Chapter–7

Formation of a Company
Formation of a company involves the following stages:

1. Promotion
2. Incorporation
3. Subscription of Capital

A private company has to complete only the first two stages, while a public company
must undergo all the three stages.

I. Promotion

It refers to the sum total of activities by which a business enterprise is brought into
existence, or in other words the business operations by which a company is
established. Promotion is the discovery of business opportunities and the subsequent
organization of funds, property and management ability into business concern for the
purpose of making profit there from.

Promoter
The persons who perform the work of promotion and bring an enterprise into
existence are known as promoters. A promoter is an entrepreneur or businessman
who gives birth to a business concern and a promoter may be an individual, a firm or
a company.

Functions of Promoters

1. Identification of business opportunity– Here the promoters have to

discover a business idea. It may be about a new line of business or the
expansion of an existing business.

2. Feasibility studies – It involves the evaluation and analysis of the

potential of the proposed project. Promoters may conduct the
following types of feasibility studies:

a. Technical feasibility– Here the promoters have to ensure the project

is technically possible such as availability of raw materials,
infrastructure, adequate technology etc.
b. Financial feasibility – If the project requires large funds which
cannot be raised within the available means, it is better to stop that
project.
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.
 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.
4. Fixing up of signatories to the Memorandum of Association – Here the 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.
5. Appointment of professionals– The promoters are entitled to appoint
professionals like mercantile bankers, auditors etc. to assist them in
the formalities of registration of the company.
6. Preparing necessary documents – The 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 Required to be Submitted for Registration of Companies

1. Memorandum of Association(MoA)
2. Articles of Association(AoA)
3. Consent of Proposed Directors
4. Agreements if any
5. Statutory Declaration
6. Receipt of payment of Fee

1. Memorandum of Association-

It 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. 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 of the company. No
company can legally undertake activities that is not contained in MoA.

Contents of Memorandum (Clauses of MoA)

1) Name Clause– It contains the name of the company. A company can have any
name subject to the following conditions: -
a. The name must not be identical to the name of an existing company.
b. The name should not give an impression that the company has a connection
with the government or national heroes.
c. The name should end with the word “Limited” or “Pvt. Limited” as the case
may be.

2) Registered Office Clause – It contains the name of State where in the company’s
registered office is proposed to be situated. Exact address is not required at the
time of registration but it should be informed to the Registrar within 30 days.

3) Objects Clause–It defines the purpose for which the company is formed i.e. the
aim of the company be disclosed in the object clause.
4) 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 – This clause states the maximum capital (authorized capital)
 with which the company is to be incorporated along with its division, i.e. : 1 lakh
shares of Rs.10 each comprises a total capital of Rs.10 lakhs.

2. Articles of Association- It is the byelaw 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.
A 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. Consent of Proposed Directors -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 – 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 Declaration – 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. Receipt of Payment of Fee–Along with all the above documents, necessary fee has
to be paid for registration based on the authorized capital of the company.
Position of promoters – The promoter is deemed to act as a trustee of the company
under promotion (actually he is not an agent or trustee).The contracts entered by the
promoter with the various parties are ratified (approved) by the company on
incorporation. He should not make any secret profits. He has the right to get
remuneration for the services rendered and be reimbursed for the expenses incurred
by him.

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

II. Incorporation

Incorporation means the registration of the company under the Indian

Companies Act. It is the second stage in formation of a company. In
order to get registered, the promoters have to submit documents to the
Registrar of Companies which are listed below in brief.
1. Memorandum of Association
2. Articles of Association
3. Written consent of proposed directors to act as directors
4. Agreement if any, with the proposed managing director or
manager
5. A copy of the approval of name from the Registrar
6. Statutory declaration.
7. Notice of exact address of the registered office of the company 30
 days exemption
8. Documentary evidence of payment of registration fee.
Certificate of Incorporation
After scrutiny of the above documents, the Registrar issues a certificate
of registration which is called the Certificate of Incorporation .It is also
called the birth certificate of the company.
Effects of Certificate of Incorporation
a. A company becomes a legal entity with perpetual succession.
b. It can enter into valid contracts.
On the issue of certificate of incorporation, a private company can
commence its business. But a public company has to go through one
more stage in the formation.
III. Capital Subscription
A public company can raise funds from the public by issuing shares and debentures.
Following are the steps required for raising funds from the public.

1. SEBI Approval–Approval from Securities and Exchange Board of India (SEBI) is

the regulatory authority in India is to be obtained for raising funds from the
public.
2. Filing of Prospectus -A copy of prospectus or statement in lieu of prospectus
must be filed with the Registrar of Companies.
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 and 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.
4. Minimum Subscription – It is the minimum amount of capital which must be
subscribed by the public before a public company allots shares is known as
minimum subscription. It is decided by the directors and must be stated in the
prospectus. (90% of the issued amount as per the SEBI guidelines)
Minimum subscription is used to purchase property, to meet all preliminary
expense and as working capital. 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
from130th day onwards.
5. Applicationtostockexchange–Companymustgiveanapplicationtoatleastone stock
exchange for permission to deal in its shares or debentures.
6. Allotment of shares – Once the permission is obtained from the stock exchange,
the company can allot shares to the applicants.

Prospectus

It is a document, notice, circular or advertisement inviting offers for subscription or

purchase ofany shares or debentures of a company from the public. A public limited
company limited by shares must issue a 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

In case a public company is confident of raising their required capital privately, they
need not to issue a prospectus to the public. 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 of Association

Basis MoA AoA

Rules of internal management and it
Defines the objects for which
Objectives indicates how the objectives of
the company is formed
company
are to be achieved
Main document of the
Subsidiary document and it
Position company and it subordinates
subordinates to MoA
to the Companies Act
Defines the relationship of Defines the relationship of members
Relationship
Company with outsiders and
The company
Acts which are beyond AoA can be
Validity Acts beyond the MoA are invalid ratified by the members without
violating MoA
Nature MoA is the charter or the AoA is the bye – laws of the
constitution of the company company’s internal management

Compulsion The preparation and filing of The preparation of AoA is not

MoA is compulsory compulsory as it can adopt Table F of
Companies Act.
Alteration Modification in MoA is a difficult Modification in AoA is very easy and
and lengthy process. simple.