JOINT

STOCK
COMPANY
 Professor & Lawyer 
Puttu Guru Prasad
B.Com., M.Com., M.Phil., M.B.A., PGDFTM., AP.SET., M.Phil., DRMS., L.L.B., ICFAI
TMF., DIRM., L.L.M., Pre PhD (PhD)from JNTUK.,  Topper
Domain Topper & 30th Batch Topper at ICFAI -2009 Training for Management Faculty
“Diploma in Psychology from YALE University”
MHRDI’s 'Institution's Innovation Council (IICs)Ambassador
NSS Certified Program Officer, (A.U)
ICFAI UNIVERSITY Trained Senior Faculty
Senior Faculty for Business Studies, Economics, Accounts
Head, Board of Administration & Management Science,
BHAGAVAD GITA & CLAT & IPMAT Program Coordinator, 
Commerce Department, VIVA-VVIT, Nambur, 
My Blog: puttuguru.blogspot.in 
My Web Site: https://gurublogs.wixsite.com/guru
93 94 96 98 98, 9885 96 36 36, 807 444 9539,
 5 Main Types of Business
OWNERSHIPS
•(a) Sole Proprietorship,
•(b) Joint Hindu Family (HUF),
•(c) Partnership Firm
•(d) Cooperative Societies, &
•(e) Joint Stock Company
(Public/Private Corporations).
How the Joint Stock Company Came
into Existence
Foundation of British East India Company
The British East India Company was in fact
the venture of some of the influential
businessmen of London who acquired the
Crown's charter for special permission to
trade in spices in the East Indies (presently
South Asia) and the permission was granted
for a period of 15 years.
The East India Company started with a
capital of 72,000 pounds and had
around 125 shareholders. One
Governor and 24 directors who
constituted the Court of Directors led it.
COMPARISION CHART
 Sole Proprietary

Catamaran

TITANIC SHIP
 Joint Stock Company
/Co-operative Society
Sailing boat
 Partnership Firm
HUF
Behemoth, giant, colossus,
monster, goliath, heavyweight,
titan.
 Some of the Famous Joint Stock
Companies in India
The main advantage of the company set up is, it can generate huge capital from the
public in the form of shares, For example the recent IPO of Zomato generated -----

ssue Open Jul 14, 2021

Issue Close
IPO Price
Jul 16, 2021
₹76 (Rs.130 per share)
Zomato IPO is a Public
Face Value
IPO Size
₹1
₹9,375.00 Cr
Issue of 71,92,33,522
Listing At
IPO Lot Size
BSE, NSE
195
Equity Shares.
Some of the Famous Cooperative Societies in India
Some of the Famous Cooperative Societies in
India

Horticultural Producers' Cooperative Marketing and

Processing Society, popularly known by its
acronym, HOPCOMS, is a farmers' society founded in 1965
• There was an interesting story behind the formation of the Joint Stock
Companies. Those historical developments we are going to discuss these
before studying the formation, merits, and demerits of Joint Stock
Companies.
• The specialty of a Joint Stock Company is Limited Liability, which is
contrary to Sole Proprietorship, HUF, and Partnership.
• As a Commerce Student, at this age you should be able to differentiate
between Limited Liability and Unlimited Liability. The Limited liability status
available to Joint Stock Companies because of its ten special features.
1) Legal Formation:
2) Artificial Person:
3) Separate Legal Entity:
4) Common Seal:
5) Perpetual Existence:
6) Limited Liability:
7) Transferability of Shares:
8) Separation of Ownership and Management:
9) Common Seal
10)Winding Up
COMMON SEAL of a COMPANY
 Historical Evolution of a Company
The word ‘company’ is derived from
the Latin word (Com=with or together;
panis =bread), and it originally
referred to an association of persons
who took their meals together.

In the leisurely past, merchants took

advantage of festive gatherings, to
discuss business matters.
 Historical Evolution of a Company

•In popular parlance, a

company denotes an
association of like-minded
persons formed for the
purpose of carrying on
some business or
undertaking.
 Historical Evolution of a Company
•The word ‘corporation’ is derived from
the Latin term ‘corpus’ which means
‘body’.
•Accordingly, ‘corporation’ is a legal
person created by a process other than
natural birth. It is, for this reason,
sometimes called artificial legal person.
 Historical Evolution of a Company
•A company is a corporate body and a legal
person having status and personality
distinct and separate from the members
constituting it .
•It is called a body corporate because the
persons composing it are made into one
body by incorporating it according to the
law and clothing it with legal personality.
 Historical Evolution of a Company
•As a legal person, a corporate is capable
of enjoying many rights and incurring
many liabilities of a natural person.
•In terms of the Companies Act, 2013
(Act No. 18 of 2013) a “company”
means a company incorporated under
this Act or under any previous
company law [Section 2(20)].
 Early Notions of Limited Liability:
•The corporate form emerged from economic
arrangements that mirrored the concept of
limited liability offered by modern
corporations.
•One such arrangement was the ”commenda”,
a system developed in Eleventh Century Italy,
wherein a ‘passive partner’ provided funding
for a merchant vessel to be sailed by a
‘managing partner’ who invested no capital.
 Early Notions of Limited Liability:

•Upon completion of the voyage, the partners divided up

the profits under a predetermined formula.
•This arrangement allowed the passive partner to limit
his or her liability of their investment, while the
managing partner assumed the risks (Unlimited
Liability) associated with the cargo and the voyage.
•Soon, investors began pooling their funds to diminish the
risk of losing their entire fortune on a single voyage.  
•In doing so, the investors realized the benefits of
pairing limited liability with diversification.
The arrival of Vasco da Gama at Calicut, 1499
On 27th May 1498, a Portuguese sailor, Vasco da Gama
crossed the Cape of Good Hope and reached Calicut in India.
He was given a warm reception by the Hindu ruler, King
Zamorin of Calicut. (SAMOOTHIRI VARMA)
VASCO DA GAMA meeting KING ZAMORIN at
his ROYAL COURT HALL (Durbar)
Ferdinand Magellan made the first voyage around
the world in 1519-1520 (CIRCUM NAVIGATION)
 Circumnavigation (1577–1580)
• Sir Francis Drake (c.  1540 – 28 January 1596) was an English explorer, sea captain, privateer,
buccaneer, slave trader, naval officer, and politician. Drake is best known for his circumnavigation of
the world in a single expedition, from 1577 to 1580. (Vasco da Gama reached India in 1499)
(Ferdinand Magellan made the first voyage around the world in 1519-1520 (CIRCUM
NAVIGATION)
• Queen Elizabeth I, awarded Drake a knighthood in 1581 which he received on the Golden
Hind in Deptford, a famous Dockyard near London.
Francis Drake 1540 – 28 January 1596
Golden Hind in Deptford

HIND=A female deer

Elizabeth I
 Queen Elizabeth's Fear about Unlimited liability

Elizabeth I knighting Francis Drake, 1580. The successful circumnavigation of the world by
Drake and wealth he acquired from east spice islands, instigated queen to enter into spice
business with other British traders, but because of unlimited liability clause she put her
decision under suspension. Immediately the Lord Justice Lindley extemporaneously delivered
the definition of the company form of organization with limited liability clause(commenda
Arrangement) to protect the interest of the Queen Elizabeth 1.
 R0le of Magna Carta
The Constitution of England

How to overcome the restrictions put forth by Magna Carta?

Signing of Magna Carta by King John
Rule of Magna Carta

Because of Magna Carta, the king or the poor were made equal before
the law. Ruling power was granted to the Bicameral Parliament. King
was just an Iconic symbol with out any powers.
Lord Justice Lindley extemporaneously delivered the definition of the
Company Form of Organization with Limited Liability Clause
(commenda Arrangement) to protect the interest of the Queen
Elizabeth 1.
Background Story of Company Formation
This incidence lead to form a joint stock company to do business with India in the year 1600,
the famous definition delivered by Lord Justice Lindley is given below. The modern day
features of Company derived from the below definition only.

• Lord Justice Lindley – “A company is an association of many persons,

• who contribute money or monies worth to a common stock,
• and employed in some trade or business and
• who share the profit and loss arising therefrom with limited liability.
• The common stock so contributed is denoted in money and is the
capital of the company.
• The persons who contribute to it or to whom it pertains are
members.
• The proportion of capital to which each member is entitled is his
share.
• The shares are always transferable although the right to transfer is
often more or less restricted.”
 Advantages of Joint Stock Company
 The student should understand that a Partnership firm can attract the borrowings
from banks, relatives, friends or from some business clients, but not from the
public at large.

 Partners cannot collect more investment, but Where as a company can attract the
investors from all over the country and from all over the world also.

 That is the main advantage of Company setup. The Chartered accountants paly an
important role in forming the company, by preparing two important documents of
a company called as Memorandum of Association and Articles of Association.

 They are called the Heart and Soul of the company. The process of registering the
company under Indian Companies Act 1956 is called as incorporation of an entity.

 Because of incorporation process the company is emerged as an artificial person

and a separate legal entity in the eyes of the constitution of India.

 The advantage of a separate legal entity is it can be treated as an equal to as a

citizen of India.
 In a Partnership business, the business's assets are
registered in the partners' names but not in the
name of the partnership firm.
For example, there are four partners RAM, SITA,
ROHAN & CHARU in BALAJI TRADERS.
All properties like Plants, Land, Vehicles, and
Warehouses, are registered in the names of the
partners, individually or combinedly by the Sub-
Registrar of the registration department.
So the Creditors, the Banks, or the Suppliers will
attach the personal properties of the Partners at
the time of bankruptcy.
But whereas in JSC, all the business properties are
registered in the name of the company.
 The Advantage of a Separate Legal Entity
 Company enjoys all the rights of an Indian Citizen, which means
it can register the property in its name, and it can sue or be sued
in the court of the law as a human being.
 It can enter into contracts. It can sell its properties, and buy the
properties. It can choose its management and auditors. It can
live forever.
 All business/Bank transactions, Assets, and Properties of the
Company belongs to Company itself, which is the cause behind
the limited liability enjoyed by the shareholders of the company.
 But whereas the Partnership firm is merely a form of business
organization, and it is not recognized as a separate legal entity,
the partners cannot register the properties on the name of the
partnership firm, but they can register the assets in their names.
 Because of this the partners are not immune from unlimited
liability.
 The Great East India Company
The English East India Company was incorporated by royal charter on December 31, 1600 and
went on to act as a part-trade organization, part-nation-state and reap vast profits from
overseas trade with India, China, Persia and Indonesia for more than two centuries.
 Incorporation of East India Company
"By command of the King and Parliament of England"
•Originally East India Company chartered as the
"Governor and Company of Merchants of London
Trading into the East-Indies in the year 1600“.
•The East India company rose to account for half of the
world's trade during the mid-1700s and early 1800s.
• Particularly in basic commodities including cotton, silk, indigo
dye, sugar, salt, spices, saltpeter, tea, and opium.
• The company also ruled the beginnings of the British Empire in India.

Chartered-(ప్రభుత్వరాజశాసనం) A document incorporating an

institution and specifying its rights; includes the articles of
incorporation and the certificate of incorporation
Development of ‘Joint-Stock’ Companies:
• In the 1600s, the British Crown began granting monopolies to
groups of investors willing to undertake certain ventures.
These monopolies took the form of “joint-stock” companies
that allowed labor and capital to be aggregated for the
purpose of undertaking tasks that would be too large for any
one person.
• A famous example was that of the East India Company, in
which investors pooled capital into a single “joint-stock”
company from which profits would be distributed according
to capital invested.
• Only members of the East India Company had the privilege of
conducting trade with India. The East India Company
eventually came to form a government over large portions of
India and maintain a standing army. 
• These examples show that by allowing the aggregation of
resources, corporations can be organized to carry out tasks
too big for one person, or even one government.
 Now with this back
ground we will discuss
about the formation of
Joint Stock Companies
as a form of Business
Organization
 2.6 JOINT STOCK COMPANY
• A company is an association of persons formed for carrying
out business activities and has a legal status independent of
its members. The company form of organisation is governed
by The Companies Act, 1956.
• A company can be described as an artificial person having a
separate legal entity, perpetual succession and a common
seal.
• The shareholders are the owners of the company while the
Board of Directors is the chief managing body elected by the
shareholders.
• Usually, the owners exercise an indirect control over the
business. The capital of the company is divided into smaller
parts called ‘shares’ which can be transferred freely from
one shareholder to another person (except in a private
company).
 2.6 Features of JOINT STOCK COMPANY
•The definition of a joint stock company
highlights the following features of a
company.
•(i) Artificial person: A company is a
creation of law and exists independent of
its members. Like natural persons, a
company can own property, incur debts,
borrow money, enter into contracts, sue
and be sued but unlike them it cannot
breathe, eat, run, talk and so on. It is,
therefore, called an artificial person.
 2.6 Features of JOINT STOCK COMPANY
•(ii) Separate legal entity: From the
day of its incorporation, a company
acquires an identity, distinct from
its members. Its assets and
liabilities are separate from those
of its owners. The law does not
recognize the business and owners
to be one and the same.
 2.6 Features of JOINT STOCK COMPANY
•(iii) Formation:
•The formation of a company is a time
consuming, expensive and complicated
process. It involves the preparation of
several documents and compliance
with several legal requirements before
it can start functioning. Registration of
a company is compulsory as provided
under the Indian Companies Act, 1956.
Incorporation of a Company means Birth of a Company,
then who are the parents of the Company

These two legal documents are called

as Parents to Form a Company
The formation of a company is a time consuming, expensive and
complicated process, because, the Senior Advocates and Experience
Charted Accounts can only prepare these legal Documents, for that the
promoters of the company have to spend lot of money as fees.
 2.6 Features of JOINT STOCK COMPANY
•(iv) Perpetual succession: A company
being a creation of the law, can be
brought to an end only by law. It will
only cease to exist when a specific
procedure for its closure, called
winding up, is completed. Members
may come and members may go, but
the company continues to exist.
 2.6 Features of JOINT STOCK COMPANY
•(v) Control: The management and control of
the affairs of the company is undertaken by
the Board of Directors, which appoints the
top management officials for running the
business. The directors hold a position of
immense significance as they are directly
accountable to the shareholders for the
working of the company. The shareholders,
however, do not have the right to be involved
in the day-to-day running of the business.
 2.6 Features of JOINT STOCK COMPANY
• (vi) Liability: The liability of the members is limited to the
extent of the capital contributed by them in a company. The
creditors can use only the assets of the company to settle
their claims since it is the company and not the members
that owes the debt. The members can be asked to contribute
to the loss only to the extent of the unpaid amount of share
held by them.
• Suppose Akshay is a shareholder in a company holding 2,000
shares of Rs.10 each on which he has already paid Rs. 7 per
share. His liability in the event of losses or company’s failure
to pay debts can be only up to Rs. 6,000 — the unpaid
amount of his share capital (Rs. 3 per share on 2,000 shares
held in the company). Beyond this, he is not liable to pay
anything towards the debts or losses of the company.
 2.6 Features of JOINT STOCK COMPANY
•(vii) Common seal: The company being an
artificial person acts through its Board of
Directors.
•The Board of Directors enters into an
agreement with others by indicating the
company’s approval through a common seal.
•The common seal is the engraved equivalent of
an official signature.
•Any agreement which does not have the
company seal put on it is not legally binding on
the company.
 2.6 Features of JOINT STOCK COMPANY
•(viii) Risk bearing: The risk of losses in a
company is borne by all the shareholders.
•This is unlike the case of a sole proprietorship
or partnership firm where one or few persons
respectively bear the losses.
•In the face of financial difficulties, all
shareholders in a company have to contribute
to the debts to the extent of their shares in the
company’s capital.
•The risk of loss thus gets spread over a large
number of shareholders.
 2.6 Merits of JOINT STOCK COMPANY
•The company form of organisation offers a
multitude of advantages, some of which are
discussed below.
•(i) Limited liability: The shareholders are liable
to the extent of the amount unpaid on the
shares held by them. Also, only the assets of
the company can be used to settle the debts,
leaving the owner’s personal property free
from any charge. This reduces the degree of
risk borne by an investor.
 2.6 Merits of JOINT STOCK COMPANY
•(ii) Transfer of interest: The ease of
transfer of ownership adds to the
advantage of investing in a company as
the share of a public limited company
can be sold in the market and as such
can be easily converted into cash in case
the need arises. This avoids blockage of
investment and presents the company
as a favourable avenue for investment
purposes.
 2.6 Merits of JOINT STOCK COMPANY
•iii) Perpetual existence: Existence of a
company is not affected by the death,
retirement, resignation, insolvency or
insanity of its members as it has a
separate entity from its members. A
company will continue to exist even if
all the members die. It can be
liquidated only as per the provisions
of the Companies Act.
 2.6 Merits of JOINT STOCK COMPANY
•(iv) Scope for expansion: As compared to the
sole proprietorship and partnership forms of
organisation, a company has large financial
resources. Further, capital can be attracted
from the public as well as through loans from
banks and financial institutions. Thus there is
greater scope for expansion. The investors are
inclined to invest in shares because of the
limited liability, transferable ownership and
possibility of high returns in a company.
 2.6 Merits of JOINT STOCK COMPANY
•(v) Professional management: A company
can afford to pay higher salaries to
specialists and professionals. It can,
therefore, employ people who are experts
in their area of specializations. The scale of
operations in a company leads to division of
work. Each department deals with a
particular activity and is headed by an
expert. This leads to balanced decision
making as well as greater efficiency in the
company’s operations.
 Limitations of JOINT STOCK COMPANY
•The major limitations of a company form
of organisation are as follows:
•(i) Complexity in formation: The
formation of a company requires greater
time, effort and extensive knowledge of
legal requirements and the procedures
involved. As compared to sole
proprietorship and partnership form of
organisations, formation of a company is
more complex.
 Limitations of JOINT STOCK COMPANY
•(ii) Lack of secrecy: The Companies
Act requires each public company to
provide from time-to-time a lot of
information to the office of the
registrar of companies. Such
information is available to the general
public also. It is, therefore, difficult to
maintain complete secrecy about the
operations of company.
 Limitations of JOINT STOCK COMPANY
•(iii) Impersonal work environment:
Separation of ownership and management
leads to situations in which there is lack of
effort as well as personal involvement on
the part of the officers of a company. The
large size of a company further makes it
difficult for the owners and top
management to maintain personal contact
with the employees, customers and
creditors.
 Limitations of JOINT STOCK COMPANY
•(iv) Numerous regulations: The functioning
of a company is subject to many legal
provisions and compulsions. A company is
burdened with numerous restrictions in
respect of aspects including audit, voting,
filing of reports and preparation of
documents, and is required to obtain various
certificates from different agencies, viz.,
registrar, SEBI, etc. This reduces the freedom
of operations of a company and takes away a
lot of time, effort and money.
 Limitations of JOINT STOCK COMPANY
•(v) Delay in decision making: Companies
are democratically managed through the
Board of Directors which is followed by
the top management, middle
management and lower level
management. Communication as well as
approval of various proposals may cause
delays not only in taking decisions but also
in acting upon them.
 Limitations of JOINT STOCK COMPANY
• (vi) Oligarchic management: (Rule by a few people) . In theory,
a company is a democratic institution wherein the Board of
Directors are representatives of the shareholders who are the
owners. In practice, however, in most large-sized organizations
having a multitude of shareholders; the owners have minimal
influence in terms of controlling or running the business.
• It is so because the shareholders are spread all over the country
and a very small percentage attend the general meetings.
• The Board of Directors as such enjoy considerable freedom in
exercising their power which they sometimes use even contrary
to the interests of the shareholders.
• Dissatisfied shareholders in such a situation have no option but
to sell their shares and exit the company. As the directors
virtually enjoy the right to take all major decisions, it leads to
rule by a few.
 Limitations of JOINT STOCK COMPANY
•(vii) Conflict in interests: There may be
conflict of interest amongst various
stakeholders of a company. The employees, for
example, may be interested in higher salaries,
consumers desire higher quality products at
lower prices, and the shareholders want
higher returns in the form of dividends and
increase in the intrinsic value of their shares.
These demands pose problems in managing
the company as it often becomes difficult to
satisfy such diverse interests.
 2.6.1 Types of Companies
• A company can be either a private or a public
company. These two types of companies are discussed
in detail in the following paragraphs.
• A private company means a company which:
• (a) restricts the right of members to transfer its shares;
• (b) has a minimum of 2 and a maximum of 50
members, excluding the present and past employees;
• (c) does not invite public to subscribe to its share
capital; and
• (d) must have a minimum paid up capital of Rs.1 lakh
or such higher amount which may be prescribed from
time-to-time.
 2.6.1 Private Company
• It is necessary for a private company to use the word private limited after its name. If a
private company contravenes any of the aforesaid provisions, it ceases to be a private
company and loses all the exemptions and privileges to which it is entitled. The
following are some of the privileges of a private limited company as against a public
limited company:
• 1. A private company can be formed by only two members whereas seven people are
needed to form a public company.
• 2. There is no need to issue a prospectus as public is not invited to subscribe to the
shares of a private company.
• 3. Allotment of shares can be done without receiving the minimum subscription.
• 4. A private company can start business as soon as it receives the certificate of
incorporation. The public company, on the other hand, has to wait for the receipt of
certificate of commencement before it can start a business.
• 5. A private company needs to have only two directors as against the minimum of
three directors in the case of a public company.
• 6. A private company is not required to keep an index of members while the same is
necessary in the case of a public company.
• 7. There is no restriction on the amount of loans to directors in a private company.
Therefore, there is no need to take permission from the government for granting the
same, as is required in the case of a public company.
Red Herring Prospectus
Red Herring Fallacy
Red Herring Prospectus
 2.6.1 Public Company
• A public company means a company which is not a
private company. As per the Indian Companies Act, a
public company is one which:
• a) has a minimum paid-up capital of Rs. 5 lakhs or a
higher amount which may be prescribed from time-to-
time;
• (b) has a minimum of 7 members and no limit on
maximum members;
• (c) has no restriction on transfer of shares; and
• (d) is not prohibited from inviting the public to
subscribe to its share capital or public deposits.
• A private company which is a subsidiary of a public
company is also treated as a public company.