1

2 FORMATION OF A COMPANY in the annual return referred to in section

92; or
There are 4 stages in the formation of a company
i.e., b. Who has control over the affairs of the
company, directly or indirectly whether as a
1. Promotion
shareholder, director or otherwise; or
2. Incorporation
3. Raising of capital c. In accordance with whose advice, directions
4. Commencement of business or instructions the Board of Directors of the
company is accustomed to act:
A private limited company is required to fulfil only
the first two stages. The promoter shall contribute at least 20% of the
post-issue capital. Such a promoter’s contribution
(1)PROMOTION OF A COMPANY
shall be locked-in for 3 years.
Promotion is the process by which a company is
Functions of a Promoter
brought into existence. It starts with the
conceptualization of the birth of a company and 1. Identification of Business Opportunity
determination of the purpose for which it is to be
formed. The promoter first identifies a potential business
opportunity. This opportunity may be regarding
The persons who conceive the company makes
detailed investigation of the proposal and if found the production of a new product or service
profitable, invest the initial funds are known as the or
promoters of the company.  making a product available through a
different channel than before or
The promoters enter into preliminary contracts  production of an old product with new
with vendors and make arrangements for the updated features or
preparation, advertisement and the circulation of  any other such opportunity having an
prospectus and raising capital. investment potential.
2. Feasibility Studies
Promoter
The promoter after having conceived a business
In India promotion generally is done by individuals
opportunity analyzes the opportunity to see
who are entrepreneurs as ‘occasional
whether it is feasible, technically as well as
promoters’. Big public companies are generally
economically. All identified business opportunities
promoted by big companies being the shareholders.
cannot be converted into real projects.
In western countries investment companies like
Goldman Sachs, Bank of America, Morgan Stanley, Therefore, the promoters undertake detailed
Merrill Lynch, Citigroup, UBS, Deutsche Bank etc. feasibility studies so as to investigate all aspects of
promote companies on professional basis as the business that they intend to begin with the help
professional promoters. Thus, individuals, of various tools like a study of the market trend,
institutions or professionals who proceed to form a industry trend, market survey, etc. and with the
company are known as promoters of the company. help of specialists like engineers, chartered
accountants etc. A venture is only feasible when it
Securities Exchange Commission Rule of US405 (a)
passes all the three below mentioned tests.
defines promoter as a “person who acting alone or
in conjunction with other persons directly or  Technical feasibility: Sometimes an idea may
indirectly takes the initiative in founding or be good and unique but technically not possible
organizing the business enterprise.” to execute because the required raw material
or technology may not be easily available.
Under Section 2 (69) Companies Act, 2013
Every business requires funds.
"promoter" means a person:
 Financial feasibility: Sometimes it may not be
feasible to arrange a large amount of funds
a. Who has been named as such in a
needed for the business or financial
prospectus or is identified by the company
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institutions may hesitate to grant huge Promoters are not agents as before incorporation
amounts of loan for the new businesses. the company is non est (does not exist) in the eye of
law so there can be no principal.
 Economic feasibility: A business opportunity
may be technically and financially feasible but They are also not trustees, as company is not a
not economically feasible. It may not be a beneficiary.
profitable venture or may not yield enough
The promoters undoubtedly stand in a fiduciary
profits. In such a case, the promoters refrain
position. A fiduciary is a person like a friend or
from starting the business.
lawyer who acts on behalf of another person/s and
3. Name Approval is legally bound to act solely in their best interests.
Once the promoters have decided to launch a Promoters have in their hand the creation and
company next step is to select a name for the moulding of the company. They have the power of
company and get it registered with the registrar of defining how and when and in what shape and
companies of the state in which the registered office under whose supervision it shall come in to
of the company is to be situated. An application existence and begin to act as a trading corporation.
with two names, in the order of their priority, is
In particular, two duties of promoter in fiduciary
filed with the registrar to get the name approved.
position are:
4. Fixing up Signatories to the Memorandum
1. Duty not to make secret profit
of Association
2. Duty to disclose to the co. any interest in a
The promoters decide upon the members who will transaction
be signing the Memorandum of Association of the
Remuneration of promoter
proposed company. Usually the signatories of the
memorandum are the first Directors of the Promoter is not an employee of the company, nor is
Company. However, the written consent of the an agent of the company so no issue of
persons signing the memorandum is required to act remuneration arises generally. He cannot legally
as Directors and to take up the qualification shares claim any remuneration. However, he is entitled for
in the company. reasonable remuneration which may be provided
by Articles of Association.
5. Appointment of Professionals
In practice, a Promoter is remunerated in following
Promoters are also required to appoint certain
ways:
professionals. These professionals help them in the
preparation of necessary documents that are 1. If disclosed, he may get cash or fully paid up
required to be filed with the Registrar of Companies shares of Company for property sold to the co.
such as merchant banks, auditors, lawyers, etc. 2. An option to buy further shares in co.
3. Commission on shares sold.
6. Preparation of Necessary Documents
4. A lump-sum amount for the services rendered
The promoters are required to prepare necessary 5. Articles of Association may provide a fixed sum
legal documents that have to be submitted to the to be paid to promoter in form of his
Registrar of the Companies for getting the company remuneration. But the promoters cannot
registered. These documents are Memorandum of enforce such clauses in Articles in their favour.
Association, Articles of Association, consent of The best provision which promoters may have
Directors and statutory declaration. is to include a power in the Articles for the
directors to pay them the value of their
Legal position of promoter
promotional services.
Promoters are deeply involved in incorporation 6. The company after incorporation may by a
process of company so a question arises what is the contract written, signed and sealed with
legal position of the promoters in the company. promoters for payment for their promotional
services, pay to the promoters. However, such
remuneration must be disclosed in prospectus
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and accounted in the first Annual General Liability of a promoter

Meeting of the Company. Normally in India the
A promoter is subjected to liabilities under the
promoter keeps ‘controlling shares’ with him.
various provisions of the Companies Act:
Pre-incorporation contracts
 Section 26 of the Companies Act, 2013 lay
In India, after the formation and registration of any down matters to be stated in a prospectus. A
company, it becomes a separate legal entity. After promoter may be held liable for omission of
the incorporation of a company, it goes through any such facts in prospectus.
various contracts and agreements daily. But, “the
 Under section 34 and 35, Companies Act,
promoters” of the company are able to form
2013 a promoter may be held liable for any
contracts even before the incorporation of the
untrue statement in the prospectus.
company. Pre incorporation contracts are contracts
which the promoters of the company make before  According to section 300, a promoter may
the company is incorporated, on the assumption the be liable to examination (if the court so
company will assume responsibility for the directs), on a liquidator’s report alleging
contract. fraud in the promotion or formation of the
company.
There are various types of pre-incorporation
contracts that can be made by a company according  A company may proceed against a promoter
to their need before incorporation, such as a lease on action for deceit or breach of duty under
agreement, employment agreement, founder's section 340, where the promoter has
agreement (defining the roles and responsibilities of co- misapplied or retained any property of the
founders) etc. company or is guilty of misfeasance or
breach of trust in relation to the company.
Pre incorporation contract is binding on a company
or promoters after incorporation when it is The Madras High Court in Prabir Kumar Misra v.
according to the object of the company and it is Ramani Ramaswamy, has held that to fix
accepted after incorporation. After acceptance of liability on a promoter, it is not necessary that
pre-incorporation contracts by the company, it he should be either a signatory to the
should also be communicated to parties. Pre Memorandum/Articles of Association or a
incorporation contracts get their validation from shareholder or a director of the company.
the “Specific Relief Act 1963” and “Companies Act, Promoter's civil liability to the company and
2013”. also to third parties remain in respect of his
conduct and contract entered into by him
Provisional contracts
during pre-incorporation stage as agent or
The contracts made after incorporation of the trustee of the company."
company but before it is entitled to commence
business are termed as Provisional Contracts. A
provisional contract becomes binding on the
company when it obtains the certificate of
commencement of business.
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(2) INCORPORATION OF A COMPANY

Incorporation/Registration of a company refers to
the setting up of a company according to the
provisions laid out in the Companies Act of 2013.
The Registrar of Companies takes care of company
registration in India. For this purpose, the central
govt. has established offices of Registrar of
Companies for different states/regions.
Procedure for registration of a company
Registration procedure for a company in India has
been simplified with the introduction of MCA21 i.e.
online registration portal of Ministry of corporate
affairs. All the new company incorporations have to
be done by the online filing of ‘SPICe+ form’
(simplified proforma for incorporating companies
electronically) available in MCA21.
Registrations of companies are overseen by the
State Registrar of Companies Office functioning
under the Ministry of Corporate Affairs of India. On
behalf of State Registrar of Companies, company (3) Draft MoA, AoA and other legal documents
registration process has been centrally managed by
The next step in company registration procedure
the Central Registration Centre located at Manesar,
after name approval is to draft Memorandum of
Hariyana.
Association (MoA) and Article of Association (AoA).
(1) Applying for Digital Signature Certificate
MoA will have following things regarding the
(DSC)
company being formed.
Since the registration is an online process various
 Name of the registered entity
application forms are required to be signed
 Location (Registered office address)
electronically by either of the directors. Digital
 Objectives
signature certificate (DSC) is required to sign
 Authorised share capital
Memorandum of Association, Article of Association
 Liability
and registration document to be filed with ROC. For
 Information of first shareholders and
this, all subscribers need to obtain digital signature
number of shares allotted to them.
in their name.
Article of Association (AOA) is the by-laws of the
(2) Applying for Company Name
company. AoA will specify the rules and regulations
Since a company is named before its birth, it is very that the company will follow along with other
important to check for name availability in advance. applicable laws while carrying on its business.

Formal application for name is to be made in PART Shareholders need to specify their name, address
A of SPICe+ form. Two names can be proposed at a and occupation on the last page or subscription
time. Supporting documents like Object Clause of page of the Memorandum and Article of Association
the Company or Trade Mark Registration Certificate before applying for company registration. e-MOA
or Board Resolution can be attached. Getting a and e-AOA (prepared electronically) need to be
desired name approved is a vital point in the whole digitally signed with DSC of the respective
process of company registration. Generally, it will subscribers and the Chartered Accountant or
take 2-3 working day for getting approval. It will be Company Secretary appointed for the co.
reserved for a period of 20 days within which the
company must fill Part-B of the SPICe+ form.
 5

(4) Apply for Company Registration  A registered company can exercise all
functions of a company incorporated under
In this last step of company registration, data is to
the Act.
be entered to the PART B of SPICe+ form in MCA
website. These forms are to be digitally signed by  The company has perpetual succession with
respective person by using their DSC. power to acquire, hold, and dispose of
property of all forms.
Here is the list of forms filed with the registrar for
approval along with Web based Registration Form.  It can contract, sue and be sued by the said
name.
1. E-MOA – Its company’s Memorandum of
Association to be digitally signed by subscribers  The company becomes a legal person
and One witness separate from the incorporators from the
2. E-AOA – It’s company’s Article of Association to date of incorporation.
be digitally signed by subscribers and One
 A binding contract comes into existence
witness
between the company and its members as
3. INC-9 Declaration of subscribers/directors
mentioned in the Memorandum and Articles
Fee (as applicable based on the authorized capital of Association.
of the company) mentioned in the registration form
 Until the company dissolves or the Registrar
will have to be paid at the time of uploading.
removes it from the register, it has
If everything goes well, then within 3 to 5 working perpetual existence.
days Central ROC will deliver incorporation
Certificate of Incorporation: Certificate of
certificate via e-mail.
incorporation is issued when the registrar is
Documents Required for Incorporating a Public satisfied with the documents provided. This
Limited Company certificate validates the establishment of the
company in the records.
 Proof of identity of all the shareholders and
directors. (3) RAISING OF CAPITAL
 Proof of address of all the directors and the
After the company is incorporated, the next stage is
shareholders.
to raise the necessary capital. In case of a private
 PAN number of all the shareholders and
limited company, funds are raised from the
directors.
members or through arrangement from banks and
 Utility bill of the proposed office i.e.
other sources. In case of a public limited company
proposed registered office for the company.
the share capital has to be raised from the public.
 A NOC (No Objection Certificate) from the
This involves the following:
landlord where the office of the company
will be situated. 1. Preparation of a draft prospectus and get it
 Director Identification Number (DIN) of all inspected (vetted) by SEBI to ensure that all
the directors. information given in the prospectus fully
 Digital Signature Certificate (DSC) of the complies with the guidelines laid down by SEBI
directors. in this regard.
 Memorandum of Association (MOA). 2. Filing a copy of the prospectus with the
 Articles of association (AOA) Registrar of Companies.
Effect of registration 3. Issue of prospectus to the public by notifying in
a newspaper and inviting the public to apply for
According to Section 9 of the Companies Act, 2013,
shares as prescribed in the prospectus.
these are the effects of registration of a company:
4. If the minimum subscription has been received,
 From the date of incorporation, the shares should be allotted to the applicants as
subscribers to the Memorandum and all per SEBI guidelines and file a return of
subsequent members of the company are a allotment with the Registrar of Companies.
body corporate.
 6

5. Listing of shares in a recognised stock exchange

so that the shares can be traded there.
Preferably, consent of a stock exchange for
listing should be obtained before issue of the
prospectus to the public.
Before commencing the business, every public
limited company must have to show that adequate
funds have been raised from the public. So when the
company gives the offer to the public to subscribe
its shares, it must ensure that a minimum number
of shares must be subscribed by the investors. This
is called minimum subscription, which is 90% of
the total number of shares offered to the public. If
the application money received is less than the
minimum subscription, then the company must
refund all the application money of the investors
and it cannot start its operation. To avoid this risk,
the share issuing company may appoint
underwriters, who undertake to buy the shares if
these are not subscribed by the public. The
underwriters perform their job on commission
basis. This process of appointing underwriters to
ensure the minimum subscription of capital is
known as Underwriting
(4) COMMENCEMENT OF BUSINESS
Certificate of commencement of business is
required for a public company to start doing
business, while a private company can start
business once it has received the certificate of
incorporation.
Public companies receiving the certificate of
incorporation can issue prospectus in order to
make the public subscribe to the share for raising
capital. Once all the minimum number of required
shares have been subscribed, a letter should be sent
to the registrar along with a bank statement.
The registrar will issue a certificate upon finding
the provided documents satisfactory. This
certificate is known as certificate of commencement
of business. The company can start business
activities from the date of issue of the certificate.