FORMATION OF COMPANY

Formation of a company means bringing a company into existence and starting its
business . It is a complex and lengthy process, which involves a number of legal formalities
and procedures. The formation of a company involves the following stages 1.Promotion
2. incorporation 3. capital subscription 4 Commencement of business.

#FOR A PRIVATE LMT. COMPANY,ONLY THE FIRST TWO STAGES ARE NEEDED.
#FOR A PUBLIC COMPANY ALL 4 STAGES ARE NEEDED FOR FORMATION OF
COMPANY.
STAGE-1 PROMOTION OF A COMPANY
* Promotion means conceiving business opportunity and taking an initiative to form a company
*promotion stage includes all the steps right from the conception of idea to starting a company,
till it is formed.
*the person who performs all the activities during the promotion stage is known as promoter.
*promoter conceives the business idea and takes all initiatives to form a company.
*the promoter can be an individual, a group of persons or an institution.
FUNCTIONS OF PROMOTER/STAGES IN PROMOTION STAGE
• IDENTIFICATION OF BUSINESS OPPORTUNITY-
* The promotion stage starts with the discovery of an idea to set up a business.
*It can be an idea to set up a new business ,an idea to expand the existing business or
merger of two business units.
* The promoter also analyses the various resources required, amount of capital required
and the degree of risk involves.
• FEASIBILITY STUDIES-
*It may not be feasible or profitable to convert all identified business opportunities into
real projects.
*before investing the money in the idea, detailed feasibility studies are conducted.
The following feasibility studies may be undertaken.
• Technical feasibility- sometime the business idea is feasible but technically it may
not be possible to implement the idea. It may due to non availability of required
technology,raw materials and other inputs.
• Financial feasibility- every business activity requires fund . If the funds required for
the projects is so large that it cannot be arranged within the available means, then the
projects is said to be financial unfeasible.
• Economic feasibility- sometime a project is rejected just because it might not be very
profitable. Generally businessmen prefer to carry on with the ideas which are
profitable.
• Name Approval-
• The promoters have to select a name for the company and get it approved from the
Registrar of companies.
• It has to be ensured that the name selected for the company does not match with the
name of any other company.
• For this, 3 names are given to the Registrar in order of preference.
• Registrar approved the name if the name is not identical to the name of any other
existing company.
• Fixing up Signatories to the Memorandum of Association
• The promoter have to decide about the people who will be the signing the MOA of
the proposed company.
• Usually, the people who sign the memorandum(known as signatories) are also the
first Directors of the Company.
• The written consent of signatories to act as a directors and to buy qualification shares
is also taken.
• The Memorandum must be signed by at least 7 persons in case of public company
and by 2 persons in case of a private company
• Appointment of Professionals:
• The promoter appoint professionals such as bankers, auditors etc to assist in
preparation and submission of necessary documents to the Registrar of Company.

• Preparation of Necessary Documents:

• The promoter takes up steps to prepare legal documents---(-MOA, AOA, Consent of
directors etc) as they have to
Be submitted to the Registrar for getting the company registered.
STAGE2- INCORPORATION STAGE
• Incorporation means registration of the company under Companies Act,1956.
• This is the second stage in the formation of company.
• After the Registrar approves the name, the promoter can proceed with the following
steps for the incorporation of the company:
• Application for Incorporation: promoters make an application for the
incorporation or registration of the company to the Registrar of Company along
with necessary documents.
• Filing of Documents:
• Memorandum of Association: It defines the objectives and activities of the
company.
• Articles of Association: It defines the rule and regulation relating to the
internal management of a company.
• Consent of proposed Directors: A written consent of Proposed Directors to
act as directors and undertaking to buy and pay for qualification shares.
• Agreement with Proposed or whole time director or manager.
• Copy of Registrar’s letter approving the name of the company.
• Statutory Declaration: Statutory Declaration stating that all the legal
requirements for the registration have been complied with.
• Payment of Fees: Along with the above documents, necessary filing fees and
registration fees at the prescribed rates are also to be paid.

• Registration: The Registrar verifies all the documents submitted and the
documentary evidence of payment of fees .If he is satisfied about the completion
of all legal formalities for registration, he enter the name of the company in his
register.
 • Certificate of Incorporation: After entering the name of the company in the
register, the Registrar issued a ‘Certificate of Incorporation’, which may be called
the birth certificate of the company .

EFFECTS OF THE CERTIFICATE OF INCORPORATION:

• A company is legally born on the date printed on the Certificate of Incorporation.

• It becomes a legal entity with perpetual succession on such date.

• It can legally enter into valid contacts on or after this date.

• The Certificate of Incorporation is the conclusive evidence of the legal existence of

the company.

STAGE-3 Capital Subscription Stage:

* A Public company can raise funds from the public by issuing shares and debentures.
* for this, it has to issue a prospectus and undergo various other formalities.
(a) SEBI Approval:
* SEBI stands for Securities and Exchange Board of India .
* A Pubic company is required to take prior approval from SEBI to raise funds from
public.
(b) Filing of Prospectus:
* A Prospectus is to be filed with the Registrar of Companies.
* Prospectus means any document, which invites deposits from the public or invites
offers from the public
to purchase share or debentures of the company.
(c) Appointment of Bankers, Brokers and Underwriters:
*Bankers of the company receive the application money.
*Brokers encourage the public to apply for the shares and sell them to the public
*Underwriters are the persons who undertake to buy the shares, if these
are not subscribed by
thepublic. They receive a commission for underwriting the issue.
(d) Minimum Subscription:
* To ensure that company does not have shortage of funds, it is made mandatory that
company receive the
amount of minimum subscription in cash within 120 days from the date of issue.
* Minimum subscription is 90%of the issued amount.
*If the minimum subscription is not received, the allotment cannot be made and the
application money
received must be returned to the applicants within the next 10 days(i.e.,130 days from
the date of issue).
(e) Application to stock Exchange:
*It is necessary for a public company to get its shares listed on a stock exchange before
it starts selling the
securities to the general public.
 *For this, company has to make an application in at least one stock exchange to get the
permission.
*If the company does not get such permission within 10 weeks from the date of closer of
subscription list,
then the allotment will become void.
*Consequently, all money received from the applicants will have to be returned to them
within 8 days.
(f) Allotment of Shares:
* Allotment of shares means acceptance of shares applied.
* Allotment letters are issued to the shareholders.
* The names and the addresses of the shareholder and the numbers of shares allotted to
each is submitted
to the Registrar within 30 days of allotment in a statement called Return of
Allotment.
STAGE-4 COMMECEMENT OF BUSINESS STAGE
*To commence a business, a public company has to obtain a ‘CERTIFICATE OF
COMMENCEMENT’
* For this, the following documents have to be filled with the Registrar of Companies.
(a) A declaration about meeting minimum subscription required(i.e.,90% of the issued
amount)
(b) A declaration that all directors have paid in cash in respect of shares made to them.
(c) A declaration about no money is pending to pay back to the applicants.
(d) A declaration that above requirements have been complied with.
* The registrar will verify all these documents and if he is satisfied, then he issues a
Certificate of
Commencement of Business.
• The grant of this certificate completes the process of formation of public company.

Q- What is the effect of conclusiveness of ‘Certificate of Incorporation’ and ‘Commencement of

Business’?
Ans- * Certificate of incorporation is conclusive evidence of the regularity of incorporation of a
company irrespective of any deficiency in its registration.
*certificate of commencement is conclusive evidence that the company is entitled to do business
from the date of issue of the certificate.
IMPORTANT DOCUMENTS REQUIRED
• The important documents required to be submitted to the Registrar are:
*Memorandum of Association
*Articles of Association
*Consent of proposed Directors
*Prospectus
*Lieu of prospectus
1. MEMORANDUM OF ASSOCIATION
* Memorandum of Association is the principal document of the company.
* It has been describe as the ‘Charter of the company’.
* It contains the powers and objectives of the company as well as the scope of operations of
the company
 beyond of which it cannot operate.
* It is sometime called a ‘Life-giving document’.
* It is also known as ‘Doctrine of outdoor management’
* The Company has to work within the limits down in the Memorandum of association.

Contents of Memorandum of Association:

The MOA must contain the following clauses;
• Name Clause-This clause contains the name of the company with which the company will be
known. The name has already approved by the Registrar of Companies.
• Registered office clause- this clause contains the name of the state, in which the registered
office of the company is proposed to be situated. The exact address of the registered office
is not required at this stage, but it must be notified to the Registrar within 30 days of
incorporation. This clause is also known as ‘Situation Clause’ or ‘Domicile Clause’.
• Object clause- It is the most important clause of MOA . It defines the purpose for which the
company is formed. It contain the main object of the company and the other secondary
objective which the company may pursue. The object must be defined and stated keeping in
mind the following conditions;
• The objects of the company must be legal.
• The objects should not be contrary to the provisions of any law.
• The object must not be immoral.
• Liability Clause. This clause defines the liabilities of the members of the company is limited
to the amount unpaid on the shares owned by them. For Example--- if a shareholder has
purchased 500 shares of rs 10 each and has already paid rs 7 per share, then his liability is
limited to rs.3 share .
• Capital Clause- this clause specifies the amount of share capital with which company is to be
registered. The capital with which a company is registered is called registered/authorized
capital. A company can issue only that number of shares which are authorized by its
memorandum.
• Association Clause: in this clause, the signatories to the MOA state their intention to be
associated with the company and also give their consent to purchase qualification shares.
The MOA must be signed by at least 7person in case of public company and by 2 person in
the case of private company.
• ARTICLE S OF ASSOCIATION-
• The Article of Association is a document containing the rules and regulation for the internal
management of the company.
• It is subsidiary to MOA.
• It cannot include any power prohibited by the MEMORANDUM.
• A public limited company may adopt rules of Table F if it does not have Article of
Assosiation.
CONTENTS OF THE ARTICLES
• The amount of share capital and different classes of shares.
• Rights of each class of shareholders.
• Procedure for making allotment of shares.
• Procedure for issuing share certificates.
• Procedure for forfeiture and reissue of forfeited shares.
• Procedure for appointment, removal and remuneration of directors.
• Procedure regarding alteration of share capital.
• Procedure regarding winding up of the company.
 • PROSPECTUS
• The prospectus is the third important document in relation to the formation of company.
• It is issued by public company to obtain money from the public.
• Prospectus means any document which invites deposits from the public for the purchase of
shares or debentures of a company.
• A private company does not issue prospectus or lieu of prospectus as it does not invite
subscription from general company.
• Statement of Lieu of Prospectus
• It is the document which is prepared in place of prospectus and presented to the Registrar.
• A public company having a share capital may sometimes decides not to approach public for
necessary capital because it may be confident of obtaining the required capital from private
sources.
• In such cases it will have to file a “Statement of Lieu of Prospectus” with the Registrar of
Companies.

QUESTION- Is it necessary for every company to file a Prosp[ectus?

Answer- No, it is not necessary for every company to file a prospectus. Since a private company
is prohibited to raise fund from public, it does not need to issue a prospectus. A public company
which does not raise funds from the public need not issue a prospectus. However, it will have to
fill a statement in lieu of prospectus with the Registrar of Companies.
Question- distinguish between preliminary contracts and provisional contracts
Answer- PRELIMINARY CONTRACTS are entered by the promoters during promotion stage ,i.e.
before incorporation of the Company, such contracts are not legally binding on the company.
On the other hand, PROVISIONAL CONTRACTS are signed after incorporation but before
commencement. They become enforceable after the company gets certificate of commencement of
business.
Question – Distinguish between Memorandum of Association and Articles of Association?

Basis MOA AOA

1.Objectives MOA defines the objects for which
the company is formed.
2.position This is the main document of the
company and is subordinate to
companies Act.
3 necessity
The preparation and filing of
4.Alteration Memorandum is compulsory.
It is difficult to alter the MOA and
5.relationship requires approval of the
government.
`it defines the relationship between
6 other name company and the outsiders.
AOA defines the rules of internal
management of company. They
indicate how the objectives of the
company are to be achieved.
This is subsidiary document and is
subordinate to both MOA and the
companies Act.
It is not compulsory for a public limited
company to file Articles. It may adopt
Table F of the companies Act.
Articles can be easily altered by passing
a special resolution.
it defines the relationship between the
members and the management.
Doctrine of indoor management.

Doctrine of outdoor management

or charter of company
Question- Define legal status of promoter?
Answer – promoter is not a trustee or not a owner of the company but he stands in a fiduciary
relationship, i.e relationship of utmost good faith with the company he is promoting.
• He should not misuse his position , i.e he should not carry out any activity which is against
the interest of company.
• He should not make any secret profits in the dealing, and if he makes, then such profits
should be disclosed.

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