Part V The Companies Act, 2013

Chapter 17
Nature and Kinds of Companies, Company
 Formation and Prospectus

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Nature of Company

An artificial person created by law, having a separate entity, with a perpetual

succession and common seal.
1. Independent legal entity 6. Capacity to sue
2. Limited liability 7. Separation of ownership &
Management
3. Everlasting existence 8. Proportionate
representation
4. Separate property 9. Right to own property
5. Flexibility of investment

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Learning Objectives

Nature and Kinds of Companies

Promotion and Incorporation

Memorandum of Association

Doctrine of Ultra Vires

Articles of Association

Alteration of Articles

Certificate of Incorporation

Prospectus

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Process of Formation of a Company

The whole process of formation of a joint stock company (in India) can be divided
into two broad stages, namely:

1. Promotion
2. Incorporation

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 Promotion Stage

 Promotion refers to the entire backing process by which a company is brought

into life.
 It begins with the conceptualization of the birth of a company, and sets out
the purpose for which it is to be formed.
 The persons who conceive the idea to form a company and usually invest the
initial funds are known as promoters of the company.
 The promoters enter into preliminary contracts with vendors and make
arrangements for the preparation, advertisement and the circulation of the
prospectus, and arrangement of necessary capital.
 Promoters occupy fiduciary position (a position based on trust and
confidence) in the company.

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Promoter’s Remuneration

A promoter besides being reimbursed for his preliminary expenses or

registration fees may be rewarded by the company for the efforts undertaken by
him in forming the company in several ways under a valid contract. The more
common ones are:
1. The company may pay him a lump sum for the services rendered.
2. The promoter may make profits on transactions entered by him with the
company after making full disclosure.
3. The promoter may sell his own property to the company for cash or against
fully paid shares in the company at an overvaluation after making full
disclosures.
4. The promoter may be given an option to under right issue  of the company
and earn commission thereon.
5. The articles of the company may provide for a fixed sum to be paid by the
company to the promoters.

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 Promoter’s Liability

In case of default by a promoter in fulfilling his/her duties, the company may rescind
the contract, and if the former has made some profits on any related transaction,
s/he may be compelled to account for it.
The promoter is also liable for misstatements made in the prospectus, if any.
A person who subscribes for any shares or debenture in the company relying on the
misstatement in the prospectus can sue the promoter for the loss or damages
sustained by the former.
Under Section 63 of the Companies Act  he may be punishable with imprisonment
for a term which may extend to two years or with fine which may extend to Rs
50,000 , or with both.
Right issue is an option wherein the subsequent issue of shares (in part or in full) is
initially offered to the existing shareholders to be subscribed for by them.

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 Incorporation

 Incorporation is the foremost obligation to be fulfilled to form any type of

company under the Companies Act.
 Registration or incorporation of a company is a procedure which is filled with
documentary compliance formalities.
 An application in FORM 1A  needs to be filed with the ROC of the state, in
which the Registered Office of the proposed company is to be located. This should
contain the following particulars:
1. Four alternative names for the proposed company.
2. Names and addresses of the promoters (Minimum 7 for a public company
while 2 for a private company)
3. Authorized Capital of the proposed company
4. Main objects of the proposed company
5. Names of other group companies. Contd.

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 … Incorporation
The ROC shall scrutinize the application on submission and send his approval or
objections thereof in about 10 days to the applicant.
On fulfilling of the objections, if any, a formal letter of name approval is issued
by the ROC. On receipt of it, the Memorandum and Articles are required to be
drafted.
Besides the Memorandum, and the Articles, the following documents must be
filed with the ROC for the registration of the company:
1. An agreement, if any, which the company proposes to enter into with any
individual for appointment as its managing director or whole-time director or
manager.
2. A statutory declaration in Form 1 by an advocate, attorney or pleader entitled
to appear before the High Court, or a Company Secretary, or a Chartered
Accountant in whole-time practice in India who is engaged in the formation of
the company, or by a person who is named as a director or manager or
secretary of the company that the requirements of the Companies Act have
been complied with in respect of the registration.
Contd.
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 … Incorporation

In addition to the above, in case of a public company, the following documents must
also be filed:
a) Written consent of directors in FORM NO. 29 to agree to act as directors
b) The complete address of the registered office of the company in FORM NO. 18.
c) Particulars of appointment of directors, MD and manager of the company in
FORM NO. 32.
After the company is registered, it receives a ‘Certificate of Incorporation or
Registration’ after which the company becomes a legal entity.

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 Certificate of Incorporation &
Corporate Identity Number
 Once all the required documents have been filed along with the registration fee,
filing fee, stamp duty, as specified and they are found to be in order, the ROC will
issue, under his seal and signature, the Certificate of Incorporation of the company.
 The certificate of incorporation is the conclusive evidence that the requirements
of the Companies Act have been complied with and the company bearing a specific
name is duly registered.
 This document is the birth certificate of the company and is the proof of the
existence of the company.
 Once this certificate is issued, the company cannot cease its existence unless it is
dissolved by order of the Court or otherwise.
 On and from the date of incorporation, the ROC shall allot to the company a
Corporate Identity Number, which shall be a distinct identity for the company.
 On obtaining the incorporation certificate a company without share capital is
eligible to carry out its business immediately. A company, with share capital however,
cannot transact business unless it has complied with capital subscription requirement.

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 Raising/Flotation of Capital

For the purpose of raising capital from the public, the company needs to
prepare and issue a document known as ‘Prospectus’.
Public companies that are confident of raising capital on their own need to
prepare a document known as ‘Statement in lieu of Prospectus’.
In this stage, a draft of the prospectus is finalized. Copies of the prospectus
are printed.
 A copy of the prospectus, duly signed by a minimum of two directors and
countersigned by the Company Secretary is filed with the Registrar of
Companies.
Thereafter the Prospectus is issued to the public. Advertisement of issue of
the prospectus is usually carried out in local newspapers.
 The aspirant investor needs to pay a nominal application fee to subscribe
to the capital of the company within a specified period.

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 Other formalities Before or After
Incorporation

Besides categorically meeting the terms of the above discussed procedure to

form a company, there are some other formalities which must be fulfilled by every
company before or after obtaining the certificate of incorporation to carry out its
operations smoothly. These include the following:
1. Obtaining a Permanent Account Number (PAN) from the Income Tax
Department.
2. Obeying Shop and Establishments Act, if required.
3. Registration for Import Export code from Director General of Foreign Trade, if
required.
4. Software Technologies Parks of India registration (STPI) if required.
5. RBI approvals, if required.

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Compliance Requirements for IT
Companies

All companies who are related to cyber business in India are required to comply with
the requirements of the cyber law contained in the Indian Information Technology Act,
2000. 
The cyber law mandates all companies to have an information technology security
policy. This evidences the architecture of the network, the roles and responsibility of
employees, security parameters and authorization required for data access, among
other things.
 Moreover, the I T Act provides that where a person committing a contravention of
any of the provisions of this Act is a Company, every person who was responsible to
the company for the conduct of business of the company as well as the company, shall
be guilty of the contravention and shall be liable to be proceeded against and
punished accordingly.

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 Prospectus

 When a company allots securities to the public based on an offer that has been
made, any document through which such an offer is made is known as prospectus.
 A prospectus is a legal document that contains all the material information
investors need about the company.
 A prospectus will notify the prospective shareholders why the company is
coming is out with a public issue, its financials and how the issue will be priced.
 Any company making a public issue is required to file its prospectus with the
Securities and Exchange Board of India (SEBI), the market regulator. In the context
of an individual securities offering, such as Initial Public Offering (IPO), a prospectus
is distributed by underwriters or brokerages to potential investors.
 There are two types of prospectus, namely Draft offer document and Red
herring prospectus.

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 Types of Prospectus

There are two types of prospectus, namely Draft offer document and Red
herring prospectus.

Draft offer document This is the first filed with SEBI. SEBI may specify changes,
if any, to be made. After the changes are made, it is filed with the Registrar of
Companies or the Stock Exchange. The Draft offer Document must be filed with
SEBI at least 21 days before the company files it with the ROC or Stock
Exchange.

Red herring prospectus This one does not have details of either the price or the
number of shares being offered or the amount the IPO aims to raise. That's
because this kind of prospectus is used in book building issues, where the
details of the final price are known only after the bidding is concluded.
Nowadays all IPOs launch their issues through the book building process.

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