TheCompanies Act, 2013, ‘articles’means the article of associationofacompanyasoriginallyframed

or as altered from time to timeor applied in pursuance of anypreviouscompanylaworofthisAct.ThearticlesofacompanyshallbeinrespectiveformsasspecifiedinTableF,G,H,IandJinscheduleI asmay be applicable to suchcompany.However,thecompaniesarefreetomaketheirownarticlesof association which may becontrary to the clauses of TableF,G,H,I,Jandinthatcasearticlesof association as adopted by thecompanyshallapply.

C. Consent of Proposed Directors: ApartfromtheMemorandumandArticles of Association, awrittenconsentofeachpersonnamedasadirectorisrequiredconfirmingthattheyagreetoact inthatcapacityandundertaketobuyandpayforqualificationshares,asmentionedintheArticlesofAssociation.

D. Agreement: The agreement, ifany,whichthecompanyproposesto enter with any individual forappointment as its ManagingDirectororawhole timeDirectororManager is another documentwhichisrequiredtobesubmittedto the registrar for getting thecompanyregisteredundertheAct.

E. Statutory Dec la rat ion : Adeclaration stating that all thelegal requirements pertaining toregistration have been compliedwith is to be submitted to theRegistrarwiththeabovementioneddocumentsforgettingthecompanyregistered under the law. Thisstatement can be signed by

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Qualification Shares

To ensure that the directors have some stake in the proposed company, theArticles usually have a provision requiring them to buy a certain number ofshares.TheyhavetopayforthesesharesbeforethecompanyobtainsCertificateofCommencementofBusiness.ThesearecalledQualificationShares.

The Articles generally contains the following matters:

1. ExclusionwhollyorinpartofTableF. 2. Adoptionofpreliminarycontracts. 3. Numberandvalueofshares. 4. Issueofpreferenceshares. 5. Allotmentofshares. 6. Callsonshares. 7. Lienonshares. 8. Transferandtransmissionofshares. 9. Nomination.10. Forfeitureofshares.11. Alterationofcapital.12. Buyback.13. Sharecertificates.14. Dematerialization.15. Conversionofsharesintostock.IncorporationofCompaniesandMatters

IncidentalThereto16. Votingrightsandproxies.17. Meetingsandrulesregardingcommittees.18. Directors,theirappointmentanddelegationsofpowers.19. Nomineedirectors.20. IssueofDebenturesandstocks.21. Auditcommittee.22. Managingdirector,Whole-timedirector,Manager,Secretary.23. Additionaldirectors.24. Seal.25. Remunerationofdirectors.26. Generalmeetings.27. Directorsmeetings.28. Borrowingpowers.29. Dividendsandreserves.30. Accountsandaudit.31. Windingup.32. Indemnity.33. Capitalisationofreserves.

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an advocate or by a CharteredAccountantoraCostAccountantoraCompanySecretaryinpracticewho is engaged in the formationof a company and by a personnamedinthearticlesasadirectorormanager or secretary of thecompany.

F. Receipt of Payment of fee:Alongwith the above-mentioneddocuments,necessaryfeeshastobepaidfortheregistrationofthecompany.Theamountofsuchfeesshall depend on the authorisedsharecapitalofthecompany.

Position of Promoters

Promotersundertakevariousactivitiesto get a company registeredandgetit to the position of commencementof business. But they are neitherthe agents nor the trustees of thecompany.Theycan’tbetheagentsasthecompanyisyettobeincorporated.Therefore, they are personally liableforallthecontractswhichareenteredby them, for the companybefore itsincorporation, in case the same arenotratifiedbythecompanylateron.Alsopromotersarenotthetrusteesofthecompany.

Promoters of a company enjoy afiduciarypositionwiththecompany,which theymust notmisuse. Theycanmakeaprofitonlyifitisdisclosedbutmustnotmakeanysecretprofits.Intheeventofanon-disclosure,thecompanycanrescindthecontractandrecoverthepurchasepricepaidtothepromoters.Itcanalsoclaimdamages

forthelosssufferedduetothenon-disclosureofmaterialinformation.

Promotersarenotlegallyentitledtoclaimtheexpensesincurredinthepromotionofthecompany.However,thecompanymaychoosetoreimbursethem for the pre-incorporationexpenses. The companymay alsoremunerate the promoters for theireffortsbypayingalumpsumamountoracommissiononthepurchasepriceofpropertypurchasedthroughthemoronthesharessold.Thecompanymayalsoallotthemsharesordebenturesorgivethemanoptiontopurchasethesecuritiesatafuturedate.

7.2.2 Incorporation

After completing the aforesaidformalities, promoters make anapplication for the incorporation ofthecompany.TheapplicationistobefiledwiththeRegistrarofCompaniesof the statewithinwhich they planto establish the registered office ofthe company. The application forregistrationmust be accompaniedwithcertaindocumentsaboutwhichwe have already discussed in theprevioussections.Thesemaybebrieflymentionedagain: 1. TheMemorandumofAssociation

duly stamped, s igned andwitnessed. In case of a publiccompany,atleastsevenmembersmust sign it. For a privatecompanyhoweverthesignaturesof twomembers are sufficient.The signatoriesmust also giveinformationabouttheiraddress,

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occupation and the number ofsharessubscribedbythem.

2. TheArticles of AssociationdulystampedandwitnessedasincaseoftheMemorandum.However,asstatedearlier,apubliccompanymay adopt Table A,which is amodelsetofArticles,givenintheCompanies Act. In that case astatementinlieuoftheprospectusissubmitted, insteadofArticlesofAssociation.

3. Writtenconsentoftheproposeddirectorstoactasdirectorsandan undertaking to purchasequalificationshares.

4. The agreement, if any,with theproposed Managing Director,Managerorwhole-timedirector.

5. A copy of the Registrar’s letterapproving the name of thecompany.

6. Astatutorydeclarationaffirmingthat all legal requirements forregistrationhavebeen compliedwith.Thismustbedulysigned.

7. Anoticeabouttheexactaddressof theregisteredofficemayalsobe submitted along with these

documents.However,ifthesameis not submitted at the time ofincorporation,itcanbesubmittedwithin30daysofthereceiptofthecertificateofincorporation.

8. Documentaryevidenceofpaymentofregistrationfees.TheRegistraruponsubmissionof

theapplicationalongwiththerequireddocumentshastobesatisfiedthatthedocumentsareinorderandthatallthestatutoryrequirementsregardingtheregistrationhavebeencompliedwith.However, it is not his duty to carryoutathoroughinvestigationabouttheauthenticityofthefactsmentionedinthedocuments.

When the Registrar is satisfied,about the completion of formalitiesfor registration, a Certificate ofIncorporationisissuedtothecompany,whichsignifythebirthofthecompany.The certificate of incorporationmaythereforebecalledthebirthcertificateofthecompany.

WitheffectfromNovember1,2000,theRegistrar of Companies allots aCIN (Corporate Identity Number) totheCompany.

Preliminary Contracts

Duringthepromotionofthecompany,promotersenterintocertaincontractswiththirdpartiesonbehalfofthecompany.Thesearecalledpreliminarycontractsorpre-incorporationcontracts.Thesearenotlegallybindingonthecompany.Acompanyaftercomingintoexistencemay,ifitsochooses,decidetoenterintofreshcontractswiththesametermsandconditionstohonourthecontractsmadebythepromoters.Notethatitcannotratifyapreliminarycontract.Acompanythuscannotbeforcedtohonourapreliminarycontract.Promoters,however,remainpersonallyliabletothirdpartiesforthesecontracts.

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Effect of the Certificate of Incorporation

A company is legally born on thedate printed on the Certificate ofIncorporation. It becomes a legalentitywith perpetual succession onsuchdate.Itbecomesentitledtoenterintovalidcontracts.TheCertificateofIncorporationisaconclusiveevidenceoftheregularityoftheincorporationof a company. Imagine,whatwouldhappen to an unsuspecting partywithwhich the companyenters intoacontract,ifitislaterfoundthattheincorporation of the company wasimproperandhenceinvalid.Therefore,the legal situation is that once aCertificateof Incorporationhasbeenissued, the company has become alegalbusinessentityirrespectiveofanyflawinitsregistration.TheCertificateof Incorporation is thus conclusiveevidence of the legal existence ofthe company. Some interestingexamples showing the impact of theconclusiveness of the Certificate ofIncorporationareasunder:(a)Documents for registrationwere

filedon6thJanuary.CertificateofIncorporationwas issued on 8th

January.ButthedatementionedontheCertificatewas6thJanuary.Itwasdecided that the companywasinexistenceandthecontractssigned on 6th January wereconsideredvalid.

(b)A person forged the signaturesof others on theMemorandum.The Incorporation was st i l lconsideredvalid.Thus,whateverbe thedeficiency

in the formalities, the Certificateof Incorporation once issued, is aconclusiveevidenceoftheexistenceofthecompany.Evenwhenacompanygets registered with illegal objects,the birth of the company cannot bequestioned.Theonlyremedyavailableistowinditup.BecausetheCertificateof Incorporation is so crucial, theRegistrar has to go very carefullybeforeissuingit.

Bothpublicandprivatecompaniesare required toobtain thecertificateforcommencementofbusinesswithin180 days of its incorporation.Oncethe certificate for commencementof business is issued by Registrarof companies it canundertake theirbusinessoperations.

Director Identification Number (DIN)

EveryIndividualintendingtobeappointedasdirectorofacompanyshallmakeanapplicationforallotmentofDirectorIdentificationNumber(DIN)totheCentralGovernmentinprescribedformalongwithfees.TheCentralGovernment shall allot aDirector IdentificationNumber to anapplicationwithinonemonthfromthereceiptoftheapplication.Noindividual,whohasalreadybeenallottedaDirectorIdentificationNumber,shallapplyfor,obtainorpossessanotherDirectorIdentificationNumber

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7.2.3 Capital Subscription

A public company can raise therequired funds from the public bymeans of issue of securities (sharesand debentures etc.). For doing thesame, it has to issue a prospectuswhichisaninvitationtothepublictosubscribetothecapitalofthecompanyandundergovariousotherformalities.The following steps are required forraisingfundsfromthepublic:(i) SEBI Approval: SEBI (SecuritiesandExchangeBoardofIndia)whichis the regulatory authority in ourcountry has issued guidelines forthe disclosure of information andinvestorprotection.Apubliccompanyinvitingfundsfromthegeneralpublicmustmake adequate disclosure ofall relevant information andmustnotconcealanymaterialinformationfrom the potential investors. This isnecessary for protecting the interestof the investors.Priorapproval fromSEBI is, therefore, required beforegoingaheadwithraising funds frompublic.(ii) Filing of Prospectus:AcopyoftheprospectusorstatementinlieuofprospectusisfiledwiththeRegistrarof Companies. A prospectus is ‘anydocument described or issued as aprospectus including any notice,circular, advertisement or otherdocumentinvitingdepositsfromthepublicorinvitingoffersfromthepublicfor the subscription or purchase ofanysecuritiesof,abodycorporate’.Inotherwords,itisaninvitationtothepublictoapplyforsecurities(shares,

debentures etc.) of the company ortomake deposits in the company.Investorsmakeuptheirmindsaboutinvestmentinacompanyprimarilyonthebasisoftheinformationcontainedin this document. Therefore, theremust not be amis-statement in theprospectusandallmaterialsignificantinformationmustbefullydisclosed.(iii) Appointment of Bankers, Brokers, Underwriters:Raisingfundsfromthepublicisastupendoustask.Theapplicationmoneyistobereceivedby the bankers of the company.The brokers try to sell the sharesby distributing the forms andencouraging the public to apply forthe shares. If the company is notreasonablyassuredofa goodpublicresponsetotheissue,itmayappointunderwriterstotheissue.Underwritersundertaketobuythesharesifthesearenotsubscribedbythepublic.Theyreceiveacommissionforunderwritingtheissue.Appointmentofunderwritersisnotnecessary.(iv) Minimum Subscription: Inorder to prevent companies fromcommencingbusinesswithinadequateresources, ithasbeenprovided thatthecompanymustreceiveapplicationsfor a certainminimum number ofshares before going aheadwith theallotment of shares. According totheCompaniesAct,thisiscalledthe‘minimum subscription’. As per theSEBIGuidelinesthelimitofminimumsubscriptionis90percentofthesizeof the issue. Thus, if applicationsreceived for the shares are for anamount lessthan90percentofthe

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issue size, the allotment cannot bemade and the application moneyreceivedmust be returned to theapplicants.(v) Application to Stock Exchange: Anapplicationismadetoatleastonestockexchangeforpermissiontodealin its shares or debentures. If suchpermission isnotgrantedbefore theexpiry of ten weeks from the date

of closure of subscription list, theallotment shall become void and allmoney received from the applicantswillhavetobereturnedtothemwithineightdays.(vi) Allotment of Shares: Till thetime shares are alloted, applicationmoney received shoud remain in aseperatebankaccountandmustnotbeusedbythecompany.Incasethe

Difference between Memorandum of Association and Articles of Association

Basis of Difference

Memorandum of Association

Articles of Association

Objectives MemorandumofAssociationdefinestheobjectsforwhichthecompanyisformed.

Articles of Association are rulesof internalmanagement of thecompany.Theyindicatehowtheobjectivesofthecompanyaretobeachieved.

Position ThisisthemaindocumentofthecompanyandissubordinatetotheCompaniesAct.

This is a subsidiary documentand is subordinate to both theMemorandumofAssociationandtheCompaniesAct.

Relationship MemorandumofAssociationdefinestherelationshipofthecompanywithoutsiders.

Articles define the relationshipofthemembersandthecompany.

Validity ActsbeyondtheMemorandumof Association are invalidandcannotbe ratifiedevenbyaunanimousvoteofthemembers.

Actswhich are beyondArticlescanberatifiedbythemembers,provided theydonotviolate theMemorandum.

Necessity EverycompanyhastofileaMemorandumofAssociation.

Itisnotcompulsoryforapublicltd. company to file Articles ofAssociation.ItmayadoptTableFofTheCompaniesAct,2013

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numberofsharesallottedislessthanthenumberappliedfor,orwherenosharesareallottedtotheapplicant,theexcessapplicationmoney,ifany,istobereturnedtoapplicantsoradjustedtowards allotmentmoney due fromthem. Allotment letters are issuedto the successful allottees. ‘Returnofallotment’,signedbyadirectororsecretaryisfiledwiththeRegistrarofCompanieswithin30daysofallotment.

Apubliccompanymaynotinvitepublic to subscribe to its securities(shares,debenturesetc.).Instead,itcanraisethefundsthroughfriends,relativesorsomeprivatearrangementsasdonebyaprivatecompany.Insuchcases, there is no need to issue aprospectus. A ‘Statement in Lieu ofProspectus’isfiledwiththeRegistraratleastthreedaysbeforemakingtheallotment.

One Person Company

With the implementation of TheCompanies Act, 2013, a single person couldconstituteacompany,undertheOnePersonCompany(OPC)concept.The introduction ofOPC in the legal system is amove thatwould encouragecorporatisationofmicrobusinessesandentrepreneurship.InIndia,intheyear2005,theJJIraniExpertCommitteerecommendedtheformationofOPC.Ithadsuggestedthatsuchanentitymaybeprovidedwithasimplerlegalregimethroughexemptionssothatthesmallentrepreneurisnotcompelledtodevoteconsiderabletime,energyandresourcesoncomplexlegalcompliance.OnePersonCompanyisacompanywithonlyonepersonasamember.Thatonepersonwillbetheshareholderofthecompany.Itavailsallthebenefitsofaprivatelimited company such as separate legal entity, protecting personal assets frombusinessliabilityandperpetualsuccession.

Characteristics

(1) OnlyanaturalpersonwhoisanIndiancitizenandresidentinIndia- (a)ShallbeeligibletoincorporateaOnePersonCompany; (b)ShallbeanomineeforthesolememberofaOnePersonCompany. Explanation–Forthepurposesofthisrule,theterm“residentinIndia”

meansapersonwhohasstayed in India foraperiodofnot less thanonehundredandeightytwodaysduringtheimmediatelyprecedingonecalendaryear.

(2) NopersonshallbeeligibletoincorporatemorethanaOnePersonCompanyorbecomenomineeinmorethanonesuchcompany.

(3) Whereanaturalperson,beingmemberinOnePersonCompanyinaccordancewiththisrulebecomesamemberinanothersuchCompanybyvirtueofhisbeinganomineeinthatOnePersonCompany,suchpersonshallmeettheeligibilitycriteriaspecifiedinsubrule(2)withinaperiodofonehundredandeightydays.

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(4) NominorshallbecomememberornomineeoftheOnePersonCompanyorcanholdsharewithbeneficialinterest.

(5) SuchCompanycannotbeincorporatedorconvertedintoacompanyundersection8oftheAct.

(6) SuchCompanycannotcarryoutNon-BankingFinancialInvestmentactivitiesincludinginvestmentinsecuritiesofanybodycorporates.

(7) NosuchcompanycanconvertvoluntarilyintoanykindofcompanyunlesstwoyearshaveexpiredfromthedateofincorporationofOnePersonCompany,exceptthresholdlimit(paidupsharecapital)isincreasedbeyondfiftylakhrupeesoritsaverageannualturnoverduringtherelevantperiodexceedstwocrorerupees.

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“SCHEDULE I”(See sections 4 and 5)

Table AMEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY SHARES

1st The name of the company is “.......................................... Limited/Private Limited”.2nd TheregisteredofficeofthecompanywillbesituatedintheStateof..................3rd (a) The objects to be pursued by the company on its incorporation are:-

.........................................................................................................................

.........................................................................................................................

(b)Matterswhicharenecessaryforfurtheranceoftheobjectsspecifiedinclause3 (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 being formed 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 witnessesA.B. of ................ Merchant ..................... Signed before me: Signature ...............

C.D. of ................ Merchant ..................... Signed before me: Signature ...............

E.F. of ................ Merchant ..................... Signed before me: Signature ...............

G.H. of ............... Merchant ..................... Signed before me: Signature ..............

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I.J.of................Merchant ..................... Signedbeforeme: Signature..............

K.L.of................Merchant ..................... Signedbeforeme: Signature..............

M.N.of...............Merchant ..................... Signedbeforeme: Signature..............

Totalsharestaken:

7th I,whosename and address is given below, amdesirous of forming acompanyinpursuanceofthismemorandumofassociationandagreetotakeallthesharesinthecapitalofthecompany(Applicableincaseofonepersoncompany):-

__________________________________________________________________Names,addresses, Signatureofsubscribed Signature,name,address,occupationsof descriptionandoccupationSubscribers ofwitness

__________________________________________________________________8th Shri/Smt ......................................, son/daughterof ......................................,

residentof....................................................................aged......................yearsshallbethenomineeintheeventofdeathofthesolemember(Applicableincaseofonepersoncompany)

Dated......................................Thedayof......................................

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Key Terms

Promotion MemorandumofAssociation ArticlesofAssociationProspectus Incorporation CapitalsubscriptionCommencementofBusiness

SUMMARY

Therearetwostagesintheformationofaprivatecompany,promotionandincorporation.Apubliccompanyhastoundergocapitalsubscriptionstagetobeginoperations.

1. Promotion: Itbeginswithapotentialbusinessidea.Certainfeasibilitystudiese.g.,technical,financialandeconomic,areconductedtodeterminewhethertheideacanbeprofitablyexploited.Incase,theinvestigationsyield favourable results, promotersmay decide to form the company.Personswhoconceivethebusinessidea,decidetoformacompany,takenecessarystepsforthesame,andassumeassociatedrisks,arecalledpromoters.

Steps in Promotion

i. Approvalofcompany’snameistakenfromtheRegistrarofCompanies

ii. SignatoriestotheMemorandumofAssociationarefixed

iii. Certainprofessionalsareappropriatedtoassistthepromoters

iv. Documentsnecessaryforregistrationareprepared

Necessary Documents a. MemorandumofAssociation

b. ArticlesofAssociation

c. Consentofproposeddirectors

d. Agreement,ifany,withproposedmanagingorwholetimedirector

e. Statutorydeclaration

2. Incorporation: An application ismade by promoters to theRegistrarofCompaniesalongwithnecessarydocumentsandregistrationfee.TheRegistrar, after due scrutiny, issues certificate of incorporation. Thecertificateofincorporationisaconclusiveevidenceofthelegalexistenceofthecompany.

3. Capital Subscription: Apubliccompanyraisingfundsfromthepublicneedstotakefollowingstepsforfundraising:

(i) SEBIapproval;

(ii) FileacopyofprospectuswiththeRegistrarofCompanies;

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(iii) Appointmentofbrokers,bankersandunderwritersetc.;

(iv) Ensurethatminimumsubscriptionisreceived;

(v) Applicationforlistingofcompany’ssecurities;

(vi) Refund/adjustexcessapplicationmoneyreceived;

(vii) Issueallotmentletterstosuccessfulapplicants;and

(viii) FilereturnofallotmentwiththeRegistrarofCompanies(ROC).

A public company, raising funds, raising funds from friends/relatives (notpublic)hastofileastatementinlieuofprospectuswiththeROCatleastthreedaysbeforeallotmentofsharesandreturnsofallotmentaftercompletingtheallotment.AspertheSEBIguidelines,minimumsubcriptionhastobe90%ofthesharestobeissuedtobepublic.

Preliminary Contracts: Contracts signed by promoters with third partiesbeforetheincorporationofcompany.

Provisional Contracts: Contracts signed after incorporation but beforecommencementofbusiness.

EXERCISES

True/False Answer Questions

1. Itisnecessarytogeteverycompanyincorporated,whetherprivateorpublic.2. Statementinlieuofprospectuscanbefiledbyapubliccompanygoingfor

apublicissue.3. Acompanycancommencebusinessafterincorporation.4. Expertswhohelppromotersinthepromotionofacompanyarealsocalled

promoters.5. Acompanycanratifypreliminarycontractsafterincorporation.6. Ifacompanyisregisteredonthebasisoffictitiousnames,itsincorporation

isinvalid.7. ‘ArticlesofAssociation’isthemaindocumentofacompany.8. EverycompanymustfileArticlesofAssociation.9. Ifacompanysuffersheavyissuesanditsassetsarenotenoughtopayoff

its liabilities, thebalancecanbe recovered from theprivateassetsof itsmembers.

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Short Answer Questions

1. Namethestagesintheformationofacompany.2. Listthedocumentsrequiredfortheincorporationofacompany.3. Whatisaprospectus?Isitnecessaryforeverycompanytofileaprospectus?4. Brieflyexplaintheterm‘ReturnofAllotment’.5. AtwhichstageintheformationofacompanydoesitinteractwithSEBI.

Long Answer Questions

1. What is meant by the term ‘Promotion’. Discuss the legal position ofpromoterswithrespecttoacompanypromotedbythem.

2. Explainthestepstakenbypromotersinthepromotionofacompany.3. Whatisa‘MemorandumofAssociation’?Brieflyexplainitsclauses.4. Distinguish between ‘Memorandum of Association’ and ‘Articles of

Association.’5. Whatisthemeaningof‘CertificateofIncorporation’?6. Discussthestagesofformationofacompany?

Project/Assignment

FindoutfromtheofficeoftheRegistrarofCompanies,theactualprocedureforformationofcompanies.Doesitmatchwithwhatyouhavestudied.Whataretheobstacleswhichcompaniesfaceingettingthemselvesregistered.

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