Module 2 Formation of Companies

Introduction:

A sole trading concern or a partnership firm can be started very easily. However, that
is not the case with the formation of a joint stock company as it involves a lengthy
legal process. The establishment of a joint stock company requires the preparation
and filing of important documents such as the Memorandum of Association, the
Articles Association, prospectus, and so on with the Registrar of Companies and the
issue of shares and debentures for raising funds required to start and run the business.
There are different stages in the formation of a joint stock company. The formation
of a public company involves ,
four stages, namely, promotion , incorporation, capital subscription, and
business commencement. However, a private company can start its business soon
after promotion and incorporation.

A. Promotion Stage:
The very first step in the formation of any company is its promotion which is carried
out by the promoters. Promotion refers to the entire set of activities through which a
company is floated. It is a process of organising the finances of a business unit under
a corporate form. Certain preliminary steps are to be taken to bring the company into
existence. There are four steps in the promotion of a company which include:

1. Discovery of business opportunities or ideas or propositions.

2. Thorough investigation of the viability and practicability of the business

proposition.

3. Assembling the various requirements of the business proposition and

4. Financing the business proposition.

PROMOTERS

Meaning of Promoter:
A promoter is a person who is associated with the formation of a company. He is the
person who is referred to as the founder of a company. The person who takes initiative
for the formation of a company is called a promoter. He devises a plan of a business
venture and takes the preliminary steps necessary for the formation of a company. A
promoter may be an individual or an association or a syndicate.

Definition of Promoter: 1
The legal definition of a promoter is given under Section 2(69) of the Companies Act.
It defines a promoter as "A person -
a. Who has been named as such in a prospectus or is identified by the company
in the annual return referred to in Section 92; or
b. Who has control over the affairs of the company, directly indirectly whether
as a shareholder, director, or otherwise; or
c. In accordance with whose advice, directions, or instructions the board of
directors of the company is accustomed to act.
However, a person who is acting merely in a professional capacity shall not be
treated as a promoter".

According to Guthmann and Doughall, "Promoter is a person who assembles the men,
money and the materials into a going concern".

Cockburn defines a promoter as, "One who undertakes to form a company with
references to a given project and to set it going, and who takes the necessary steps to
accomplish that purpose".

From the above definitions, it is clear that promoters are the persons who initiate
the idea of starting a company for running a business, conduct a thorough study
of the proposition assemble the various requirements of the proposition, take
steps to fund the proposition, and ultimately bring the company into existence.

Position of Promoters.

The position of the promoters is quite peculiar. By the role they play in the promotion
of a company, one can conveniently consider them as the trustees or the agents of the
company. But in fact, they neither act as agents nor trustees of the company they
promote, because there is no trust or principal in existence at the time of their efforts.
However, certain fiduciary duties like an agent or trustee have been imposed on the
promoters under the Companies Act. They stand in a fiduciary position (i.e., a
position which requires full of trust and confidence) with the company they are
promoting.

The promoters invest huge funds to promote the company on behalf of the company
which is yet to take its birth. As stated earlier, a company comes into existence only
after incorporation. The promoters get the invested money back with their
remuneration from the directors of the company only after its incorporation. Until
then, they are solely responsible for all acts they carry out during promotion. If
anything goes wrong in between, they lose the entire amount they invest in promoting
the business. In other words, they should not be negligent in their work as promoters,
deceive or provide false information to the directors of the new company. Therefore,
they run a heavy risk in their venture. Till then, they act as the caretakers or custodians
of the entire property of the company. 2
Functions of Promoters:

The promoters have to perform various functions in bringing the company into
existence. The following are such functions:

1. Promotion of Company:
The foremost important function of the promoters is the promotion of a company.
They carry out the various processes of promotion such as the discovery of a business
idea or opportunity, thorough investigation of the business idea, assembling the
requirements to materialise the business idea, and financing the entire project of
starting a company. At this stage, they enter into preliminary contracts with necessary
people either to buy an existing business or start a new business altogether.

2. Registration of Company:
After promoting the company, promoters have to proceed with registering the
company. For this purpose, they have to get the documents such as the Memorandum
of Association, the Articles Association, etc. drafted and printed to be submitted to
the Registrar of Companies for registration and get the company registered.

3. Raising Capital:
If the company to be started is a public company with share capital, the promoters
have to take the necessary steps to raise the share capital required for the
commencement and running of the business. For this purpose, they enter into a
contract with the bankers, brokers, underwriters, etc. for allotting shares to the public.
Then they make necessary arrangements for obtaining the Certificate to Commence
Business from the Registrar of Companies.

4. Nurturing the Company:

Sometimes, promoters also get associated with the company even after bringing the
company into existence in the capacity of first subscribers to the Memorandum of
Association and the first directors of the company and take up the responsibility of
running the business of the company during the initial period of its growth.

B Incorporation Stage
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The second stage in the formation of any company is registration or incorporation. In
the case of private companies, this stage is the last stage as they can start their business
soon after registration.

Procedure for registration and Incorporation

The procedure for registration and incorporation of the company involves the
following steps
1. Application to the registrar for availability of the Name: An application for
availability of proposed name should be made to the registrar in the prescribed
form. The registrar shall den inform about the availability of the proposed
name. Thereafter, the company is got registered by filing an application with
the registrar of companies of the area in which registered office of the company
is to be situated.

2. Filing of documents and information with registrar: After getting the

approval of name, the application for registration of the company should be
filed with the registrar along with the following documents and particulars.
a) The Memorandum of association: It is the document which describes the
scope of company activities. It must be signed by the required number of
persons which are necessary for the formation of the company and who
come forward to form it.
b) The articles of association: It is the document which contains the rules and
regulations of the company. It must also be signed by all the persons who
sign the memorandum of association.
c) Prescribed declaration : A declaration in the prescribed form stating that
all the requirements of the companies Act ,2013 and rules made under in
respect of registration have been complies with. Such a declaration should
be given by
• An advocate. A charted accountant cost of accountant or a company
secretary in practise whom is engaged in the formation of the
company.
• A person named in the articles, as a director, manager or secretary of
the company.
d) Affidavit of subscribers and first directors: An affidavit from each of
subscribers to memorandum, and from first directors named in ‘articles’ to
the effect that they are not convicted and have not been found guilty of any
fraud, misfeasance or breach of duty under this act or under any previous
company law during the last 5 years and all the documents filed with the
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registrar are correct and complete.
 e) Correspondence address: The address for correspondence till the
registered office of the company is established.
f) Particulars of the subscribers: The complete particulars of name
including surname or family name, residential address, nationality and
prescribed particulars of every subscriber to the memorandum including
their proof of identity.
g) Particulars of first directors: The complete particulars of name as stated
above, including proof of identity of persons named in the articles as first
directors. The particulars of director identification number (DIN) should
also be given.
h) Consent to act as directors and particulars of interest: The consent to
act as directors and particulars of interest of first directors mentioned in
company’s articles of association.

MEMORANDUM OF ASSOCIATION
Memorandum Of Association of a company is one most important documents
requiredto be filed with the Registrar Of Companies at the time of formation of a
company. No company can be registered without Memorandum of Association.
It contains the fundamental conditions on which the company is to be
incorporated. In fact, this document is of great importance in relation to the affairs
of the proposed company. It may rightly be called a ‘charter’ or the ‘construction’
of the company as it regulates the relationship of the company with the outside
world. It contains information about name, capital, and liability of the members
and the objectives of the company. It lays down the powers and objects of a
company, and the scope of the operations of the company beyond which its
actions cannot go. The company is bound to act according to the objects and
powers as contained in its memorandum. Any action outside the scope of
memorandum of association will be void.
The memorandum of association is a public document, and every person who deals
withthe company is presumed to have the sufficient knowledge of its contents.
The main purpose of the memorandum of association is to enable shareholders,
creditors and all those persons who deal with the company to know what its
powers are, and what is therange of its activities. Thus, the shareholders will come
to know for what purpose theirinvestment is going to be utilized. They will also
know the risk involved in the investment.

CLAUSES (CONTENTS) OF MEMORANDUM OF ASSOCIATION

Section 13 of the Companies Act lays down that the Memorandum Of Association
shallcontain the following clauses: 5
1. Name Clause
2. Registered Office Clause
3. Object Clause
4. Liability Clause
5. Capital Clause
6. Association or Subscription Clause

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NAME CLAUSE [Section 13 (1)(a)]
This clause of ‘memorandum of association’ contains the name of the
proposed company. The company being a legal person must have a name to
establish its identity. As a matter of fact, the name is the symbol of personal
existence of the

company. A company may choose any suitable name it likes. However, the
followingrules must be observed while selecting a name of the company:

i. The name should not be undesirable: The name of the company should
not be undesirable in the opinion of the Central Government, if it is so, the
company cannot be registered with such a name [Section 20 (1)]. This
provision enables the Central Government to reject a name without giving
any reason.

ii. The name should not be identical with another company’s name: The
name ofthe company should not be identical with the name of an already
existing company. It should also not too closely resemble the name of
another existing company. The purpose of prohibiting the use of such
names is that the company must not create an impression that it is carrying
on the business of another well-established company. Such name may be
declared undesirable by the Central Government. If the company gets
registered with such name, the other company with whom the name
resembles can apply to the court for an order that the new company be
restrained from having an identical name. Such court order is known as
‘injunction’. As a matter of fact, the name of a company is a part of its
business reputation. If a new company is allowed to have an identical name,
the reputation of the existing company is definitely injured. Therefore, the
courts grant injunctions prohibiting the use of identical names.

iii. The name should not be a prohibited one: The name of the company
should not be prohibited by the Emblems and Names (Prevention of
Improper Use) Act, 1950. This act prohibits the use of the name and
emblems of (a) U.N.O. and World Health Organization, (b) Indian National
Flag, (C) The official Seal and Emblem of Central and State Government,
(d) The name and pictorial representation of Mahatma Gandhi, and Prime

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 Minister of India.

iv. The name should end with words Limited or Private Limited: The
public company with limited liability must add the word ‘Limited’ at the end
of its name, and the private company the word ‘Private Limited’. The
purpose of adding these words is that all persons dealing with the company
should have a clear notice that the liability of the members is limited.

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2. REGISTERED OFFICE CLAUSE [Section 13 (1)(b)]
This clause of ‘memorandum of association’ contains the name of the State in
whichthe Registered Office of the company is to be situated. Every company
must have its registered office to which all communications and notices be
addressed. The exact address need not be given. However, registered office
of the company must be in
existence from the day when the company starts its business, or from the 30th
day ofincorporation of the company whichever is earlier. It, therefore, follows
that the exact situations of the registered office must be decided immediately
on the commencement of business by the company or within 30 days of its
incorporation. If default is made in complying with these requirements, the
company and every other officer who is in default shall be punishable with fine
which may extend to Rs. 500/- for every day during which the default
continues.

3. OBJECTS CLAUSE [Section 13(1)(c)& (d)]

This clause of ‘memorandum of association’ contains the objects for which
the proposed company is to be formed.
i. Main objects clause: This clause will state the main objects of the
company which are to be pursued by it on its incorporation. The objects
which are incidental or ancillary to the attainment of main objects will
also be stated in this clause.
ii. Other objects clause: This clause will state those objects of the
company which have not been mentioned in the above clause.
They are free to choose any lawful objects for their company, subject to
the following restrictions:

a. The objects should not be illegal or against the public policy e.g.,
formation of a company for conducting lotteries, trading with enemy
etc.
b. The objects should not be against the provisions of the Companies Act.
c. The objects should not be against the general law of the land e.g., the
law prohibits gambling.

4. PURPOSE OF OBJECTS CLAUSE

The purpose of requiring the company to state its objects in clear and definite
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 terms may be summed up under:
i. It informs the members (i.e., the shareholders), the kind of business in
which their money may be used.
ii. It informs the persons dealing with the company, the powers of the company.
iii. It also serves the public interest, as the activities of the company are
confined to a defined field and the company cannot go beyond these
activities.

5. LIABILITY CLAUSE [ Section 13 (2)]

This clause of ‘memorandum of association’ contains the nature of the liability
of the members of the company. This clause is necessary for those companies
in which the liability of the members is limited. The memorandum of such
companies must state that the liability of the members is limited. The
proposed company may be

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 limited by shares, or by guarantee. In these cases, the liability clause should
state as under:
i. In case of companies limited by shares. The liability of a member is
limited to the nominal value of shares held by him. If the shares are
partly paid, the liability is limited to the amount which remains unpaid,
and if the shares arefully paid, then the liability of the members is nil.
ii. In case of companies limited by guarantee, the liability clause will also
state the amount which every member undertakes to contribute to the
assets of thecompany in the event of its winding up.

6. CAPITAL CLAUSE [Section 13 (4) (a])

This clause of ‘memorandum of association’ contains the amount of share
capital with which the company is to be registered. This clause should also state
the number and value of shares into which the capital of the company is
divided. The capital with which the company is registered is called the
‘registered’, ’nominal’ or ‘authorized’ capital. The effect of this clause is that
a company cannot issue more shares than authorized by the Memorandum

7. ASSOCIATION OR SUBSCRIPTION CLAUSE

This clause of ‘memorandum of association’ contains the names of the persons
whosign the memorandum and states that they are willing to form themselves
into a company. These persons are called subscribers. In this clause, the
subscribers mustmake a declaration reading as under:
“We, the several persons whose names and addresses are subscribed, are
desirous being formed into a company in pursuance of this memorandum of
association, and we respectively agree to take the number of shares in the
capital of the company setopposite our respective names”.
This declaration must be signed by each subscriber in the presence of at least
one witness who must attest the signatures. Moreover, every subscriber must
also writehis name, address, description and occupation, if any, the number of
shares which he takes. In case of a public company, the memorandum must be
signed by at least seven subscribers and in case of a private company by at
least two subscribers.

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ARTICLES OF ASSOCIATION.
The Articles of Association briefly called ‘articles’ is the second most important
document to be filled with the registrar at the time of incorporation of the
company. This document contains the rules, regulations and bye-laws for the
internal management of the company. These rules and regulations are framed for
the purpose of carrying out the objects of the company as stated in the
memorandum of association.

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It may be noted that the articles of association is subordinate to and controlled by
the memorandum of association.
The ‘memorandum of association’ lays down the objects and powers of the
company. And the ‘articles of association’ lays down the modes in which the
objects of the company are to be carried out by the members.

PROVISIONS OR CONTENTS OF THE ARTICLES OF ASSOCIATION:

No doubt, the provisions or contents of the articles of associations differ from

companyto company. However, the articles of a company, usually, contain the
following provisions:
1. Nature of the business of the company.
2. Amount of share capital of the company and its division into different classes
or shares.
3. Rights of different classes of shareholders.
4. Rules for making calls on shares.
5. Rules for allotment of shares.
6. Payment of commission on shares and dsebentures to underwriters.
7. Rules for transfer and transmission of shares.
8. Rules regarding the forfeiture and surrender of shares, and the re-issue of
forfeited and surrendered shares.
9. Rules relating to company’s lien on shares.
10. Provisions relating to the conversion of shares into stocks.
11. Procedure relating to issue of share certificates and share warrants.
12. Provision s relating to the alteration and reduction of share capital.
13. Provisions relating to the alteration of the articles of association.
14. Rules regarding the appointment, qualifications, number, powers, duties,
remuneration, etc. of directors.
15. Rules regarding the appointment of managing director, manager and secretary.
16. Rules relating to indemnity to officers or agents of the company.
17. Rules for adopting preliminary contracts, if any.
18. Procedure of convening and conducting directors’ and shareholders’ meetings.
19. Provisions relating to the quorum of meetings.
20. Rules relating to voting system.
21. Rules relating to capitalization of profits.
22. Provisions relating to declaration of dividends.

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23. Provisions regarding creation of reserves.
24. Provisions relating to keeping of register of members.
25. Provisions relating to the maintenance of accounts and their audit.
26. Provision regarding the appointment and remuneration of auditors.
27. Provisions relating to the common seal of the company.

RELATION BETWEEN MEMORANDUM AND ARTICLES OF

ASSOCIATION.

The relation between the memorandum and articles of association of a company

is that the article of association is subordinate to the memorandum of association.
This relation between these two documents is evident from the following points:

1. The articles of association cannot give to the company which is not given
by thememorandum of association. If they are inconsistent on any point,
then the memorandum of association shall prevail.
2. The articles of association cannot alter the provisions of memorandum of
association. The articles, therefore, must not contain anything which is
contraryto the provisions of memorandum of association.
3. The articles of association may explain or supplement the memorandum of
association, but cannot extend its scope. However, if there is no ambiguity
in the memorandum of association, its terms cannot even be controlled or
modified bythe articles of association.

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COMPARISION BETWEEN MEMORANDUM AND ARTICLE OF
ASSOCIATION

Sl. MEMORANDUM ARTICLES OF ASSOCIATION

No. OF
ASSOCIATION
1. It defines the objects and powers of It contains the rules and regulations of
the company. the company which are formed for the
purpose of carrying out the objectives as
lay down in the memorandum of
association.
2. It is the supreme document as it It is subordinate to the memorandum of
defines the constitution of the Association. In case of any conflict
company. As a matter of fact, it is between the two, the memorandum shall
the prevail.
charter of the company.
3. It regulates the relationship of the It regulates the internal management of
company with the outsiders, as the the company, as the rules and regulation
objects and powers of the company contained in it describe the internal
are made known to the outsiders procedure to be followed by the
through this document. company.
4. It cannot be easily altered. The It can be easily altered as compared to
company has to follow memorandum of association.
strict procedure for the alteration
of its registered office clause for
shifting the registered office from
one state to
another.
5. It is an important, and every It is not necessary for every company.
company must have its own Because a public company limited by
‘memorandum of association’. shares may not have any articles of its
own ,it may adopt ‘table A’ of schedule
1 of the Companies Act.
6. Any act which is ultra vires (i.e. Any act which is ultra vires the articles of
beyond powers) the memorandum, association may be ratified by the
is wholly void and cannot be ratified shareholders. Acts ultra vires the articles
even by the whole body of of association are merely irregular and
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 shareholders. As a matter of fact, the not void. However, such act can be
company cannot go beyond the ratified only if it is within the scope of
scope memorandum of association.
of its memorandum of association.

C. Capital Subscription Stage:

The third stage in the formation of a public company is the capital subscription stage
in which the task of raising the capital needed for the formation and running of the
company is done. At this stage, arrangements are made by the promoters/ directors to
consider the following:

1. Convening the First Board Meeting:

a) The appointment of Regular Secretary
b) Appointment of Bankers, solicitors, brokers , auditors
c) Approval of preliminary contracts
d) Obtaining approval for listing of shares
e) Adoption of underwriting contract
2. Filing the copy of the prospectus or a statement in lieu of prospectus
3. Issue of prospectus to the public
4. Allotment of shares

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17
Prospectus:
After the formation of a public limited company if the promoters wish to
collect the necessary capital for commencing business from the public they
have to approach the public with an invitation to subscribe to the shares of
the company. Such deposits may be invited from the public by issuing a
document known as prospectus.

Definition and meaning:

According to Section 2 (70) of the Companies Act “ A Prospectus means any
document described or issued as prospectus and includes any notice or circular,
advertisement orother document inviting deposits from the public or inviting
offers from the public for the subscription or purchase of any shares in, or
debentures of a body corporate”.

The above definition reveals the following ingredients of a prospectus:

1. There must be an invitation to the public
2. The invitation must be to subscribe to the shares or debentures of the
company.
3. The invitation must be made by or on behalf of the company or in
relation to the proposed company
Thus a prospectus means any invitation issued to the public inviting it to deposit
money with the company or to take shares and debentures of the company. It
contains all material and essential information about the company affairs and its
future prospectus. The invitation may be in the form of a document or a notice,
circular, advertisement etc. The only requirement is that the invitation must be
made to the public

Contents of Prospectus
Section 26 of the Companies Act, 2013 deals with the contents of the prospectus.
In the contents, a detailed description of the establishment of the company, its
characteristics, and its estimated future is given. The important matters
incorporated in the prospectus of a company are as follows:

A. Brief History and Prospects:

The following information is provided under this head:

• A brief history of the company.

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 • The main objects of the company.
• The location of the plant.
• Information about the project, plant and its machinery, raw material, etc
• Economic justification and marketability of the goods to be produced and
marketed.

B. Capital Structure:

• Share capital of the company; authorised, issued, subscribed, and paid up

capital, present issue offered for subscription.
• Basis for allotment of shares.
• Facilities available to non-residents for purchase of shares etc.

C. Information about the Company Management:

Under this head, complete information is provided about the history main objects
and present business of the company. The details regarding the experience and
background of the promoters, full addresses of the manager, managing director,
and other directors are also furnished under this head.

D. Details about the Project:

The main information provided under this head is the cost of the project, the
means of financing the project, location of the project, utilities like water and
power supply, nature of the products, etc.

E. Financial Information:

Under financial information, the following particulars are provided:

o Auditor's Report
o Shareholders' equity and liabilities.
o Auditor's certificate on share capital.
o Estimated cost of the project and the means of the finance.

F General Information:
The main information provided under this head are:

• Appointment of chief executive.

• Election of directors.
• Powers of directors.
• Borrowing powers of directors.

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• Voting rights.
• Transfer of shares.
• Quorum of the general meeting.

G Commission, Brokerage and Tax Exemptions:

This part contains the following information:

• Commission to be paid to the bankers to the issue
• Brokerage
• Tax exemption on investment on the shares of the company
• Exemption from customs duty and sales tax on plant and machinery, if any

H. Particulars of Directors:

Under this head, the particulars regarding the names, addresses, occupation, and
the director identification number of the board of directors are given.

I. Interest of Directors:

This head provides information regarding:

• Interest of directors in dividends and other benefits.

• Remuneration to be paid to the chief executive, directors, and the secretary.

J. Application and Allotment:

The procedure of applying for shares, their scrutiny, and allotment of shares is
made clear to the prospective investors in this section.

K. Miscellaneous:

The main contents under this head are:

o Place and address of the registered office.

o Bankers of the company.
o Bankers to the issue both local and foreigner
o Legal adviser, consultants to the issue

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Statement in Lieu of Prospectus:

A statement in lieu of (in the place of) prospectus is a document filed with the
Registrar of Companies when a company does not want to issue a prospectus to
the public for inviting it to subscribe to its shares or debentures. It is similar to a
prospectus giving crucial information about the company like the name of the
company, nature of business, names, and addresses of directors, number and type
of shares issued, the face value of shares, and so on. Like a prospectus, it should
also be signed by all directors of the company. It must be filed with the Registrar
of Companies at least three days before the first allotment of shares/debentures.
If the directors of a company are confident of raising the required capital from a
small group of people consisting of their family members, friends, and relatives,
it need not issue a prospectus. It can issue a statement in lieu of a prospectus to
that small group. It is also a public document but issued only to a limited number
of people. In such a case, the public cannot invest in the securities of that
company.

Book Building:

Book building is the process by which an underwriter attempts to determine the

price at which an initial public offer will be offered. The process of price
discovery involves generating and recording investor demand for shares before
arriving at an issue price. It is a mechanism by which companies price their initial
public offering (IPO) and is recommended by all the major stock exchanges as
the most efficient way to price securities.

D. Business Commencement Stage

A private company can commence its business soon after incorporation as the
formation of such a company has only two stages. However, in the case of a
public company, it has to complete four stages in its formation and the fourth/last
stage is the business commencement stage. At this stage, it has to obtain a
Certificate to Commence Business to start its operations. For this purpose, the
promoters/directors of the company make necessary arrangements for obtaining
this Certificate from the Registrar of Companies to commence business.

E-filing for obtaining Business Commencement Certificate:

For obtaining the Business Commencement Certificate, the promoters or
directors have to take the following steps:

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1. Filing e Form (application) with the Registrar of Companies:

An application (Form 20A) is to be submitted to the Registrar of Companies

requesting him to issue the Business Commencement Certificate. This is to be
done within six months of the incorporation of the company. If the company fails
to do so, a fine of ₹50,000 has to be paid by the company and every officer in
default shall be liable to a penalty of 1,000 per day for each day during which the
default continues subject to a maximum of 1,00,000. The Registrar of Companies
has even the power to remove the name of the company from the Register of
Companies. The e-form has to be verified and certified by a practicing
professional such as a Chartered accountant/ company secretary/cost and
management accountant before filing with the Registrar of Companies.

2. Attaching Necessary Documents and Statements:

In the e-form filed with the Registrar of Companies for obtaining the Business
Commencement Certificate, the following documents and statements in the form
of a board resolution must also be submitted:

a. Digital Signature Certificate.

b.Corporate Identification Number of the company.

c. Registration Certificate issued by the Reserve Bank of India financial

companies which do not carry on banking business.

d. Full name and address of the registered company,

e. Proof of payment done by subscribers.

f. address of registered office of the company.

g. Email address of the company.

h. A declaration stating that the shares have been allotted upto the minimum
subscription amount.

i. A declaration stating that a copy of the prospectus (statement in lieu of

prospectus if the company wants to raise funds from a small group) has been filed
with the Registrar of Companies.

j. A declaration stating that the directors have purchased the minimum number of
qualification shares to qualify themselves to act as such.

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k. A declaration stating that no money is to be refunded to the applicants of shares
because of the inability to obtain permission for the listing of shares in a
recognised stock exchange.

l.. A Statutory Declaration ('Declaration of Compliance' under Section 10 of the

Companies Act, 2013) by the directors or the company secretary in the form of a
board resolution stating that the requirements of the Companies Act in respect of
the commencement of business have been duly complied with.

3. Payment of the Required Fees:

Along with the application for the Business Commencement Certificate and the
above declarations, the company must also pay the required fees to the Registrar
of Companies.

4. Obtainment of Business Commencement Certificate:

On receiving the application for Business Commencement Certificate together

with the various declarations and the fees, the Registrar of Companies will verify
whether all requirements of the Companies Act in respect of grant of Business
Commencement Certificate have been complied with. If he is satisfied with the
documents submitted to him, he will issue the Business Commencement
Certificate to the company.

Register of Companies:

The Register of Companies is a register maintained at the office of the Registrar

of Companies (ROC). When the promoters or directors of the company submit
the necessary documents with him for registration, he issues a certificate known
as the Registration/Incorporation Certificate. He will do so only after the scrutiny
of all those documents submitted to him and finds that they are in order. On
registration, the Registrar of Companies enters the details of the company which
is registered such as the name of the company, address of the registered office of
the company, Corporate Identification Number of the company, PAN Number,
Bank A/c Number, and Email address of the company. Within 180 days of the
issue of a Certificate of Incorporation, a company must proceed to obtain its
Business Commencement Certificate from the Registrar of Companies to start its
business. If it fails to do so, the Registrar of Companies has the right to remove
the name of the company from the Register of Companies.

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FORMATION OF GLOBAL COMPANIES

Meaning of Global Companies:

Global companies are those companies which market their products/services in

different countries. A global company is also referred to as a multinational
corporation (MNC). Their products/services will have a world market or
international market/global market. That is why they are called global
companies. They extend their manufacturing and marketing activities in several
countries through a network of their business units. Normally such companies
have their head office in one country and branches all over the world. Bosch,
Coca Cola, Pepsi, Deutsche Bank, Videocon, Suzuki, Maruti Suzuki, etc are the
best examples of global companies.

Features of Global Companies:

The following are the significant features of global companies:

• Large Capital
• Centralised control
• Advanced Technology
• Increased weightage for innovation
• Foreign collaborations
• Expansion of market domain

Types of global companies

There are different types of global companies which are as follows:

1. Exporting:

This is the most preferred type for reaching out to their customers by the majority
of the global companies. This type of global company specialise in selling their
products to the customers directly through their outlets or agents or distributors
located in different countries. Manufacturing of the products normally is done in
their home country and products are exported to other countries. In such a case,
they need not deploy their own employees in large numbers for marketing
activities since it is done by their agents or distributors in their target markets.
This will have a minimal impact on the company's human resource management.

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2. Licensing:

Licensing is another way of expanding one's business beyond national

boundaries. In this case, an agreement is entered into between the licensor (global
company) and licensee in which the licensee is granted an intangible right in the
form of intellectual property rights such as patents, and copyrights for
manufacturing and marketing of goods/services under a trading name in different
countries. The licensee is supposed to pay a royalty as per the agreement in return
for the use of the license. In such a case, the entire business is done by the licensee
only.

3. Franchising:

In a way, franchising is similar to licensing in the sense that in franchising, an

option is given by the parent company to another company to do business in a
prescribed manner. Franchising is different from licensing in the sense that it
expects the franchisee to observe stringent guidelines in managing the business
than licensing. Moreover, in licensing, the licensor grants his rights only to
manufacture the products while franchising is more popular with service firms
which specialise in the marketing of services like hotels, car rental services, etc.
eg. Dominos, Uber, Ola, etc.

4. Foreign Direct Investment:

A foreign direct investment (FDI) is an investment in the form of controlling

ownership in a business in one country by an entity based in another country.
When business operations of a business enterprise in one country are controlled
by a business unit in a foreign country, it is termed as foreign direct investment.
FDI takes place when an investor establishes foreign business operations or
acquires foreign business assets, including establishing ownership or controlling
interest in a foreign company. This implies that foreign companies not only bring
in money with them but also knowledge, skill, and technology. It may take either
of two forms, namely, joint venture or wholly owned subsidiaries. Two or more
companies collaborate to run a business in case of a joint venture, whereas the
entire business is fully owned by a foreign company investing 100 per cent capital
in another company in the case of wholly-owned

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