Company - Definition,

Meaning,
Features
Types of companies;
Incorporation of a company –
#Memorandum of Association,
#Articles of Association and
#Prospectus;
Share Capital;
Management;
Related Party Transaction;
 Introduction to SEBI
 The word ‘company’ was derived from the
Latin words
Com=with or together : Panis =bread

 A company can be defined as an "artificial

person", invisible, intangible, created under
law, with a discrete legal entity, perpetual
succession and a common seal.
 The Indian company law begun with the
companies act 1850, modeled on
British companies act 1844
 The Indian Companies act of 1913 was based on
the British Companies act of 1908
 The Indian Companies act, 1956; April 1, 1956
 The Indian Companies act, 2013
 Passed in Lok sabha: December 18, 2012

 Passed in Rajya Sabha: August 08, 2013

 Total number of sections: 470

 Total number of chapters: 29

 Total number of schedules: 7

 Effective from September 12, 2013


J.J Irani Committee
 Meaning and definition
 A company is a voluntary association of persons formed
for some common purpose with capital divisible into parts
known as shares .

Justice Lindlay defines company “as an association of many

persons who contribute money or money’s worth to a
common stock and employ it in some trade or business and
who share the profits arising there from”

According to companies act a company means a company

formed and registered under companies act
 To promote the development of the economy

 To encourage transparency and accountability

 To promote high standards of corporate governance

 To recognize new concepts and procedures to support business while

protecting interests of all the stakeholders

 To set up institutional structure in the form of various authorities, bodies

and panels.

 To enforce stricter action against fraud and gross non - compliance with
company law provisions
FEATURES OF A REGISTERED COMPANY

1.      Voluntary Association
A company is voluntary association of persons who have come together for a common object
which generally is to earn profit.
The activities of this association are governed by the law and are limited by its memorandum of
association

2.      Incorporated association
A company comes into existence on incorporation or registration under the companies act.
Minimum number of persons required for the purpose of incorporation is seven in case of a
public company and two in case of a private company.

3.      Separate legal entity

 On incorporation company gets personality which is separate and distinct from those of its
members. Company is an artificial person created by law. 

4.      Separate property
The company can own , enjoy  and dispose off its property in its own name.

5.      Legal restrictions
The formation, working and winding up of a company are strictly governed by laws, rules and
regulations
6.      Perpetual succession
Unlike a person a company never dies. Its existence is not affected in any way by    the death or
insolvency of any shareholder. Members may come and members may go , but the company
continues its operations until it is wound up.

7.      Common seal
As a company is an artificial person it cannot sign its name on a contract. So it function with
the help of seal. All contract entered into by the members will be under the common seal of the
company.

8.      Share capital
A company mobilizes its capital by selling its shares. Those persons who buy these shares
become its share holders and thereby become members in it

9.      Limited Liability
In case of limited companies liability of members will be limited to the amount unpaid on the
shares.

10. Transferability of shares.
Members can freely transfer and sell their shares .The right to transfer share is a statutory right
of members.
OWNERSHIP AND MANAGEMENT

• The owners of a company are its share holders.

• The affairs of the company are managed by their representatives known as Directors
 TYPE OF COMPANIES

Companies can be classified on the basis of ;

A.      Incorporation
B.      Liability of members
C.      Number of members
D.      Ownership
A. Incorporation
   

1.       Chartered company
2.       Statutory company
3.       Registered company

1. Chartered company
 The company which have formed and incorporated under a special charter granted by the
king or queen.
Eg East India company.
Bank of England.

2. Statutory company
These are companies which are created by means of a special Act of Parliament or any state
legislature.
Eg RBI, Railway

3. Registered company
Company formed and registered under companies Act 1956 is called Registered companies.
B. Liability of members
   

1.      Limited company
2.      Company limited by guarantee
3.      Unlimited company

1.      Limited company or company limited by share

Majority of registered companies will be company limited by shares. In case of limited
companies liability of members will be limited to the amount unpaid on the shares.

2. Company limited by guarantee

Here liability of each member is limited by the memorandum to such amount as he may
guarantee by the memorandum to contribute to the assets of the company in the event of its
winding up.
Such  companies are formed for the promotion of art science, culture, sports etc.

3. Unlimited company
A company not having any limit on the liability of its members is termed as unlimited company.
The members are liable for the debts of the company at the time of winding up
  C. Number of members
 
1.      Private company
2.      Public company

1. Private company
A private company is a company
            -which restricts the right to transfer its shares.
            -limits the number of its members to 50.
           -prohibits any invitation to public to subscribe its shares.

2. Public company
A public company means a company which is not a private company
E. Ownership
   

1.      Government Company
2.      Foreign company
3.      Holding and subsidiary company

1. Government company
A company is said to be government company when 51% of the paid up capital is held by
the central government or by any state government or partly by central govt or partly by one
or more state govt.

2. Foreign company
A foreign company is a company incorporated outside  India and having a place of business
in India.

3. Holding and subsidiary company

            À company which controls another company is known as the holding company and
the so controlled company is known as subsidiary company.

4. One Person Company

This is a company in which one man holds practically the whole of the share capital of the
company, and in order to meet the statutory requirement of minimum number of members
some dummy members like his wife and son holds one or two shares each
DISTINTION BETWEEN PUBLIC COMPANY & PRIVATE COMPANY.
NO. PRIVATE CO. PUBLIC CO.
1. Minimum no of members is 2 Minimum no of members is 7

2. Maximum no members is 50 No maximum limit

3. Minimum paid up capital is Rs 1 lakh Minimum paid up capital is 5 lakh

4. Name must end with the word ‘Pvt Ltd’ Name must end with the word
‘Ltd’

5. Can commence business immediately It shall have to wait until it receive

after incorporation the certificate for commencement
of business.

6. It cannot invite public to subscribe its It can invite public to subscribe its
shares and debentures shares and debentures
 DISTINCTION BETWEEN PUBLIC COMPANY & PRIVATE COMPANY(CONT)

7. Minimum subscription is not required for Minimum subscription is required

allotment of shares. for allotment of shares.

8. Need not hold statutory meeting of the It has to hold a statutory meeting
members. and file a status report.

9. Quorum required for a meeting is 2. Quorum required for a meeting is 5

10. There is restriction of transfer of shares  Shares can be freely transferred.

11. Not required to issue prospectus. Must issue prospectus.

13. Two directors Three directors

FORMATION OF A COMPANY

The procedure or formation of a company may be divided into four stages;

1. Promotion

2. Incorporation

3. Raising of capital

4. Commencement of business
FORMATION OF A COMPANY
The procedure or formation of a company may be divided into four stages;
1. Promotion
2. Incorporation
3. Raising of capital
4. Commencement of business

I. Promotion
It is the first stage in the formation of a company.
In this stage the idea of carrying on a business is conceived by a person or a group of persons
called promoters. They make detailed investigation about the workability of the idea, amt of
capital required, operating expense etc.
Before a company an be formed, there must be some persons who have an intention to form a
company and who take the necessary steps to carry that intention into operation. Such persons
are called promoters.
The promoter is the person who brings a company into existence.
II. Incorporation
A company is said to be incorporated  when it is registered with the registrar under the
companies act. The certificate of incorporation is the birth certificate of the company. A
company comes into existence from the date mentioned in the certificate.
II. a : Procedure for registration
The promoter has to first decide the proposed form of company as whether it is to be a public
company or a private company.
They may form the company with limited liability , unlimited liability  or limited by
guarantee.
They have to decide the name of the company agreeable and desirable to all. For eg if the
name proposed is identical with or closely resembles the name of an existing company , it is
undesirable.
For getting registration an application has to be made to the registrar. The application shall be
accompanied by the following documents:

1.      Memorandum of association
2.      Articles of association
3.      A statement of nominal capital
4.      A notice of address of the registered office of the company.
5.      A list of directors and their consent to a act signed by them
6.      A declaration that all the requirements of the act have been complied with. Such
declaration shall be signed by an advocate of high court or supreme court or a chartered
accountant who is engaged in the formation of company
II. b : Certificate of incorporation
If the registrar is satisfied that all the requirements of the act have been complied with he
shall register the company and issue a certificate of incorporation.

II. c : Conclusive proof

Once a company is registered incorporation cannot be challenged subsequently.
The certificate of incorporation is a conclusive evidence of the fact that-
1. all the requirements of the act have been complied with.
2. company is duly registered.
3. company came into existence on the date of certificate.

Advantages of incorporation
1.      Transferability of shares
2.      Separate legal entity
3.      Perpetual succession
4.      Common seal
5.      Separate property
6.      Capacity to sue
III. Raising of capital
After incorporation a company can raise capital by issuing shares. A private company cannot
issue shares to public.
In case of public company a copy of prospectus is filed with the registrar and it will be issued
to the public. Those who are intended in purchasing share are required to send their
application money to company's  banker.
 On the last date fixed for the receipt of application if the company has received application
equal to minimum subscription the directors will start with allotment of shares.

IV. Commencement of business

A private company may commence its business immediately after incorporation.
But a public company cannot commence business immediately after incorporation but it has
to obtain a certificate of commencement from the registrar.
MEMORANDUM OF ASSOCIATION
Memorandum of association for a company is like the constitutional law for a country. It is
the document which contains  the rules regarding constitution and activities of the
company. It is a fundamental charter of the company.
It defines the extent of powers of the company, beyond that it cannot go. It is a document
filed at the time of incorporation.
It is a public document ie any interested public can get a copy on payment of prescribed
fees.

Contents of memorandum
1. Name clause
2. Registered office clause
3. Object clause
4. Liability clause
5. Capital clause
6. Association clause or subscription clause.
1. Name clause
The first clause of memorandum requires a company to state its name
Rules:-Should not adopt identical with or resembles that of an existing company.   Ltd for public
company and Pvt Ltd for private company. Should not use a name prohibited by the Name and
Emblems Act. 
2. Registered office clause
The memorandum must specify the state in which the registered office of the company is to be
situated.
3. Object clause
This is the most important clause of the memorandum of association. It defines the object of the
company and the extent of its powers. The object of the company must be state very clearly and
a company cannot do anything beyond object clause. The objects of the company shall not be
illegal or against public policy. 
4. Liability clause
This  clause state the nature of liability of members.
5. Capital clause
This clause contains the  total amount of capital with which the company is registered. This
capital is known as authorized capital or nominal capital or registered capital.
6. Association clause or subscription clause
The memorandum concludes with subscription clause. The memorandum must be subscribed by
at least  7 persons in case of public company and 2 in case of private company. Each subscriber
must sign the document and write the number of shares taken by him.
Doctrine of ultra vires
  Memorandum contains  the rules regarding constitution and activities of the company. It is a
fundamental charter of the company. It defines the extent of powers of the company, beyond
that it cannot go.
A co can act and function within the limits of memorandum. Any act which is beyond the
memorandum is ultra vires the company. Such acts are void .
Ultra means beyond and vires means powers. So ultra vires means ‘beyond powers’.
The purpose of this doctrine is to helps the shareholders , creditors and every third person
dealing with the company to ensure that their investment are not diverted to unauthorized
objects.

.
ARTICLES OF ASSOCIATION
Articles of association are the internal regulations of the company and are for the benefit
of shareholders. These are the rules and regulation relating to the internal management of a
company. The article define the mode and form on which the business of the company is
to be carried on
Prospectus: 
Section 2(70) of the Companies Act, 2013 defines a prospectus as ““A prospectus means
Any documents described or issued as a prospectus and includes any notices, circular,
advertisement, or other documents inviting deposit from the public or documents inviting
offer from the public for the subscription of shares or debentures in a company.” A
prospectus also includes shelf prospectus and red herring prospectus. A prospectus is not
merely an advertisement. 

A document shall be called a prospectus if it satisfy two things:

1. It invites subscription to shares or debentures or invites deposits.
2. The aforesaid invitation is made to the public.
Contents of a prospectus:
1. Address of the registered office of the company.
2. Name and address of company secretary, auditors, bankers, underwriters etc.
3. Dates of the opening and closing of the issue.
4. Declaration about the issue of allotment letters and refunds within the prescribed
time.
5. A statement by the board of directors about the separate bank account where all
monies received out of shares issued are to be transferred.
6. Details about underwriting of the issue.
7. Consent of directors, auditors, bankers to the issue, expert’s opinion if any.
8. The authority for the issue and the details of the resolution passed therefore.
9. Procedure and time schedule for allotment and issue of securities.
10. Capital structure of the company.
11. Main objects and present business of the company and its location.
12. Main object of public offer and terms of the present issue.
13. Minimum subscription, amount payable by way of premium, issue of shares
otherwise than on cash.
14. Details of directors including their appointment and remuneration.
15. Disclosure about sources of promoter’s contribution.
16. Particulars relation to management perception of risk factors specific to the
project, gestation period of the project, extent of progress made in the project and
deadlines for completion of the project.
 RED HERRING PROSPECTUS
Red herring prospectus is the prospectus which lacks the complete
particulars about the quantum of the price of the securities. A company
may issue a red herring prospectus prior to the issue of prospectus when
it is proposing to make an offer of securities.

This type of prospectus needs to be filed with the registrar at least three
days prior to the opening of the subscription list or the offer. The obligations
carried by a red herring prospectus are same as a prospectus. If there is any
variation between a red herring prospectus and a prospectus then it should
be highlighted in the prospectus as variations.

When the offer of securities closes then the prospectus has to state the total
capital raised either raised by the way of debt or share capital. It also has to
state the closing price of the securities. Any other details which have not
been included in the prospectus need to be registered with the registrar and
SEBI.
 ABRIDGED PROSPECTUS

The abridged prospectus is a summary of a prospectus filed before the

registrar. It contains all the features of a prospectus. An abridged
prospectus contains all the information of the prospectus in brief so that it
should be convenient and quick for an investor to know all the useful
information in short.

Section33(1) of the Companies Act, 2013 also states that when any
form for the purchase of securities of a company is issued, it must be
accompanied by an abridged prospectus.
It contains all the useful and materialistic information so that the investor
can take a rational decision and it also reduces the cost of public issue of
the capital as it is a short form of a prospectus.
 SHELF PROSPECTUS

Shelf prospectus can be defined as a prospectus that has been issued by any
public financial institution, company or bank for one or more issues of
securities or class of securities as mentioned in the prospectus. When a shelf
prospectus is issued then the issuer does not need to issue a separate
prospectus for each offering he can offer or sell securities without issuing any
further prospectus.

The provisions related to shelf prospectus has been discussed under 

section 31 of the Companies Act, 2013.

The regulations are to be provided by the Securities and Exchange Board of

India for any class or classes of companies that may file a shelf prospectus at
the stage of the first offer of securities to the registrar.
The prospectus shall prescribe the validity period of the prospectus and it
should be not be exceeding one year. This period commences from the
opening date of the first offer of the securities. For any second or further
offer, no separate prospectus is required.
While filing for a shelf prospectus, a company is required to file an
information memorandum along with it.
Information Memorandum [Section 31(2)]

The company which is filing a shelf prospectus is required to file the

information memorandum. It should contain all the facts regarding the new
charges created, what changes have undergone in the financial position of
the company since the first offer of the security or between the two offers.
It should be filed with the registrar within three months before the issue of
the second or subsequent offer made under the shelf prospectus as given
under Rule 4CCA of section 60A(3) under the Companies (Central
Government’s) General Rules and Forms, 1956.

When any company or a person has received an application for the

allotment of securities with advance payment of subscription before any
changes have been made, then he must be informed about the changes. If
he desires to withdraw the application within 15 days then the money must
be refunded to them.

After the information memorandum has been filed, if any offer or securities
is made, the memorandum along with the shelf prospectus is considered as
a prospectus.
Deemed Prospectus

A deemed prospectus has been stated under 

section 25(1) of the Companies Act, 2013.

When any company to offer securities for sale to the public, allots or
agrees to allot securities, the document will be considered as a
deemed prospectus through which the offer is made to the public for
sale. The document is deemed to be a prospectus of a company for
all purposes and all the provision of content and liabilities of a
prospectus will be applied upon it.
In the case of SEBI v. Kunnamkulam Paper Mills Ltd., it was held
by the court that where a rights issue is made to the existing
members with a right to renounce in the favour of others, it becomes
a deemed prospectus if the number of such others exceeds fifty.
NOMINAL OR AUTHORISED OR REGISTERED CAPITAL:
“Authorised capital” or “Nominal capital” means such capital as
is authorised by the memorandum of a company to be the
maximum amount of share capital of the company. Thus it is the
sum stated in the memorandum as the capital of the company with
which it is to be registered being the maximum amount which it is
authorised to raise by issuing shares, and upon which it pays the
stamp duty.

ISSUED CAPITAL:

“Issued capital” which means such capital as the company issues

from time to time for subscription.It is that part of authorised
capital which is offered by the company for subscription and
includes the shares allotted for consideration other than cash.
Solved Example on Classification of Capital
Q1. The public subscribes for 10,000 shares of a company of Rs. 100 each. The company calls
up Rs. 50 per share but receives the payment only from 9,000 subscribers. Calculate:
•Subscribed capital
•Called up capital
•Paid up Capital
Answer:
Since the subscription is for 10,000 shares at Rs. 100 per share, the subscribed capital is:
10,000 x 100 = Rs. 100,000.
Further, the company calls up Rs. 50 per share. Hence, the called up capital is: 10,000 x 50 =
Rs. 50,000.
However, only 9,000 subscribers pay. This means that 1,000 subscribers default. Hence,
Arrears = 1,000 x 50 = Rs. 5,000.
Therefore, the paid up capital is:
Called up capital – Arrears = 50,000 – 5,000 = Rs. 45,000.