Chapter - 7

F o r m a t i o n of a
Company
Stages of Company Formation

Promotion

Incorporation

Subscription of
Capital
Stages of Company Formation

A private company has

to complete only the
first 2 stages

Promotion &
Incorporation
 1.
Promotio
n
 Promotion
Promotion is the discovery of business
opportunities and organization of funds, property
and management ability into business concern for
the purpose of making profit
 Promotion
Promotion means the establishment of
business into reality
Promoter
 Promoter
The persons who perform the work of
promotion and bring an enterprise into
existence are known as promoters
 Promoter
A promoter is an entrepreneur or businessman
who gives birth to a business concern

A promoter may be an individual, a firm or a

company
Functions of
Promoters
 FunctionsofPromoters
1 Identification of business opportunity
Promoters have to discover a
business idea

It may be about a new line of business or the

expansion of an existing business
 FunctionsofPromoters
2 Feasibility studies

It involves the evaluation and analysis of

the potential of the proposed project
Types of
Feasibility
Studies
 FunctionsofPromoters
a) Technical feasibility
Here the promoters have to ensure the project is
technically possible such as availability of raw
materials, infrastructure, adequate technology etc.
 FunctionsofPromoters
b) Financial feasibility
If the project requires large funds which cannot be
raised within the available means, it is better to stop
that project
 FunctionsofPromoters
c) Economic feasibility
Even if the project is technically and financially
viable, it may have poor profitability, so that the
promoters have to take expert advice

Only when the above feasibility studies give

positive results, the promoters can launch the
new project
 FunctionsofPromoters
3 Name approval
They have to select a name for the company
and it should not be identical or same to an
existing company

If it is satisfied by the Registrar of Companies,

it will approved
 FunctionsofPromoters
4 Fixing up of signatories to the
Memorandum of
Association
Promoters have to fix the members who are
willing to sign the MoA and obtain their
written consent to act as directors and to
take the qualification shares
 FunctionsofPromoters
5 Appointment of professionals
Promoters are entitled to appoint
professionals like mercantile bankers,
auditors etc. to assist them in the formalities
of registration of the company
 FunctionsofPromoters
6 Preparing necessary documents

Promoters are bound to prepare necessary

documents for registration such as
Memorandum of Association, Articles of
Association, Prospectus or Statement in lieu of
prospectus, list of directors etc.
Documents for the
Registration of a
Company
 DocumentsfortheRegistration

1.Memorandum of Association (MoA)

2.Articles of Association (AoA)
3.Consent of Proposed Directors
4.Agreements if any
5.Statutory Declaration
6.Payment of Fees
1

M e m o r a n d u m of
Association
 Memorandum ofAssociation
MoA is the most important document of a
company

It defines the objects and powers of a company

and the company’s relationship with the outside
world
 Memorandum ofAssociation
While preparing the Memorandum of
Association, great care should be taken, because
the company cannot go beyond the limits laid
down in it as it is the charter or magna carta of
the company

M a g n a Carta
 Contents of
Memorandum
(Clauses of MoA)
1

Name Clause
It contains the name of the company
 NameClause
A company can have any name subject to the
following conditions: -

●
It must not be identical to the name of an
existing company.
●
It should not give an impression that
the
company has a connection with
the government or national
heroes.
●
It should end with the word “Limited”
or
2

Domicile Clause or
Situation Clause

It contains the place or State where in the

company’s registered office is situated
 DomicileClause
Exact address is not required at the time of
registration but it should be informed to the
Registrar within 30 days
3

Object Clause

It defines the purpose for which the

company is formed
 ObjectClause
The aim of the company be disclosed in the
object clause

Eg: Car Manufacturing

4

Liability Clause

It defines the liability of members is

limited
 Liability Clause
This clause limits the liability of members to
the amount unpaid on the shares
owned by them

Eg: Face value of a share is Rs.10, on which Rs.6 paid,

the liability of the shareholder is limited to the balance
amount of Rs.4 only.
5

Capital Clause

It defines the maximum amount of

capital that can be raised by the company
 CapitalClause
This clause states the maximum capital
(authorized capital) with which the company is
to be incorporated along with its division, ie: 1
lakh shares of Rs.10 each comprises a total
capital of Rs.10 lakhs.
Contents of Memorandum

1. Name Clause
2. Domicile Clause
3. Object Clause
4. Liability Clause
5. Capital Clause
2

Articles
of
A s s o c i a tion
 ArticlesofAssociation
It is the bye-law of a company
It contains the rules and regulations for the
internal management of the company

It is subsidiary to MoA and hence it should not

contradict with anything stated in MoA
 ArticlesofAssociation
A public company may have its own AoA
or may adopt Table F,G,H,I or J

These Tables are model AoA given in Companies Act 2013

for different types of companies such as Company Limited
by shares (Table F), Company Limited by Guarantee (Table
G) etc.
3

C o n s e n t of
P r o p o s e d D ir e c t o r s
 ConsentofProposedDirectors
A written consent of proposed directors is also
required to confirm that they agree to act as
directors and to undertake
qualification shares
4

Agreement
 Agre ment
Agreement with any individual for appointing
him as Managing Director or whole time
director or manager is another document to
be submitted to the Registrar
5

Statutory
D e c l a r a tion
 StatutoryDeclaration
It should be submitted to the Registrar stating
that all legal formalities have been
complied with

It must be signed by any one of the following: An

advocate of high court or supreme court, a chartered
accountant, a director of the company,
manager or secretary of the company
6

P a y m e n t of F e e s
 Payment of Fees
Along with all the above documents,
necessary fee has to be paid for registration
based on the authorized capital of the
company
Documents Required for
Registration

1.Memorandum of Association (MoA)

2.Articles of Association (AoA)
3.Consent of Proposed Directors
4.Agreements if any
5.Statutory Declaration
6.Payment of Fees
Position of Promoters
 PositionofPromoters
The promoter is deemed to act as a trustee of the
company under promotion

Actually he is not an agent or trustee

 PositionofPromoters
The contracts entered by the promoter with
various parties will be ratified (approved) by
the company on incorporation
 PositionofPromoters
He has the right to get remuneration for the
services rendered and be reimbursed for the
expenses incurred by him

He should not make any secret profits

 PositionofPromoters
The promoter is personally liable for all the
preliminary contracts even after incorporation

He is also liable to the shareholders and debenture

holders for any mis-statement in the prospectus at
the time of issue of company securities
2. Inc or po r at io n
 Incorporation
Incorporation means the registration of the
company under the Indian Companies Act

It is the second stage in formation of a company

 CertificateofIncorporation
After scrutiny of the documents submitted, the
Registrar issues a certificate of registration which
is called the
Certificate of Incorporation

It is also called the birth certificate of the company

CertificateofIncorporation
 Incorporation
Effect of Certificate of Incorporation

1. A company becomes a legal entity with

perpetual succession

2. It can enter into valid contracts

 Incorporation
Effect of Certificate of Incorporation

On the issue of certificate of incorporation, a

private company can commence its business

But a public company has to go through two

more stages in the formation
 3. C apit al
S u b s cription
 Capital Subscription
A public company can raise funds from the
public by issuing shares and debentures

Share Capital
Procedure for raising
funds from the
public
 CapitalSubscription-Procedure
1. SEBI Approval
Approval from Securities and Exchange Board
of India (SEBI) is to be obtained for raising
funds from the public

SEBIis the regulatory authority of security

market in India
 CapitalSubscription-Procedure
2. Filing of Prospectus
A copy of prospectus or statement in lieu of
prospectus must be filed with the Registrar of
Companies
 CapitalSubscription-Procedure
3. Appointment of Bankers, Brokers and
Underwriters
●
Bankers collect the application money from the
public
●
Brokers distribute the application form and
encourage the public to apply for shares
●
Underwriters give guarantee to the issue of
shares by giving an undertaking to buy the
shares for a commission if not subscribed by
the public
 CapitalSubscription-Procedure
4. Minimum Subscription
The minimum amount of capital which must be
subscribed by the public before a public
company can allot shares is known as
minimum subscription
CapitalSubscription-Procedure
Minimum Subscription
90% of the issued amount as per the SEBI guidelines
It is decided by the directors and stated in the
prospectus
CapitalSubscription-Procedure
Minimum Subscription
Minimum subscription is used to purchase property, to
meet all preliminary expense and as working capital
 CapitalSubscription-Procedure
Minimum Subscription
If minimum subscription is not received within 120
days from the date of issue, amount collected must be
returned to the applicants

If not, the directors are liable to repay the money with 6%

interest from 130th day onwards
 CapitalSubscription-Procedure
5. Application to stock exchange
Company should give an application to at least
one stock exchange for permission to deal in
its shares or debentures
 CapitalSubscription-Procedure
6. Allotment of shares
Once the permission is obtained from the
stock exchange, the company can allot
shares to the applicants
Procedure for Capital Subscription

1.SEBI Approval
2.Filing of Prospectus
3.Appointment of Bankers etc.
4.Minimum Subscription
5.Application to Stock Exchange
6.Allotment of Shares
Prospectus
 Prospectus

It is a document, notice, circular or

advertisement inviting offers for subscription or
purchase of any shares or debentures of a
company from the public
 Prospectus

A public limited company limited by shares must

issue the prospectus if it intends to issue the
shares to the public and a copy of the same should
be filed with the Registrar
Statement in lieu of
Prospectus
 StatementinlieuofProspectus

In case a public company is confident of raising

capital privately, they need not issue the
prospectus
Statement in lieu of

But they have to prepare a Statement in Lieu of

Prospectus and it must be filed with the
Registrar for registration
 Differences
between
Memorandum and
Articles
 Memorandum Vs. Articles
1 Objectives

MoA AoA
Defines the Defines the
objects of the rules of internal
Company management
 Memorandum Vs. Articles
2 Position

MoA AoA
Subsidiary
Main document document
of the Company
Subordinate to
Subordinate to MoA and
Companies Act Companies Act
 Memorandum Vs. Articles
3 Relationship

MoA AoA

Defines the Defines the

relationship of relationship of
Company with members and
outsiders the company
 Memorandum Vs. Articles
4 Validity

MoA AoA

Acts beyond AoA

can be ratified by
Acts beyond the members,
MoA is invalid provided they do
not violate MoA
 Memorandum Vs. Articles
5 Necessity

MoA AoA

Not necessary
Every company for public Co.
has to file MoA It can adopt
Table F
 Memorandum Vs. Articles
Basis MoA AoA

1. Objectives Defines the objects Rules of internal

management

2. Position Main document of the Subsidiary document

company

Defines the relationship

3. Relationship of company with Defines the relationship of
outsiders members and the company

4. Validity Acts beyond the MoA Acts which are beyond AoA
are invalid can be ratified

5. Necessity Every company has to It is not necessary for a

file a MoA public ltd. company