Formis of Business Organisations Chapter 2 63

3.5 Joint Stock Company

mpany form ot organisation is considered to be most suitable for organising business activities
The
cale.
alargesc. It has advantage of attracting
huge capital from the public.With adequate
employ ttrained and experienced managers tO run the business activities eficiently.
nlov capita co nt

Definitions by Different Authors

woint stock company Is meant as an assoclation of many persons who contribute money
to g Common stock and empioy it for some common purpose.
or
money's worth
-Justice Lindley
ayont'stock company is a
voluntary association of individuals for profit, having capltalProf
a
dividedHaney
into
transferable shares, the ownership of which is the condition of membership.jV - 1
" A joint stock company is an artifcial person, invisible, intangible and existing only in the eyes of law"
chief Justice Marshall

company is an artificial person having separate legal existence, perpetual succession and
Ajoint stock
common scal.

3.6 Features of Joint Stock Company

Following are the chief characteristics of the company form of organisation.
1. Separate Legal Existence. A company has a separate legal entity. A company can carry on
with
business in its own name, buy and sell assets in its own name, it can enter into contract
it can

name; the company and its members are separate individuals.

outsiders in its own
2 Artificiál Person. A company does not
have a physical body like a natural human
FEATURES OF JOINT STOCK COMPANY
being. It is an artificlal person created Separate
Legal Existence
by law. Its operations are performed by Artificial Person
the elected representatives of members,
is
known as directors, although business Registrabon
run in the name of the companyVN 12 Perpe
SuccesO
3. RegistrationIt is legally compulsory Common Seal
for a compahy to get itself registered Transferability
of Share
under the Companies Act, 1956.Without
can çóme into
Separation
registration no company Ownership and Control
Limited Liability
existence
has
4 Perpetual Succession. A company
Fig 13
continuqus existence îndependent of its and only law can bring an end to its existence The death
members.A company IS created by Taw may
or.incapacity of any mnember does not affect the existence of company Members
insolvency goes on for
ever, The lite of the company
can come

come and members may go but the company

to an end through legal procedure of winding up. therefore there is need for
artificial person the company
cannot sign,
an
5. Common Seal. Being carried through
engraved on it. The activities of the company are
common seal with its name
behalf of the can use common seal in place of
a group of people. Anyone acting
on company
document which does not bear the common
bind the company. Any
Signature of the company to
Seal of the binding on the company.
company is not of the
is divided into shares. The shares
6. of Shares. The capital of the company
Transferability members.Ashareholder is free to withdraw his
membership
transferable by its
Company are freely cannot be easily
his shares. The shares of private limited companies
from the company by selling

transferred.
 oundabori's of Business

7.
Separation ofOwnershipand Control.The company formofbusiness isowned bythe sharenooers
nareholders elect their representatives who are called directors of the company. The
Orectors manage and control the activities of the company by appointing protessionap
.
Limited Liability. The liability of members of the company is limited to the extent of their share
in the company. For example, if a person has purchased 1000 shares or value
opitd contribution
10 each, then his
liability is limited upto 10,000 only
3.7 Merits/Advantages of Joint Stock Company
The impotapt advantages of joint stock company are
a.prge Amount of Capital. The biggest advantage of company form of business is that it can colect
Pa large amount of caprtal by ssuing of shares to general public. The people havingsmallaving,can
also buy the shares of company because the value of a share is very small.
Apart from share
of
capital,the
company can collect funds by raising loans from financial institutions and by issue degfntures
andother securities.
imited Liability. The liability of
members of the company is limited MERITS/ADVANTAGES OF JOINT STOCK COMPANY
to the extent of their share capital
drg
contribution in the company. The Amount of Capital
Limited Liabity
limited liability attracts many people to
invest their money in company form of Continuity/Stability
business, as in case of loss the creditors Efficient Management
cannot have claim over the personal Growth
of the members.
property and Expansion Easy
3Continuity/Stability. The company Transferabilityof Shares
form of business enjoys perpetual Public Confidence

succession. As it has separate existence, Democratic

Management
it is formed by law and can end by legal Dispersal
of Ownership
procedure of winding up only. The Social
death, insolvency and incapacity of any Responsibilities

member does not affect the existence of 4

company.
of business has huge funds at its disposal. It can easly
Efficient Management. Company form of the
U afford to hire professional experts to perform managerial and other activities organisation.
The expert and specialised people improve the eficiency and working of the company.
S. Growth and Expansion. In company form of business there is more scope for growth and
expansion. The company has large financial resources and their rate of profit is also high. They can
use large amount of accrued or
retained profit for expansion and growth.
easily
6. Easy Transferability of Shares. The shares of the company can be easily bought and sold in the
market. If the owner of shares is in need of cash, he can easily sell the shares and get cash.The
easy transferability of shares brings liquidity of investment. At any time the share investment can
be converted into cash and the same amount can be used to buy the shares of othercompany.

7 Poblic Confdence. General public has more trust and confidence

in
company as compared to
partnership. The reason for that is companies publish their annual accounts, annualreports,future
and proft earning rate, public can plan to invest in the
plans etc. Based on the financial soundness
securities of different companies.
 can be classified into following categories:
On the basis of ownership, the companies
1. Private company
2Public company
3 One person company. of Indian Companies act, 2013
as 2(68)
sec
1. Private Cormpany. Private Company per
Private company means a company having a
minimum paid up capital of one lakh rupees
or
such
and which by its articles:
higher paid up share capital as may be prescribed
() Restricts the rights to transfer its shares.
where two or more persons ont hold
(i) Limit the nümber its members to 20o, privided that
or more share in a company joining, they shall for the purpose o this clause treated singe
member and provided further that the persons who are (or were) in the employment of t

company shall not be included in the number of members and

Gi) Prohibits any invitation to the public to subscribe for any securities of the company
2. Public Company. Section 2(71) of the Indian Companies Act (2013), Public Company means
Company which-

(a) is not a private company

(6) has a minimum paid up share capital of five lakh rupees or such higher capital, as may
prescribed.
Company which is a subsidiary of a company, not to
being a private company, shall be deemea
public company for the purpose of this act, even where such to
subsidiary company. Continues
a private company by its articles.
 Forms ol Business Chapler2 67
Organisations

Company Limited by GUarantee means a company having the liability of its members limited by
to such
the memorandum amount as the members may respectively undertake to contribute to
the assets of the company in the event of its being wound up.

Company Limited by Shares means a company having the liability of its members limited by the
memorandum to the amount, if any, unpaid on the shares respectively held by them

NOTE
of
A Company is a
subsidiary company if the other company controls the composition of its
another
Board of Directors, or if the other company holds more than 5o per cent of its equity share capital.

One Person Company: The 2013 Act introduces a new type of entity to the existing list i.e. apart
from forming a publicor private limited company, the 2013 Act enables the formation of a new
entity a 'one-person company' (OPC). An OPC means a company with only one person as its
member [section 3(1) of 2013 Act).

Requirement-One person Company

Rule 3(1) provides that only a natural person who is an Indian citizen and a resideht in India shall be
eligible to incorporate OPC
No person shall be eligible to incorporate more than one OPC orbecome nominee in more than
one such company

OPCto compulsory convert itselfinto public or private company in certain cases. Where the paid
the
up share capital of an OPC exceeds fifty lakh rupees or its average annual tumover during
relevant period exceeds two crore rupees, it shall cease to be entitled to continue as a One Person
Company
 PANY
Kt stck company has to follow a certain specified legahbrocedure for its formation. Planned action
d coscious efforts are required.
Formation of a company involves the following stages:
Promotion
tncorporation
Capitalsubscription stage
Commencement of business.
4.1 Promotion
Promotion stage includes all the steps right from
is formed t is the
conception of idea to starting the company till t
process of planning and organising all the resources required to forma company
Promotion involves the
discovery of business idea, its investigation and assembling, necessaryresources
to set up the business The
person who performs all the activities during the promotion stage
as Promoter. The promoter conceives the business idea
is know
and takes
all initiatives toform a
promotercan be an individual, a group of persons or an institution.V IS company. The
The prorioter performs the foilowing functions. These functions are also known as steps in t
pronotion stage.
Steps in the prornotion stage are
. Identihcatíon of Business Opportunity. The promotion stage begins with the discovery
To set up a business. It can be an idea to set up a new business or an idea to
of an ide
expand the existr
business The prornoter ideritifies the profitability of the idea by
analysing the opportunite
avalable in that area The prornoter also analyses the various resources
required, amount
captal required and the degree of risk involved.
2. Feasibility Studies. After analysing all the concepts related to the idea discovered, the promu
starts doing detailed irvestigation to give practicalshape to the idea. Hedoesdetailed investigab
 S pro YprodUction process, demand pf the product etc. While doing this, tne
promoter takes the help of a
specialist or
specialists make an objective analysis ofexperts
such
as chartered accountants, engineers etc.
The
all the
the specialists help the promoterto take a details collected by the promoter. The reports of
decision
plant, amount of capital etc. regardngfhe size
of the business, location of the
Feasibility includes:
(a) Technical Feasibility. Sometimes the idea
implement the idea. It may be due
is
good but technically it may not be
possible to

The
to
non-avalabjfty of raw materials, inputs, technology
project is considered technically unfeasible unless etc,
the
can be imported or are available in our technology or other required inputs
country
(b) Financial Feasibility. If the required capital orfunds
for the business idea are so
cannot be arrangedwithin the available
means, then it is said to be
largethat these
example, one may have an idea to urbanise the rural area but the financially unfeasible. For
this idea are so huge that it may not be funds required to carry out
converted into action due plan to financial unfeasibility.
(c) Economic Feasibility. Sometimes a project is abandoned just because it might not be very
profitable. Generally businessmen prefer to carry on with the ideas which are
profitable.
Name Approval. Two companies cannot have identical names. It is
to its name necessary for every company
get approved from the
registrar so that it does not match with
any other company's
name. Generally company gives these names in order of
priority to the registrar. The
matches the name with the names of other registrar
companies and if it is not identical then the
approves the name. registrar
Fixing up Signatories to Memorandum of Association. Promoters have to decide about the
people who will be signing the memorandum. Usually the signatories of memorandum become
the first directors of the company. Promoters also take their written consent to act as directors
and ask them to buy qualihcation shares.
Appointment of Professionals. The promoter appoints the brokers and underwriters to ensure
the availability of capital by sale of a company's securities and solicitors are appointed to deal with
the legal matters of the company. Bankers are appointed to have smooth fhnancial dealings.
Preparation of Necessary Documents. A promoter takes up the steps to prepare some legal
documents of the company which have to be submitted to the registrarat the time of incorporation.
The common documents which are prepared by a promoter are Memorandum of Association,
Article of Association, Prospectus etc. (These documents are explained in Section 2.5 later.) V 6
Re LCa CRO
Incorporation Stage
orporation of a company is the second stage in the formation ofa company. Incorporation refers to

egistration.of the.company.under.CompaniesAct, 1956, .7

main steps under the incorporation stage:
Filing df Necessary Documents. Once the registrar approves of the name, the following
documents have to be submitted with the
registrar
) Memorandum of Association
(i) Articles of Association
Gii) Statement of Authorised Capital
() A list of directors with their names, addresses, occupation and age
 art A Foundations ot Business

The written consent of the directors to act as directors

(
()Notice of the address of the registered offce of the company
(wi) Astatutory declaration stating that all the formalities related to the formation of the
are duly completed.
compa
of Fees. Along with fling of the above documents the prescribed fees of
2.
Payment registratio
alsohave to be deposited. The amount of registration fees depends on the amount of authorse
capital
3. Registration. The registrar verifies all the documents submitted and he also checks the receip
of fees deposited. If he is satisfied with the
validity and authenticity of the documents submite
then the registrar enters the name of the
company in his register
4. Certificate of Incorporation. After
entering the name of the company in the register, the registra
issues a certificate
of incorporation. From this date onwards the company is considered a5
separatelegalentityS
Specimen of Certificate of Incorporation
hereby certify that (Name of the Company) is this day
incorporated under the
.

companiesAct 1956, and that the company is limited given under hand at Delhi, this
fourth day of August, two thousand and
my twenty
twelve.
Fees: Deed Stamp
Stamp Duty on Capital
SEAL
Sd/-
Registrar of Companies
Delhi
Corporate identity Number 1930 of 2015
Effect of the Certificate of incorporation. A company is legally born on the date
Certificate of Incorporation. It is considered as a separate printed on the
legal entity with perpetual
only from this date. The certificate of incorporation is the conclusive succession
evidence of the legal
existence of the company. Whatever may be the deficiency the in
formalities, once the certiñhcate
is issued it is conclusive evidence that company came to existence on
the date mentioned
certificate of incorporation. the on

Following points will make it more clear:

1. The certificate of incorporation was issued on 24th AUgust whereas on the certiñcate
date was
written as 22nd August. The company i5 considered to tbe
born on 22nd August only and so all
dealings carried on 23rd August will be considered iegal ditnougn the certincate was issued
on 24th August.
ony
2. After issue of registration certificate, it was found that a person had forged signuture on the
memorandumbut then also the incorporation wilbe considered valid

.3 Capital Subscription Stage

fter getting the certifcate of incorporation the private companies get formulated and can comme
neir business activities but a public limited company has to performa third stage and get the certihe
i cat

commencement.
stage ot commencement of business are:
The steps involved
in
1. SEBI P P

the capital market of India to protect the interest of investors. The Public Ltd. companies mus
Submit allthe relevant information with the SEBI before issuing its securities in the capital market.
Companies should not hide any material fact from SEBI, else their registration can be cancelled
according to "quidelinesfordisclosureand investor protection 2000
Prospectus or a Statement in Lieu of Prospectus. A company has to prepare another
public
Tmportant document called prospectus. It is a circular or invitation issued to invitethe general
Dublic for subscribing to the shares ofthecompany. This document has to be deposited with the
RU
registrar.
2. Appointment of Bankers, Brokers and Underwriters. To receive and deposit the application
money bankers are appointed-Fo-sellthe shares brokers are appointed. They encourage public to
whole
buy the shares and charge commission forthe same. If the company is not sure of selling the
lot of shares it may appoint underwriters. They underwrite the shares and charge commission for
the same
Minimunm'aubscription. To make sure that company does not have shortage of funds, it is madeis
compulsory that company must receive applications for minimum number of shares. This
some

alled minimum subscriptión.APubliclimitedcompany.cannot makeallotment of shares unless a

8minimum subscription is received. As per the rules ofSEBI(SecuritiesExchange Board ofIndia),a
For
company must receive 90 per centof the issuedamount within 120 days of issue of prospectus.
example. If a company plans to issue 10,000 shares of 1o each then it must receive applications
for minimum 9,000 shares (90% of 10,o0o) before allotment. 2)
In case the minimum subscription is not received then the company must send back or return the
application within the next ten days (a30 days from the issue of prospectus).

5. Application to StockExchange a frm must get itself listed in a stock exchange before selling its
securities to the general public.yhe company may apply in any of the recognised stock exchanges
to get the permission. The stock exchange authorities verify the financial soundness and other
aspects of the company and if they are satisfied then theof the company is listed. If a
name

firm does not get permission from a stock exchange within ten weeks from date of closure of

subscription list then the allotment will become void and the money received from applicant must
be returned
6. Aflotment of Shares. After getting the name listed, the company preparesareturnofallotment.
Return of allotment is a statement giving details about the names and addresses of all the
shareholders. The company has to submit a return of allotment with the registrar stating the
names, addresses and the number of shares allotted to each shareholder.
 here are three basic documents, which are required to be filed with the registrar of companies in t
ormation of a public company.
These are:
Memorandum of Association
Articles of Association
Prospectus.
5.1 Memorandum of Association (MOA)
The Memorandum of Association is
the principal document of a
of the company. It contains the company. It is considered as the chart
powers and
operations of the company. It can be altered objectives
of the company. It also
describes the scopec
Act regarding its alterations. only according to the provisions made in the Compane
Memorandum of Association
provides information outsiders such as
to
know the
limitations and scope of a creditors, suppliers, etc.
company's dealings. It is also known as the
management. doctrine of outdot
5.1AContents of Memorandum of Association
The
Memorandúmof Association contains the following clauses:
1. Name Clause. This clause
contains the
any name subject to the
complete name of the company. The
following restrictions: company can chocs
(i) The name ofthe company must end
with the word'Limited' in
with the word Private Limited' in case case of public limited
of Private Limited
Company. company 3
 not be similar or identical to the name of any other company.
name should
)The
( should not contain the word "Cooperative".
The name
) with a government
connection or link of the company
The name should not convey any
iv)
departmen resolution and

Name Clause. A company can change its name by passing

a special
Alteration of 8
by obtaining a written approval of the central government.AN state which the registered
This clause contains the name of the in

situation/Domicile Clause. gets the registration

company Is to be situated. It is necessary because a company
office of the documents of the
office is a place where all the important
from that stateonly. The registered activities
ofice when it starts its business
kept. A company must have registered
a
company are
of its whichever is earlier,
registration,
orwithin thity days be altered in the following ways:
Situation Clause. The situation clause can
alteratlon of both the states if
sanction of the registrars of
0 By passing a special resolution and by obtaining
to be shifted from one state to another.
the office is another in the
is to be shifted from one town to
a special resolution only if the offhce
() By passing
same state.
another within
if office is to be shifted from one locality to

(ii) By passing an
ordinary resolution
the same town LN'8 contains
Memorandum of Association. It
Clause. It important clause of the
is the most
3. Objects which the company may pursue
and other secondary objectives
the m a i n object of the company The objects must be
the and limitations of the activities of the company.
This clause defines scope
conditions:
defined and stated keeping in mind the following
(0 The objects of the company must be legal.
law.
be contrary to the provisions of any
(i) The objects should not

(i) The objects.must not be immoral.

must pass a special
Clause. In order to alter its object clause a company
Alteration in Objects
resolution and obtain the permission of the Company Law Board N 8
In case of companies
of the members of the company.
Liability Clause. This clause defines the liability amount of their share
is limited to the extent of unpaid
limited by shares, the liability of the members
value of Rio each and he has paid
1000 shares of the face
For example, if a person is having
capital. will be 3000 [*3 (unpaid amount) Number
x

then at the time of winding up his liability

share
7per
of shares.
is limited to the amount of guarantee given
of company limited by guarantee the liability
In case a

by each member.
make an alteration in its iability clause then
Alteration of tlability Clause. If a company wants to
t must passa unanimous resolution in a meeting of its members) N S
share capital with which company is to be
S. Capital Clause. This clause specifies the amount of
is called registered/authonsed or
egistered. The capital with which a company is registered
by its
Ominal capital. A company can issue only that number of shares which are authonsed

memorandym
Alteration of CapitalClause. A company can alter its capital clause by passing a special resolution
and by obtaining the approval of Company Law BoardLN S
 Foundations of BusinesS
6.
Association/Subscription
that"We, the several
Clause. This clause contains the
declarat
formed into a
persons whose names and
submi
addresses are
re desirous of being
company in accordance with
Memorandum of AsoCt nd we undertake to
take the qualification shares". This declaration must be signed by al the direr s
of the company
Alterdttonof Association Clause. This clause cannot be altered
 Foms of Business Organisations Chaptor: 2 7
SALo O
Difference between Memorandum of Association and Articles of Assoclation
Basis of Distinction Memorandum of Association Articles of Association
MOA is the charter the constitution of
Natyre or AoA refers to the bye-laws of the
company
the company forsmooth andinternal management of the
company
cope It defines the objects and powers of the It contalns rules and regulations for carrying out
company. day-to-day operations.
It is the
Statuy fundamentaldacument ofa It is a
supplementary document ola company
company.lt supersedes the articles.
Legal effect Acts done beyond the scope of
Acts done beyond the articles can beratifed by
memorandum are void. the shareholders
The preparation and filing of
ompulsion Memorandum of Association is
The preparation of Articles of Association is not
compulsory. A company may adopt Table F of
compulsory the Companies Act.
5.
Relatiopshiip It defines the relationship of the It defines the internal relationship between the
company withthe outside world. company and its members.
Alteration Alteration in Memorandum of Alteration of Articles of Association is an
association is a difficult and lengthy easy and simple process. The approval of the
process. The approval of the government is not necessary.
9overnment is necessary for alteration.
53Prospectusuttcon atol
A public limited company, limited by shares, must issue the prospectus if it wants to make an
appeal to thepublic to subscribe to its shares or debentures. According to the Companies Act, 1956,
"A prospectu[ is any document (including any notice, circular, advertisement or other documents)
that invites deposits or offers from public for the subscription or purchase of any shares or debentures
ofa body corporate." N-7
In general, we can say prospectus includes any document which invites general public to invest their
money in the securities of a company.
The essential elements of a prospectus are as follows:
1. There must be an invitation to the public at large.
2. The invitation must be made by or on behalf of the company.
3. The invitation must be to subscribe to or purchase its shares or debentures. 9
S.2Articles of Association (AoA) regarding the management
directors
of a companys

rules and regulations board of

A s s o c i a t i o n contains officers and the
Ates and nghts of managers, do not want
tdehines the powers, duties In case companies
as.
tema their o w n Articles
of Association.
e e r a l y al the companies
prepare
select any one association givenin
article of
atices of association,
then they can associations are
ther
model sets of articles of
own
e prepere
F of Companies Act 9g
Companies
Act. In Table Assoation must be
Tae Fof the
one from these ninety-nine sets. The Articies of
select any
Articies
duly attested by ary bwo witnesses.
copanies can
Ne

company. It must
be
sigmed y a he
directors of the
Doctrine ofIndoor Maragement, The cortents
of
as byelaus ofa company or
Assatnsasoincawn numbered.
and paragraphs are
atces
2 CVidesmo paragraphs
heme Contets of Articles of Assodation
are:

shares
he a n a share capital and diferent classes of

Rgso each tvpe of shareho'ders

A e famaking alotmert of shares

P e e o ssmg share certihtates

. esTe fortanster of shares
Paedre for fometure of shares
Frocedeforressue of fofeted shares
Presure for canducting meetng5

E or p nerd and removal of directors

2 e s PWES 2nd remuneration of directors
Prxedue for seciaraton and payment of divdend
2 Proetre egardng wndingup of the company
3 Deure regardngieeping of boois cf accounts and their audit
Sea c the campany i O
Aricies acies ci assocatien cf a
means the
conmpany as onignaly framed or as altered fron
e to tire orppein pursuane cf any previous company law or of this Act.
Alerion byArides efAssociction. A company may change its Art.cles of
a speca soun, sea 1o the AssoCiation by passing
fokowung cond tions
Thee aer zter mest not Se ontráry i against the
Compaes A peoviSicns of Memorandum ot
Association and
2 ast e
resuTbtch contrat w th outsders
3 sR
De an e
company Erest cf the
s 2 not rest i nreasng the han ty of its members
sheteraton nvtves conery 3n o
ptComy nto prnåte company, then the
he ces gveramert rhst be oRa.ned.
approval cf