Unit 2

FORMATION OF A COMPANY

INTRODUCTION

• Stages in the formation of a company involve legal formalities and procedures.

• A company can come to existence when group of people come together with a view of
forming an association to explore a business opportunity.

• The procedure for the formation of a company, from the time the idea of forming a company
is first conceived till the company is actually formed and commences business, may be
divided into four principal stages:

(i) Promotion

(ii) Incorporation

(iii) Subscription

(iv) Commencement of business

Stage 1 - PROMOTION STAGE

Meaning of Promotion Stage

It is the first stage in the formation of the company.This stage where the idea is evolved and is put to
work by taking necessary steps to launch the business.It involves planning and organizing to form a
business enterprise.

Meaning of Promoter

The person or group who brings a company into existence is called promoter. A promoter may be an
individual, firm, association of persons or a company.

Functions of a Promoter

• Idea Generation- To conceive an idea of starting a business and explore its possibilities.

• Detailed Investigation - Detailed technical, economic and commercial feasibility of the

business propositions.

• Assembling 4 Ms of Production - The promoters start collecting all the resources necessary
to form a company. Promoter makes contracts for purchase of material, land, machinery;
 recruitment of staff etc. He also enters into contract with the government and other agencies
clearance and license of business.

• Deciding Name, Location, nature of the company- The promoter has to select a name and
location of the company while selecting the name the promoter keeps in mind that the name
should not be identical to the name of any other company.
• Preparation of Preliminary Documents- The promoters take steps to prepare various legal
documents of the company which have to be submitted to the Registrar of Companies at the
time of incorporation. The documents which are required to be prepared include
Memorandum of Association, Articles of Association, Prospectus, etc.
• To enter into preliminary contracts with vendors, under writers etc.-The promoter signs
a contract with different parties before the incorporation of the company, generally company
approves these contracts after the incorporation but in case company does not approve these
contract ,then promoter is personally liable for these contracts.

Position of a Promoter

• Promoter is neither an agent nor a trustee for the company since company is not in existence.

• He holds a fiduciary position in relation to the company that he holds.

• Promoter cannot make secret profits in the course of promotion of the business.

STAGE 2 - INCORPORATION OF A COMPANY

Meaning of Incorporation Stage-

It is the second stage in the formation of a company. It is also called as registration stage.The
incorporation of a company refers to the legal process that is used to form a corporate entity
or a company. An incorporated company is a separate legal entity on its own, recognized by
the law.

Steps in incorporation of company

• Filing the application along with preliminary documents like MOA, AOA and prospectus.

• Getting the approval from Registrar of companies.

• Fixing up common seal.

• Payment of registration fees and stamp duties to ROC.

• Getting the “Certificate of Incorporation” from ROC.

Documents to be filed with the Registrar during registration

The promoter should then prepare and file the following documents with the Registrar of Joint Stock
Companies. He should also pay the necessary filing and registration fees.

Preliminary Documents of the company

  Memorandum of Association
 Articles of Association and
 Prospectus

Memorandum of Association (MOA)

MOA is the fundamental document of the company pprepared in the incorporation stage by the
promoter. It contains the fundamental information of the company. It is called a charter of the
company. It is treated as the constitution of the company. It determines the relationship between the
company and the outsiders.

• Clauses of MOA

1. Name Clause

2. Location/Domicile Clause

3. Object Clause

4. Liability Clause

5. Capital Clause

6. Subscription Clause

1. Name Clause
The name of the company should be stated in this clause. A company is free to select any name it
likes. But the name should not be identical or similar to that of a company already registered. If it is a
Public Limited Company, the name of the company should end with the word ‘Limited’ and if it is a
Private Limited Company, the name should end with the words ‘Private Limited’.

2. Situation Clause
In this clause, the name of the State where the Company’s registered office is located should be
mentioned. Registered office means a place where the common seal; statutory books etc., of the
company are kept. The company should intimate the location of registered office to the registrar
within thirty days from the date of incorporation or commencement of business.

The registered office of a company can be shifted from one place to another within the town with a
simple intimation to the Registrar. But in some situation, the company may want to shift its registered
office to another town within the state. Under such circumstance, a special resolution should be
passed. Whereas, to shift the registered office to other state, Memorandum should be altered
accordingly.

3. Objects Clause
This clause specifies the objectives or scope of the business. A company will not be allowed to take
up any other business not mentioned in the object clause. The objectives are of two types a) Main
objectives and b) Other objectives.

4. Liability Clause
This clause states the liability of the members of the company. The liability may be limited by shares
or by guarantee. Usually liability is limited to face value of shares held by the members in case of
company limited by shares.
5. Capital Clause
This clause mentions the maximum amount of capital that can be raised by the company. The division
of capital into shares is also mentioned in this clause. The company cannot secure more capital than
mentioned in this clause. If some special rights and privileges are conferred on any type of
shareholders mention may also be made in this clause.

6. Subscription Clause
It contains the names and addresses of the first subscribers. The subscribers to the Memorandum must
take at least one share. The minimum number of members is two in case of a private company and
seven in case of a public company.

Thus the Memorandum of Association of the company is the most important document. It is the
foundation of the company.

Meaning of Articles of Association:

AOA is the preliminary document that contains the rules and regulations or bye-laws of the company.
It is related to the internal working or management of the company. It plays a very important role in
managing the daily affairs of a company.

Contents of Articles of Association

The articles generally deal with the following

1. Classes of shares, their values and the rights attached to each of them.

2. Calls on shares, transfer of shares, forfeitureand conversion of shares and alteration of capital.

3. Directors, their appointment, powers, duties etc.

4. Meetings and minutes, notices etc.

5. Accounts and Audit

6. Appointment of and remuneration to Auditors.

7. Voting, poll, proxy etc.

8. Dividends and Reserves

9. Procedure for winding up.

10. Borrowing powers of Board of Directors and managers etc.

11. Minimum subscription.

12. Rules regarding use and custody of common seal.

13. Rules and regulations regarding conversion of fully paid shares into stock.

14. Lien on shares.

Difference between Memorandum of Association and Articles of Association
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BASIS FOR MEMORANDUM OF ARTICLES OF ASSOCIATION

COMPARISON ASSOCIATION

1. Memorandum of Association (MOA) is Articles of Association (AOA) is a document

a document that contains all the containing all the rules and regulations that
Definition
fundamental data which are required for govern the company
the company incorporation.
2. MOA must be registered at the time of
Registration The articles may or may not be registered.
incorporation.

3. The articles demonstrate obligations, rights,

The Memorandum is the charter, which
and powers of individuals, who are endowed
Scope characterizes and limits powers and
with the responsibility of running the
constraints of the organization.
organization and administration.

4. Status Supreme document. It is subordinate to the memorandum.

5. The articles are constrained by the act, but

The memorandum cannot give the
they are also subsidiary to the memorandum
Power company power to do anything opposed
and cannot exceed the powers contained
to the provision of the companies act.
therein.

6. A memorandum must contain six The articles can be drafted according to the
Contents
clauses. decision of the Company.

7. The articles provide the regulations by which

The memorandum contains the
Objectives those objectives and powers are to be
objectives and powers of the company.
conveyed into impact.

8. The memorandum is the dominant Any provision, as opposed to a memorandum

Validity
instrument and controls articles. of association, is invalid.

Certificate of Incorporation (COI)

• COI is a legal document that is issued by the Ministry of Corporate Affairs once the company
is successfully registered.
• COI is the proof that the company is registered with ROC.

• It is the duty of the Promoter to apply for Certificate of Incorporation.

• After receiving the COI a private company can start their business.

• COI consists of Date of Incorporation, CIN no., Name of the company, Type of Company,
Place of Registration and Company address.
 Specimen copy of Certificate of Incorporation

Effect of registration of a company

A company is legally born on the date printed on the certificate of incorporation.It becomes a legal
entity with perpetual succession. A private company can start the business as soon as it gets
“Certificate of Incorporation” but a Public Company has to get an additional certificate called
“Certificate of Commencement of Business” to start its business operations.

Stage 3: Subscription Stage

A public company is allowed to raise their funds from the public by issuing shares and debentures.But
before that it has to issue a prospectus for the public to subscribe to the capital of the company and
undergo various other formalities.

Prospectus

Meaning of Prospectus - It is an invitation issued to the public to subscribe to the shares of the
company.

Definition of Prospectus

According to Companies Act, 2013 A prospectus is a notice, circular, Advertisement or any other
document inviting the public for the subscription or purchase of shares or debentures of a body
corporate.
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.

Statement in lieu of Prospectus

A public company, which does not raise its capital by public issue, need not issue a
prospectus. In such a case a statement in lieu of prospectus must be filed with the
Registrar 3 days before the allotment of shares or debentures is made. It should be
dated and signed by each director or proposed director and should contain the same
particulars as are required in case of prospectus proper.

Contents of Statement in lieu of Prospectus

1. Name of the company

2. Location of the company
3. Objectives
4. Number and classes of shares issued
5. Name and address of directors
6. Remuneration to directors
7. Minimum subscription raised
Book building

Book building is a process by which an underwriter attempts to determine the price at which shares
can be offered in Initial Public Offering based on demand of investors. It is a process used in IPO for
efficient price discovery where various bids are collected at various processes from the potential
investors which is equal to or more than floor price. The offer price is determined after the bid closing
date.

Book Building Process:

Stage 1-The Issuer who is planning an offer nominates lead merchant banker(s) as ‘book runners’.
Stage 2- The Issuer specifies the number of securities to be issued and the price band for the bids.
Stage 3- The Issuer also appoints syndicate members with whom orders are to be placed by the
investors.
Stage 4-The syndicate members put the orders into an ‘electronic book’. This process is called
‘bidding’ and is similar to open auction.
Stage 5- The book normally remains open for a period of 5 days.
Stage 6- Bids have to be entered within the specified price band.
Stage 7- Bids can be revised by the bidders before the book closes.

Stage 4: Commencement Stage

This is the last stage in the formation of a public company. After the registrar is satisfied that all the
formalities I have been followed a certificate no certificate of commencement of business is issued to
the public company public company is entitled to comments its business only after obtaining
certificate of commencement of business from the ROC.

For commencement of business these following documents are required

1. A declaration that share payable in cash have been subscribed for and allotted up to the minimum
subscription mentioned in the prospectus;

2. A declaration that every director has paid in cash, the application and allotment money on his
shares in the same proportion as others;

3. A declaration that no money is payable or liable to become payable to the applicants because of the
company to either apply for or obtain permission to deal in its security on stock exchange;

4. A statutory declaration that the above requirements have been compiled with.

`E filing – it refers to submission of required documents in an electronic format to ROC. It is a new

feature of Companies Act, 2013.

Registrar of Companies- The Registrar of Companies (ROC) is an office under the

Indian Ministry of Corporate Affairs that deals with administration of the Companies Act
1956 and Companies Act, 2013. There are currently 22 Registrars of Companies (ROC) operating
from offices in all major states of India. Some states, such as Maharashtra and Tamil Nadu, have two
ROCs each.
These offices function as registry of records, relating to the companies registered with them, which
are available for inspection by members of public on payment of the prescribed fee.