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Q.1. Define a joint stock company. (Mar. 96, 98; Oct. 99, 2000)
Ans. Definition and Meaning:
H.L. Haney:
“A Joint Stock Company is a voluntary association of individuals for profit, having its capital
divided into transferable shares the ownership of which is the condition of membership”.
Section 3(1) of Indian Companies Act, 1956
“Company means a company formed and registered under this Act or an existing company” &
Existing company means a company formed and registered under any of the previous
company laws”.
Thus a company is a voluntary association, an incorporated association, an artificial person
created by law, having a common seal and perpetual succession
Shareholder‟s are the owners of the company but management lies in the hands of Board of
Directors. The company conducts its business under the provision of the Indian Companies ct,
Q.2. Define a Joint Stock Company. What are its characteristics / features? (Mar. 98, Oct. 97,
99, 2000 – Long Answers)
Ans. Definition and Meaning: Same as Ans. 1
Characteristics / Features of a Joint Stock Company:
The characteristics / features of a Joint Stock Company are:
1. Compulsory Incorporation:
A company is a voluntary association of persons formed and incorporated under the
existing Corinne law. Only when it gets certificate of incorporation it comes into existence
as a body corporate.
2. Artificial person:
A company is an artificial person created by law. It is created by legal process and not by
natural birth. Even though it has no natural personality, it has legal personality. Therefore
it can enter into contracts, sue and can be sued, own property, appoint employees and
borrow money like any other natural person.
3. Common Seal:
Since a company is an artificial person having no physical features like a natural person,
it cannot sign. Hence every company by law must have a common seal on which its
name is engraved. The common seal can serve as its signature. The common seal is
affixed on all important documents and contracts which is witnessed by signature of two
directors and countersigned by secretary where ever required. The common seal is kept
under the custody of directors.
4. Perpetual succession:
Since the company has a separate existence from its members, directors and
employees, their death, insolvency or insanity will not affect its life and existence men
may come and men may go but a company remains forever. It can be wound up only
under the provisions of the act.
5. Limited liability:
Usually the liability of members of a company is limited to the extent of uncalled or
unpaid value of shares held by them. Their personal property cannot be seized to meet
the company‟s liability beyond the above mentioned liability.
6. Share capital:
The capital required by the company is raised by issues shares. A share is a share in the
share capital of the company. The member who holds the shares of a company can
transfer its ownership any other person, without the company‟s permission.
7. Separation of ownership and management:
In company organisation the ownership and management are separated. The
shareholders who are the owners do not take active part in the everyday affairs of the
company. Instead, they elect their representatives known as Directors, who with the help
of managers and employees manage the company. Thus, there is division of labour and
8. Legal Entity:
Since the company is created by law it has separate legal existence compared to its
members. Therefore the members cannot be personally held responsible for the acts of
the company.
9. Large membership:
The company is owned by a larger number of members – maximum of 50 in the case of
private limited company and unlimited number of members in the case of a public limited
Q.3. What re the advantages / merit of a Joint Stock Company? (Mar. 96, Oct. 98, 2002, 2003)
Ans. Defination and Meaning – Same as Ans. 1
Advantages / Merits of a Joint Stock Company:
The advantages / Merits of a Joint Stock Company are:
1. Large Capital:
A company can collect huge capital for the business through shares and debentures,
public deposits, loans etc. due to huge capital the company can conduct business on a
large scale.
2. Limited Liability:
Shareholder‟s liability is limited to the face value of the shares held by them. The
members are liable only to the extent of unpaid value of share. If the shares are fully paid
up then the member is not liable for any debts of the company.
3. Continuity and Stability:
A company has a long and stable life. its existence is not affected by death, insolvency or
insanity of its members.
4. Professional Management:
The company appoints experienced, competent and experts to manage the business.
Their services lead to managerial and administrative efficiency and accuracy.
5. Economies of scale:
As the company operates on a large scale it enjoys economies in production, distribution,
management and financing.
6. Bargaining Power:
Compared to other forms of commercial organization a joint stock company has strong
bargaining power in buying as well as in selling of goods because of its large scale
7. Legal Status: Same as features point 16
The company enjoys a distinct legal entity separate from its members. Being a legal
creation it enjoys permanent existence.
8. Large Membership:
A joint stock company (especially a public company) has large number of members.
Large membership brings in large amount of funds which can be invested in companies
expansion and diversification.
9. Transferability of shares:
Shares of a Joint Stock Company (especially public companies) are freely transferable
A member who wants to sell his shares can easily do so in the stock market. This
encourages the public and other to invest in shares.
10. Employment:
Joint stock company provides employment to a large number of people directly and
This leads to higher national income for the country and higher standard of living for the
11. Government Revenue:
Joint Stock Companies provides revenue to the government in the form of taxes charged
directly and indirectly.
12. Research and Development:
Joint Stock Companies undertake R & D continuously thus bringing about new and
improved products which benefits people.
13. Economic Development:
Because of Joint Stock Companies there is all round development of trade, commerce
and industry. The society in general gains the benefit of the industrial development.
Large capital, government revenue, economic development etc. are the advantages of a Joint
Stock Company.
Q.4. What are the disadvantages / demerits of a Joint Stock Company? (Mar. 96, Oct. 98,
2002, 2003)
Ans. Definition and Meaning: Same as Ans. 1
Disadvantages / Demerits of a Joint Stock Company:
The disadvantages / demerits of a Joint Stock Company are:
1. Difficult Formation:
Formation of a Joint Stock Company is an expensive and time consuming process as a
number of legal formalities have to be undertaken in order to register the company.
2. Lacks Flexibility:
The working of a Joint Stock Company is less flexible as compared to other
organizations. For every small thing they either have to follow a detailed procedure or
obtain sanctions from various authorities. This results in lack of flexibility.
3. No Business secrecy:
This form of organization lacks business secrecy because it is compulsory for the
company to publish accounts and other records.
4. Excessive government regulation:
The company is subject to excessive government control. It has to follow the numerous
provision of the Indian Companies Act. This makes working difficult.
5. Delay in Decision Making:
Due to excessive government control and a democratic set up all decisions are taken in
meetings and some decisions require shareholder‟s approval. All this leads to delay in
decision making.
6. Lack of contact with customers:
Due to large scale operations a company finds it difficult to maintain direct contact with its
customers. This may lead to poor sales promotion.
7. Lack of contact with employees:
The top management may not have personal contact with their employees. This may
cause friction and disputes amongst the management and workers which may affect the
worker‟s morale.
8. Conflicts of Interest:
There may arise a conflict of interest amongst the various parties (shareholders,
management, workers etc.) in a joint stock company. This conflicting interest
undoubtedly harms the company‟s interest.
9. Not suitable for all types of business:
This type of an organization is not suitable for business where personalized services are
10. Exploitation of shareholders:
Sometimes the Board of Directors may misappropriate the funds and mislead the
shareholders by window dress report. The directors may even manipulate the share trading on
the stock exchange. Thus shareholders can be exploited by corrupt directors.
Difficult formation, no business secrecy, heavy taxation etc. are the disadvantages of a Joint
Stock Company.
Q.5. Discuss the various types of Companies? (Mar. 2000)
Ans. Defination and Meaning: Same as Ans. 1
Types of Companies:
The companies can be classified on the basis of the following:
(A) On the basis of Incorporation:
1. Chartered Companies:
(a) Incorporated under:
Such companies are incorporated under a Royal Character (order) issued by
the King or Queen or Head of the State.
(b) Exclusive rights:
Such companies have exclusive rights, powers and privileges under the
royal charter.
(c) Example:
East India Company, Bank of England.
2. Statutory Companies:
(a) Formed under:
Such companies are formed under the special act passed by the Parliament
or State Legislature.
(b) Powers defined:
The powers which can be exercised by such companies are defined by the
Acts that constitute them. Thus, such companies do not require a
Memorandum of Association.
(c) Example:
Reserve Bank of India, State Bank of India, Life Insurance Corporation.
3. Registered Companies:
(a) Incorporated under:
A company incorporated under the Indian Companies Act, 1956 is called
Registered Company.
(b) Powers defined:
The powers exercised by such companies are defined by the Companies Act
and Memorandum of Association.
(c) Can be:
A registered company can be a Private Ltd. Company or a Public Ltd.
(B) On the basis of liability of its members:
1. Companies Limited by Shares:
(a) Members liability limited:
In such companies the liability of the members is limited to the extent of the
unpaid value on shares. In the event of winding up of the company the
members need to pay the unpaid value of the shares.
(b) Can be:
Such companies may be a Public limited company or a Private limited
2. Companies Limited by Guarantee:
(a) Member promises to pay:
Every member promises or guarantees to pay a fixed sum of money
(specified in the memorandum) at the time of liquidation of the company for
payment of companies liabilities.
(b) Non – trading Companies:
Such companies are formed without a share capital for non – trading (non –
profit) purpose to promote culture, art, science, religion, charity, sports etc.
(c) Depend upon:
Such companies depend upon their existence on entrance and subscription
fees as they do not have share capital.
3. Unlimited Companies:
(a) Unlimited liability:
In such companies the liability of the members is unlimited. In the event of
winding up of the company the private property of the member can be used
to pay the debts of the firm.
(b) Not in India:
Due to the high risk involved, such companies are not found in India.
(C) On the basis of Membership:
1. Private Limited Company:
A private limited company is the one which by its articles
(a) Minimum, Maximum:
Limits the maximum number of its members to 50, minimum being 2.
(b) Transfer of shares:
Places some restriction on the transfer of its shares.
(c) Prohibits any invitation:
Prohibits any invitation by prospectus or otherwise to the general public to
subscribe to any of its shares or debentures.
(d) Word ‘Private Limited’:
A private company must used the word „Private Limited‟ after its name
2. Public Limited Company:
(a) Not a private company:
According to Companies Act, a public limited company is a company which
is not a private company.
(b) Minimum, Maximum:
Minimum number of members in a private company is 7 and there is no
maximum limit.
(c) Directors:
It must have atleast 3 directors – 1/3rd of the directors are permanent and
2/3rd are subject to retirement by rotation out of which 1/3rd retire every year.
(d) Free transfer of shares:
Shares can be freely transferred in a public company.
(e) Statutory Meeting:
In case of a public company Statutory Meeting is compulsory.
(D) On the basis of Ownership:
1. Government Company:
(a) Means:
A government company means any company in which not less than 51% of
the paid – up share capital is held by the Central Government and / or by
any State Government(s) or partly by the Central Government and partly by
one or more State Government.
(b) Follows provisions of Companies Act:
Such companies have to follow all provisions of the Indian Companies Act,
1956. It has to be registered under the Indian Companies Act, 1956.
(c) Examples:
Hindustan Machine Tools, Oil and Natural Gas Commission etc.
2. Foreign Companies:
(a) Meaning:
It is a company which is registered in one country but carries out its
operations in India.
(E) On the basis of Shareholding:
1. Holding Companies:
(a) Meaning:
It is a company which controls another company by holding a minimum 51%
of shares and thereby controlling the composition of the board of the
2. Subsidiary Companies:
A company which another company holds a minimum of 51% of share capital i.e.
holding company is known as subsidiary company.
Thus the above given are the various types of companies.
Q.6. What is share? What are the various types of shares. (Mar. 2002)
Ans. Defination – Share
Section 2(46) of the Indian Companies Act 1956 defines share as “a share in the share capital
of a company and includes stock except when a distinction between stock and shares is
expressed and implied”.
Meaning – Share:
Owned capital of a company divided into a large number of equal parts or units. Each such part
having the same face value is called share
Types of shares:
1. Equity Shares:
Equity shares are those shares which do not have, preferential rights with regards to:
(a) Payment of dividend
(b) Repayment (return) of capital, in case of winding up of the company.
Equity shares are also known as Ordinary shares.
There are no types of equity shares.
2. Preference Shares:
Preference shares are those shares which have preferential rights over the equity shares
with regards to:
(1) Repayment of capital in the event of liquidation / winding up of the company.
(2) Payment of dividend.
(I) On the basis of participation:
(a) Participating Preference Shares:
The rate of dividend on preference shares is decided and fixed at the time of
issue of preference shares. Participating preference shareholders extra
dividend (additional dividend) after payment of dividend to equity
shareholders. Thus participating preference share get two types of dividend,
one is their normal fixed rate of divided and the other is the extra dividend
which is paid out of the surplus profit left after payment of dividend on equity
(b) Non – participating Preference Shares:
They get only their normal fixed rate of dividend. They do not have the right
to receive an extra dividend, after the dividend is paid on equity shares.
(II) On the basis of right to accumulate dividend:
(a) Cumulative Preference Share:
If in any year, the dividend is not paid, it gets accumulated on cumulative
preference shares. If the dividend is not paid in one or more years due to
poor performance of the company then such unpaid dividend gets
accumulated and is paid. When the company performs well. It is to be paid
before making any payments of dividend to equity shareholders.
(b) Non – Cumulative Preference Shares:
In non – cumulative preference shares, if in any year, the dividend is not
paid, it does not get accumulated.
(III) On the basis of Redemption:
(a) Redeemable Preference Shares:
They are those preference shares which are redeemed after a particular
period. They are issued for a specific period and after the completion of the
particular period for which they had been issued, the company redeems /
returns the capital of the redeemable preference shareholders.
(b) Irredeemable / Non – redeemable Preference Shares:
They are those preference shares which are not redeemed during the
lifetime of the company. Non – redeemable preference shares are redeemed
only on the winding up of the company. Such shares are not issued for a
particular period.
(IV) On the basis of Conversion:
(a) Convertible Preference Shares:
Preference shares which can be converted into equity shares of the
company at a later date are called convertible preference shares The rate
and the date of conversion are mentioned at the time of issue of convertible
preference shares.
(b) Non – Convertible Preference Shares:
Preference shares which cannot be converted into equity shares of the
company are known as non – convertible preference shares. They remain as
preference shares only.
3. Bonus Shares:
A part of the company‟s profit is transferred to reserves. Out of such reserves a company
issues bonus shares. Such shares are issued to the equity share holders of the company
free of charge. Infact bonus shares are also equity shares.
Conditions for the issue of Bonus Shares:
1. Approval from:
Approval from the Securities and Exchange Board of India (SEBI) must be
obtained for the issue of bonus shares.
2. Twice:
There can be an issue of bonus shares only twice in a period of 5 years.
3. Articles of Association:
Provision in the Articles of Association of the company for the bonus issue.
4. Shareholder’s approval:
Shareholders‟ approval must be obtained in the shareholders‟ meeting by passing
a resolution giving approval to the Board‟s decision for the issue of bonus shares.
5. Reserves:
Sufficient amount of accumulated reserves.
6. Shares fully paid up:
Bonus shares can be issued only when the existing shares are fully paid up.
4. Deferred Shares / Founder Shares / Management Shares:
These shares are issued to the promoters of the company. They rank last of all shares in
respect of payment of dividend and repayment of capital. Deferred shares are usually of
a lower face value. Only private companies can issue deferred shares.
5. Qualification Shares:
The articles of a company usually require a director to hold certain number of shares to
be eligible as a director. Such shares are called qualification shares. The directors are
entrusted with the management of the company it is necessary that they have some
financial stake or else they may not take sufficient interest in the efficient management of
the company.
The directors must obtain qualification shares within 6 months from his appointment as a
director. If he does not purchase the qualification shares within the prescribed period he
ceases to be the director of the company. He can purchase the shares from the company
itself or from the stock market.
Q.7. Explain the various types of company meetings? (Oct. 96, 2003) OR
Short Note on Statutory Meetings. (Mar. 2001)
Ans. Meeting – Defination:
“An official gathering to concerned persons who come together in required number, in order to
discuss and arrive at decisions, required for the functioning of an organisation.
It is a gathering of 2 or more persons who come together for important discussion and decision
on lawful matters.
Types of Company Meetings:
1. Board of Directors Meeting:
(a) Board to meet once in every three moths:
For every company, a meeting of its Board of directors shall be held at least once
in every three months and at least four meetings every year.
(b) Notice of Meetings:

Notice of every Board meeting shall be given in writing to every director for
the time being in India, and at his usual address in India.

Unless the articles of the company provide a definite period of notice, a

reasonable notice will be given of Board meeting. What is reasonable
notice will depend on any particular case.

If proper notice is not given, proceedings are invalid unless all directors
are present.

Normally, agenda is enclosed along with the notice, although it is not

obligatory to send agenda.
(c) Quorum for Meetings:

The quorum for a meeting of the Board of Directors of a company shall be one –
third of its total strength (any fraction in that one – third being rounded off as
one), or two directors, whichever is higher.

The total strength of directors does not include interested directors.

If the quorum is not present, the meeting is adjourned to the next week, at
the same day, time and place and if that is a public holiday, then the next
succeeding day which is not a public holiday.
Matters to be discussed at Board Meetings:
The following some of the matters are discussed at Board Meetings:

To borrow money.

To make calls on shares

To approve transfer & transmission of shares.

To allot shares and debentures

To sanction loans

To forfeit shares.

To reinstate membership.

To purchase or sell property.

2. Shareholder Meeting:
(a) Statutory Meeting:
Every public limited company having share capital must convene a general
meeting of shareholders, within a period of not less than one month and not more
than six months from the date at which the company is entitled to commence
business. Such meeting is called statutory meeting. It is the first meeting of the
shareholders and it is held once in the life time of a company.
Notice of meeting:
The directors are required to send to notice to all members of the company, at
least 21 days in advance. Stating that it is a statutory meeting.
Objects of the statutory meeting:
(a) The statutory meeting is held to inform the shareholders in respect of
matters relating to:
Allotment of shares
Receipts and payments made by the company, etc.
Incorporation of the company.
Details of preliminary expenses.
Details of the contracts concluded by the company or changes in the
existing contract.
Details of further prospects of the company.
(b) Any special matters which require approval of the shareholders is placed
before them at this meeting.
Statutory Report:
The directors are required to prepare and send a report called Statutory Report to
all members at least 21 days in advance of the meeting. The report states the
affairs of the company since incorporation.
Effect of non – compliance of:

If default is made in complying with the provision of Sec. 165, (i.e. not
sending a statutory report and not holding statutory meeting), every director
or other officer who is in default shall be punishable with fine, which may
extend to Rs.5,000.

If statutory meeting is not held and statutory report not filed, the company
may be compulsorily wound up under the orders of the court.
(b) Annual General Meeting:
Every company shall in each year hold (in addition to any other meetings) a
general meeting of its shareholders. The purpose of holding such meeting is to
review the progress and prospects of the company and to elect directors and
auditors, as the case may be.
When Annual General Meetings must be held?

The first annual general meeting of the company is held within 18 months of
its incorporation.

Subsequent annual general meetings must be held once in every year.

There should not be more than 15 months gap between two annual general
meetings. However, the registrar can extend the time upto a period of three
Notice of the meeting:
At least 21 days advance notice from the date of the meeting must be given to all
the members at their registered address in India.
Along with Notice:
The members should be supplied with certified copies of Profit and Loss Account
and Balance sheet, Directors Report and Auditor‟s Report, along with the notice.
Business transacted at the meeting:
The business transacted at this meeting is as follows:
(a) Routine Business:

Declaration of Dividend

Appointment of auditors in place of those retiring.

Adoption of Annual Accounts, Directors Report and Auditor‟s Report.

Election of Directors in place of those retiring by rotation.

(b) Special Business:

To alter the articles of association.

To increase authorized capital.

Reduction of share capital, etc.

Effect of non – compliance:

If default is made in holding an annual general meeting in accordance with

the provisions of the Companies Act, the Central Govt., on the application of
any member of the company can call, or direct the calling of such meeting.

If the meeting is not held as per the provisions of the Companies Act or the
directives of the Central Govt., then every officer who is in default, is
punishable with fine which may extend to Rs.50,000 and in case the default
continues, then with a further fine upto Rs.2,500 every day till such default
(c) Extra Ordinary General Meeting:
It is general meeting which is held between two annual general meetings. This
meeting is called to discuss important and urgent matters which cannot be
postpone till the next annual general meeting.
Purpose of Meeting:
This meeting may be called to discuss such matters as:
1. Reduction of Share Capital.
2. Changes in Articles of Association.
3. Alternation of any clause of Memorandum.
4. Increasing the Authorised Capital, etc.
Who can call such meeting:
(a) The directors can call such meeting after holding discussion in the Board
meeting and as per provisions in the Articles.
(b) The directors can call such meeting on the requisition of the members.
The members who make a requisition must hold at least 1/10 th of the total
paid – up share capital or 1/10th of voting power.
(c) If the board do not call a meeting within 14 days of a valid requisition,
then the meeting can be called by the requisitionists themselves within 3
months from the date of submitting their requisition to the company.
(d) The Companies Act empowers the Company Law Board to call extra –
ordinary general meeting.
Notice of the Meeting:
At least 21 days notice must be given to all members giving details of the matters
to be discussed at the meeting.
Resolution at the Meeting:
The resolutions passed at such a meeting are normally special resolutions and
such special resolution have to be filed with the Registrar within 30 days.
The quorum at all shareholders meetings, (including this meeting) must be least
five members in case of public company and two members in case of private
3. Class Meeting:
The company can have different classes of shareholders. Equity shareholders
preference shareholders etc. The company may be required to call meeting of a
particular class of shareholders. Such meeting may be called to incorporate changes in
the rights and privileges of the shareholders. For instance, the redeemable shares can
be converted into irredeemable shares.
The procedure for conducting such class meetings is often prescribed in the articles of
the company.
The above given are the various types of meetings of the company.
The above given are the various types of meetings of the company.
Q.8. What is Memorandum of Association? What are its clauses? (Oct. 99; Mar. 03) (Short Note
– Oct. 97)
Ans. Defination and Meaning: Same as Ans. 1
Memorandum of Association:
Memorandum of Association is the most important document of a company. It is like the
constitution of the company. Memorandum speaks about the aims and objects of the
company. It defines the relationship of the company with the outsiders. Memorandum is
treated as an unalterable charter or document of a company. Changes in the memorandum
are possible but the procedure of bringing such changes in time – consuming, lengthy and
requires the sanction from the government or, from the court. Memorandum is, therefore,
treated as practically unalterable charter of the company.
The purpose of this document is to inform the outsiders regarding the permitted range of
activities of the company. The company must work within the limits of Memorandum of
Association. Any act of company beyond the limits should be called ultra – virus and it will
not be binding on the company. This document is prepared by promoters and filed with the
registrar for incorporation certificate. It is divided into different paragraphs called
Clauses. Each such clause deals with one aspect of company management.
Following are the contents of Memorandum of Association:
1. The Name Clauses:
This clause mentions the name of the company followed by the words „Limited‟ in case of
a public company or „Private Limited‟, in the case of a private company. The word
„Company‟ need not be included in the name of the company. The name should not be
similar to that of any other existing company. It should not contain any word which may
denote the government support or the patronage of the ruling power.
2. The Domicile Clause:
This clause mentions the name of the State in which the registered office of the company
is to be situated. This helps to determine domicile and nationality of the company and the
jurisdiction of the court under which it comes. All communications and notices are to be
addressed to the registered office. The company has to maintain all its statutory books at
the registered office of the company.
3. The Objects Clause:
This clause states the objects of the company. It contains the list of business activities
which the company can undertake. The objects are classified as: (1) the main objects
and (2) other objects. The list is usually exhaustive so as to include all those business
activities which the company may undertake in future. While selecting the objects, the
company has to see that they are not illegal or opposed to public policy or contradictory
to the Companies Act or any other law. Any alteration in this clause requires the sanction
of the Company Law Board.
4. The Capital Clause:
This clause mentions the total share capital which the company is authorized to raise and
its division into different types of shares of fixed denomination. The total capital
mentioned in the Memorandum is called „Authorised Capital‟ or „Nominal Capital‟ or
„Registered Capital‟. It also mentions whether the company is limited by shares or by
guarantee. Any alteration in this clause requires the sanction of the court.
The MOA of a company must be printed and suitably divided into paragraphs which
should be numbered serially. The Memorandum must be duly dated and stamped as
required under the Indian Stamp Act.
5. The Liability Clause:
This clauses states that the liability of the members of the company is limited to the face
value of shares purchased by them. In the case of a company limited by guarantee, this
clause states the amount which members undertake to contribute to the assets of the
company in the event of its winding up. An unlimited company does not have this clause
in the MOA.
6. The Association or Subscription Clause:
This clause states that the persons who sign the Memorandum are desirous of forming
themselves into a company to achieve the objects mentioned in the Memorandum and
that they agree to subscribe for the number of shares of the company, mentioned against
their names in the Memorandum. It is necessary to mention the name, description,
occupation and address of each subscriber. The name, address, description and
occupation of the witness are also required to be mentioned in this clause.
This is Memorandum of Association and these are its clauses
Q.9. Short Note:
(a) Promotion & Meaning (Mar. 99)
Ans. Defination and Meaning: Same as Ans. 1
Formation of a Public Company:
Formation of a public company can be divided into 4 stages
1. Promotion stage
2. Incorporation stage / Registration stage
3. Capital Subscription Stage
4. Trading Certificate Stage / Commencement of Business Stage
1. Promotion Stage:
H.L. Haney:
“Promotion may be defined as the process of organizing and planning the finances
of a business enterprise under the corporate form”.
It is the first stage in the formation of the company. The person who takes initiative
in forming a Joint Stock Company is called „Promoter‟.
(1) Discovery of an idea:
The work of a promoter starts when an idea strikes him regarding some
business which can be profitably undertaken. When a person understands
that there is a possibility of starting or expanding some business the idea is
said to have been discovered.
(2) Detailed Investigation:
Commercial feasibility of the idea is checked with reference to:
(a) Sources of supply of raw material.
(b) Availability of funds and manpower
(c) Extent of demand
The investigation can be undertaken by the promoter themselves or by
(3) Verification of the idea:
In this stage the findings are verified so that there is a double guarantee
regarding the validity of the report.
(4) Assembling:
In this stage activities like:
(a) Selection of a site for the project
(b) Purchase of land and building
(c) Entering into technical, managerial contracts etc. is undertaken.
(5) Financial Plan:
In this stage the amount of funds required, sources of funds etc. is
(6) Presenting the Proposition:
The promoter may ask some more persons to join venture. He presents the
plan to them and they take the proposition.
This is the promotion stage with its stages.
(b) Incorporation Stage: (Oct. 96):
The incorporation stage is also called as registration stage. The incorporation of a
company gives birth to a new company. The promoters must obtain the registration or
incorporation certificate from the Registrar of Companies. The following steps are to be
1. Name of the Company:
The promoters may give any name for the company but it should nto resemble with
the name of another existing company. The promoters should get the name
allotted or sanctioned. The application for the allotment of name must be
forwarded to the Department of Company Law Administration, Government of
India through the Registrar of Companies.
The application form must consist of several alternate names, so that if one or the
other name is rejected then the promoters can get at least one name allotted to
their company.
2. Preparation and Arrangement of Documents:
For getting a company incorporated, the following documents have to be prepared:
(a) Memorandum of Association:
It defines or states objectives and activities of the company.
(b) Articles of Association:
It is a set of rules and regulations regarding the internal affairs of the
(c) List of Directors:
It contains name, address, occupation and age of the directors.
(d) Written Consent of Directors:
Every director must give in his own handwriting – name, address,
occupation, age and nationality and should put his signature declaring that
he has given consent to act as director of the company. It is required in case
of public companies only.
(e) Statutory Declaration:
That all the requirements or provisions of the Companies Act, 1956 with
regard to registration have been complied with.
(f) Notice of Address:
At which the registered office of the company will be located.
(g) Declaration of Qualification Shares:
If the Articles provide for qualification shares, then the directors have to give
a declaration stating that they have agreed to purchase and pay for
qualification shares. Such declaration is required in case of public limited
companies only.

3. Filing of Documents:
All the required documents (as mentioned above) must be filed with the Registrar
of Companies in order to get the company incorporated.
4. Examination of Documents:
The Registrar of Companies will examine the documents. The Registrar will check:
(a) Whether all documents are in order
(b) Whether details in the documents are properly filled in
5. Issue of Certificate of Incorporation:
If the Registrar is satisfied with the documents, he issues a Certificate of
Incorporation. The issue of certificate is the conclusive evidence of the fact that the
company is incorporated and that the requirements of the Companies Act have
been complied with. The certificate of Incorporation is numbered, dated and signed
by the Registrar of Companies.
(c) Statement in lieu of prospectus: (Mar. 97)
It is not compulsory for a public company to issue a prospectus. If the promoters are
confident of raising the required capital privately from their friends and relatives then they
need not issue a prospectus. However, in such a case a statement in lieu of prospectus
must be filed with the Registrar of Companies at least three days prior to allotment of
1. Meaning:
It is a document prepared as an alternative to prospectus when public subscription
is not required.
2. Purpose:
It is required to be filed with the Registrar within 3 days prior to allotment.
3. Suitability:
This document is suitable for private limited companies where the directors can
collect money from private sources such as friends and relatives.
4. Use:
It helps the Registrar to know whether the capital issue is as per the provisions of
the companies act. This document is mainly used for fulfilling the statutory
5. Contents of statements in lieu of prospectus:
The statement in lieu of prospectus are more or less similar to the prospectus. It
should clearly indicate:
The date on which it was delivered to the Registrar for registration.
Number and type of shares.
Rights of the shareholders.
Particulars regarding directors, managing directors etc.
Details about preliminary expenses paid or payable.
Details of contracts relating to purchase of property.
Treatment of Reserves
Names and addresses of auditors, bankers, legal advisers etc.
Full name and address of the registered office
Main object of the company and other details
Date and signature of the directors.
Q.10. Distinguish between

1. Partnership and Joint Stock Company. (Oct. 96; March 2000, 2002)

Partnership Joint Stock Company

1. Meaning:
Here 2 or more people come It is voluntary association, artificial person
together for doing some business created by law having a common seal and
and making profit perpetual succession
2. Formation:
Relatively easy, less legal Formation difficult, too many legal
formalities involved formalities involved.
3. Capital:
It can raise limited capital due to It can raise large capital due to large
limitation on the number of members
members and their capacity
4. Liability:
Liability of partners is unlimited joint Members liability limited to the face value
and several of shares
5. Ownership and Management:
There is no difference in ownership There is no difference in ownership and
and management management
6. Flexibility:
More flexible, compared to Joint Less flexible compared to partnership firm
Stock Companies
7. Continuity and Stability:
Lacks continuity and stability, Joint stock company is continuous and
business may come to an end with stable, business does not come to an
death, insolvency and insanity of end with death insolvency or insanity of
partners partners
8. Business Secrecy:
Can be maintained to a certain extent No business secrecy
9. Government Regulation:
Minimum government regulation Strict and excessive government regulation
10. Taxation:
Less compared to joint stock companies Subject to heavy taxation
11. Decision making:
Quick decision making Delay in decision making
12. Economies of scale:
Less economies of scale as compared to Enjoys economies of scale as it
Joint Stock Companies undertakes business on a large scale
13. Bargaining Power: Strong bargaining power
Generally weak bargaining power
14. Contract with customers & employees:
Close contact with customers and No contacts with customers and
employees employees
15. Legal status:
No legal status Possesses and a legal status
16. Act:
Governed by Partnership Act, 1932 Governed by Companies Act, 1956
2. Shares and Debentures (Mar. 96, 97, 2003)

Shares Debentures
1. Meaning:
The total capital of the company is It is a acknowledgement of debt issued by
divided into similar parts and each the company under its seal.
part thereof is called a share.
2. Security:
The shares are not secured as it The debentures are secured as they
does not create charge on create charge on assets of the company
companies assets.
3. Repayment:
Equity shareholders are never The debentureholders can get the
repaid during the life time of the redemption of their debentures during the
company lifetime of the company.
4. Conversion:
The shares cannot be converted into The debenture can be converted into
debentures shares
5. Nature of Capital:
Shares represent owned capital Debentures represent borrowed or
loaned or owed capital
6. Status of the Owner:
Shareholder is a part owner of the Debentureholder is only a creditor of the
company. company
7. Income:
Income on shares is called Dividend. Income on debentures is called interest.
This dividend on shares is not fixed but This interest is fixed at the time of issue
variable. It varies along with the net profit of debentures and is not variable in due
of the company. course.
8. Right of holders:
Shareholders are the members of Debentureholders are the creditors of
the company and are given voting the company and do not carry voting
rights. They can also participate in rights. They are not concerned with the
the management of their company. management of the company.
9. Position on winding up:
The claim of owners of shares The claim of owners of debentures
stands last i.e. after the payment to stands first as they are creditors of the
other creditors company
10. Period on Finance:
Shares are suitable for long term Debentures are suitable for medium
finance term finance
11. Appeal to Investors:
Appeal to adventurous investors Appeal only to cautious investors who
who are willing to accept risk. are happy with fixed rate of interest.
3. Preference Shares and Equity Shares: (Oct. 99)

Preference Shares Equity Shares

1. Meaning:
Preference shares are those shares Shares which bear the risk and provide
which enjoys preference regarding permanent finance are called equity
dividend and repayment of capital shares
2. Repayment:
Preference shareholders get back their Equity capital is not repaid during the
finance during life time of the company life time of company.
and before the equity shareholders
3. Nature of Preference:
Preference shares enjoy preferential Equity shares do not carry such
rights as regards the payment of preferential rights over preference
dividend and return of capital shares
4. Rate of Dividend:
Rate of dividend is fixed at the time Rate of dividend is not fixed but flexible.
of issue and changes are not made In changes every year as per the net
in this rate in due course profit of the company
5. Voting Rights:
Preference shares do not carry Equity shares carry normal voting rights
normal rights, but only under
exceptional circumstances

6. Types:
There are different types of All equity shares are of one type or
preference shares like cumulative, category. They are always irredeemable
redeemable, irredeemable,
participating and non – participating
7. Appeal to Investors:
Preference shares appeal to Equity shares appeal to adventurous
relatively less adventurous investors willing to take risks in their
investors, interested in fixed, but investment.
regular return on investment
8. Face value:
Relatively higher. Usually Rs.100 Relatively less. Usually Rs.10
9. Capital Appreciation:
No capital appreciation is possible Capital appreciation is possible due to
prospects of rising dividends.
4. Incorporation Certificate and Trading Certificate / Commencement Certificate:

Incorporation Certificate Trading Certificate / Commencement


1. Meaning:
It is a certificate issued to a joint stock It is a certificate issued to a public
company by the Registrar of company by the Registrar, giving a signal
companies signifying the birth of the to commence the business.
2. Documents Required:
To obtain the certificate following To obtain this certificate the following
documents are required: documents are required:
1. MOA & AOA 1. Declaration of filing prospectus.
2. List of directors. 2. Declaration of receiving minimum
3. Declaration of directors subscription.
4. Written consent of directors 3. Declaration of payment towards
5. Statutory declaration regarding qualification shares.
incorporation. 4. Statutory declaration regarding
3. Stage in Company Formation:
It represents the first stage in the It represents the last stage in the
company formation company formation
4. Effect:
A private limited company can start its A public limited company can start its
business while a public company can business after obtaining this certificate.
raise capital for the business.
5. Need:
Both public and private companies Only public companies need such a
need such certificate for formation certificate.
6. Other:
This must be obtained before trading This is obtained after incorporation
certificate certificate
7. Implications of not obtaining:
Not obtaining of this document is The company cannot commence its
illegal and the company can be business without procurement of this
wound up under the Companies Act. certificate.
5. Prospectus and Lieu of Prospectus:

Prospectus Lieu Prospectus

1. Meaning:
Prospectus is a document inviting Statement in Lieu of Prospectus is a
the public to subscribe to the share document prepared for filing with the
capital of a company. Registrar. It is an alternative to the prospectus.
2. Purpose:
It gives wide publicity to the It is prepared only for completing the
company and also provides share legal formality and not for capital
capital to the company collection.
3. Filing:
It is meant not only for filing with the It is meant only for filing with the
Registrar but also for capital Registrar.
4. Who Prepares?:
It is normally prepared by big It is normally prepared by small
companies for fulfilling legal companies just for fulfilling legal
obligations. obligation.
5. Contents:
The prospectus gives detailed The contents are similar to that of
information about the company, as per prospectus but form in detailed.
the provisions of Companies Act.
6. For whom?:
It is meant for public at large It is meant for friends and relatives of directors.
6. Private Limited Company and Public Limited Company. (Oct. 98 2000, 2001)

Private Limited Company Public Limited Company

1. Membership:
Minimum membership 2, Maximum Minimum membership 7, Maximum
membership 50 membership unlimited
2. Formation
Comparatively simple, certificate of Comparatively difficult as the procedure
incorporation is adequate is lengthy.
3. Number of Directors:
It must have at least two directors It must have at least three directors
4. Transfer of Shares:
The shares are not freely transferable Shares are freely transferable.
5. Issue of Prospectus:
It is allowed to issue prospectus It can issue prospectus
6. Commencement of Business:
It can start the business after the It requires trading certificate for starting
receipt of certificate of business
7. Suitability:
Suitable for business on a small scale Suitable for large – scale business.
8. Invitation:
It cannot invite public to subscribe It invites public to purchase securities
for securities of the company of the company.
9. Allotment:
It can allot shares immediately after Shares cannot be allotted unless
incorporation minimum subscription is collected.
10. Qualification shares:
The directors need not hold The directors have to purchase some
qualification shares qualification shares to become the director.
11. Directorship:
There is no restriction on the A director cannot be a director of more
number of directorship than 20 companies
12. Quorum:
Two members present in the meeting is Five members present in the meetings
a quorum at general meeting is a quorum at general meeting.
13. Share Warrant:
It cannot issue bearer share warrant It can issue bearer share warrant

14. Articles of Association:

It must prepare separate articles of It need not prepare separate articles of
association as Table A cannot be association as it can adopt Table A
15. Statutory Meeting:
Not necessary It must be held
16. Retirement of Directors:
Directors need not retire by rotation 1/3rd of the directors retire by rotation
every year every year
17. End – words of the name:
The words „Private Limited‟ are The word „Limited‟ is necessary in the
necessary name
7. Memorandum of Association and Articles of Association. (Mar. 99, 02; Oct. 02)

Memorandum of Association Articles of Association

1. Meaning:
It is a fundamental document which It is a subordinate document which provides
lays down company‟s objectives rules to achieve the objectives.
2. Regarded as:
It is regarded as the constitution or It is regarded as the rules and regulations
charter of the company for internal working of the company.
3. Purpose:
Purpose is to define the scope of Purpose is to provide direction for the
companies activities internal management of the company
4. Alteration:
It is not so easy to alter – It is easy to alter the articles.
5. Ultra Virus Act:
Acts done by the company against Act done by directors against the provision
the provision of memorandum of the articles maybe ratified by the
cannot be ratified by shareholders shareholders in general meetings.
6. Contents:
It contents six clauses and governs It contents rules regarding internal
external relations of the company management of the company
7. Obligation:
All companies are obliged to Companies limited by shares need not
prepare and register its prepare and register its articles as it can
memorandum with Registrar of adopt Table A
9. Status:
It is primary, fundamental and It is secondary, subsidiary, sub –
supreme document ordinate document to MOA
8. Director and Managing Director. (Oct. 96, 2000)

Director Managing Director

1. Meaning:
Director is an elected representative Managing Director is the representative of
of shareholders of the company. He Board of Director. He is full time director
looks after company management looking after planning and execution of
and performs “thinking” function activities of the company.
2. Authority:
He is authorized by the shareholders He is authorized by the directors to look
to frame policies of the company and after the day to day administration of the
conduct the business in the best company as per the policies decided by
possible manner. the Board of Directors.
3. Period of Appointment:
He is elected for the period of three He is appointed for the period of five
years and he retires by rotation years and is not subject to retirement by
4. Capacity:
A director has to act in threefold A Managing Director has to act in two –
capacity. He acts as the agent, fold capacity. Firstly, as a director he has
trustee and managing partner of the to participate in framing policies of the
company company. Secondly, as the chief
executive he has to carry out the policies
decided by Board.
5. Remuneration:
A director gets fees for attending board A Managing Director acts as full time
meeting and also honorarium. The total director of the company. He gets salary
fees paid to the directors should not for his services as per the service
exceed 11% of the net profit of the agreement and also a share in the net
company. profit not exceeding 5% of the net profit.
6. Sanction:
Central Government‟s permission is not Central Government‟s permission is required
required for election of a Director. for appoint of Managing Director.
7. Appointment:
He is elected by the shareholders He is selected by the Directors.
8. No. of Directorship:
No person shall hold position of a No person can be appointed as a
director in more than 20 public limited managing director if he is either a
companies managing director or manager or CEO of
any other company without the permission
of Central Government.
9. Annual General Meeting and Extra Ordinary General Meeting. ( Mar. 98)

Annual General Meeting Extra Ordinary General Meeting

1. Meaning:
It is a meeting held at the end of the Extra ordinary general meeting is a
accounting year to discuss progress and meeting held between the two annual
prospects of the company and approve general meeting to discuss urgent matters
the final accounts of a company
2. Frequency:
It is held once in a calendar year It can be held at any time when
circumstances so demand
3. Who Calls?:
It is called by the Board of Directors This meeting may be called by Board of
of the company Directors or it may be requisitioned by
4. Period:
It must be held every year. The gap There is no fixed period as it is held only
between 2 AGM should not exceed under special conditions.
15 months
5. Documents with notice:
Along with the notice Annual report, No documents are enclosed with the
Annual accounts and Auditors report notice.
are sent.
6. Filing:
Copies of annual report, accounts Special resolution passed at the meeting
and resolution are to be filed within are to be filed with the Registrar within 30
30 days with the Registrar days of meeting.
7. Penalty:
Every concerned officer may be fined There is no such provision for penalty in
up to Rs.5,000 for not holding the Companies Act
meeting on time
8. Business transacted:
Ordinary and special business is Only special business is transacted
9. Purpose:
The main purpose is to approve The main purpose is to transact very
annual accounts, approve Annual special business.
Report, approve Auditors Report &
declare dividend and election of
directors and appointment of auditors.
10. Statutory and Annual General Meeting. (Oct. 97, 2002)

Statutory General Meeting Annual General Meeting

1. Meaning:
It is the first general meeting of the It is a general meeting of a company
company held in order to inform the held at the end of the financial year for
members regarding formation of discussing progress and prospects of
the company and fulfill legal the company and approve final
obligation accounts of the company
2. When Called:
It is held not earlier than 1 month The first annual general meeting is held
and not later than 6 months of within 18 months from the date of
obtaining trading certificate obtaining certificate of incorporation.
Subsequent AGMs should be held
within gap of 15 months.
3. Documents with notice:
Statutory Report is sent with the Along with the notice annual report,
notice annual accounts, and auditors report is
4. Filing:
Statutory reports is to be filed to the Annual Returns are to be filed within 30
Registrar before the meeting days of the meeting.
5. Business Transacted:
Approval of Statutory report, Ordinary and special business is
allotment of shares and transacted at this meeting
modification in contracts is the
nature of business transacted
6. Frequency:
It is held only once in the life time It is held once in a calendar year
of the company
7. Statutory Provision:
This meeting must be held by It is compulsory for both private and
public companies. But it is not public companies
necessary for private company
8. Penalty:
Every concern officer and director Every concerned officer is liable fine up
is liable to fine up to Rs.500 to Rs.5,000
9. Purpose:
The main purpose is to approve the Main purpose is approval of annual
Statutory report accounts, declare dividend, appoint,
directors, auditors and review progress.

10. Period:
It must be held not less than one It must be held every year and gap
month and more than 6 months between two Annual General Meetings
from the date of receiving should not be more than 15 months
commencement certificate
11. Caller:
It is called by promoters It is called by Board of Directors.
11. Board Meeting and Shareholders Meetings. (Mar. 99)

Board Meeting Shareholders Meeting

1. Meaning:
It is the meeting of the Board of It is a meeting of the members of the
Directors company
2. Purpose:
It is called to discuss company policy It is called to get the approval of
matters shareholders on certain matters
3. Quorum:
Minimum 2 directors or 1/3rd of the Minimum 5 members in case of Public
total strength of directors whichever is Company and minimum 2 members in
more case of Private Company.
4. Agenda:
Need not be sent to the directors Must be sent to the members along with
5. Kinds:
There are two types: Board meetings There are four types: Statutory Meeting,
and meetings of Committees of Annual General Meeting, Extra Ordinary
Directors General Meeting and Class Meeting.
6. Notice:
Reasonable notice must be given 21 days notice must be given
7. Voting:
By show of hands, Yes / No By show of hands or by Poll
8. Proxy:
Directors cannot depute proxies Members can depute proxies
9. Filing:
Filing of reports is not necessary Filing of reports and resolutions is
10. Frequency:
At least once in 3 months and at least Depends upon the type of the meeting.
4 meetings in a year
12. Statutory Meeting and Extraordinary General Meeting.

Statutory Meeting Extraordinary General Meeting

1. Meaning:
Statutory meeting is the first General Extraordinary General Meeting is the
meeting of the public company. meeting of members which is held under
special circumstances
2. Purpose:
The main purpose is to approve The main purpose is to transact special
statutory report business
3. Frequency:
It is held once in the life time of the It can be held any number of times
company depending on urgency
4. Penalty:
If his meeting is not held within There is no such penalty as EGM is not to
prescribed time limit, every be compulsorily held.
concerned officer of the company is
punishable fine up to Rs.500
5. Caller:
It is called by promoters This meeting may be called by Directors
or it may be requisitioned by shareholders
6. Documents with the Notice:
Statutory Report is sent with the No documents are attached with the
Notice Notice
7. Statutory Provision:
This meeting must be held by public It is not compulsory for public as well as
companies but it is not necessary for private company to hold a meeting. It can
the private company be held when circumstances so demand.