Formation of a Company

Given: We need to identify the stages in the formation of a company.

Answer:

The stages in the formation of a company are:

For a Private Company:
1. Promotion – Conceiving the business idea and taking steps to form the company.
2. Incorporation – Getting the company legally registered with the Registrar of Companies.

For a Public Company (additional stage):
3. Capital Subscription – Raising funds from the public by issuing shares/debentures.

*(Note: A public company must complete all three stages before it can commence business, whereas a private company needs only the first two stages.)*

Given: We need to list the documents required for incorporation of a company.

Answer:

The following documents are required to be submitted to the Registrar of Companies for incorporation:

1. Memorandum of Association (MoA): The fundamental document defining the company's objectives, scope of activities, and its relationship with the outside world.

2. Articles of Association (AoA): The document containing rules and regulations for the internal management of the company.

3. Consent of Proposed Directors: Written consent from persons who have agreed to act as directors of the company.

4. Agreement (if any): Agreement with the proposed Managing Director or Whole-Time Director, if applicable.

5. Statutory Declaration: A declaration by a person (such as an advocate or chartered accountant) stating that all legal requirements for registration have been complied with.

Along with these documents, the prescribed registration fee must also be paid to the Registrar of Companies.

Given: We need to define prospectus and determine whether every company must file it.

What is a Prospectus?

A prospectus is a detailed document issued by a public company inviting the general public to subscribe to its shares or debentures. It contains information about the company's objectives, financial position, management, terms of the issue, and other relevant details that help investors make informed decisions. It is filed with the Registrar of Companies before being circulated to the public.

Is it necessary for every company to file a prospectus?

No, it is not necessary for every company to file a prospectus. The requirement depends on the type of company and its method of raising funds:

- A private company cannot invite the public to subscribe to its shares, so it is not required to issue or file a prospectus.

- A public company raising funds from the general public is required to file a copy of the prospectus with the Registrar of Companies.

- A public company that does not raise funds from the public (i.e., raises funds from friends, relatives, or known sources) is not required to file a prospectus. However, it must file a 'Statement in Lieu of Prospectus' with the Registrar of Companies at least three days before the allotment of shares.

Conclusion: Filing a prospectus is mandatory only for public companies that invite the general public to subscribe to their securities.

Given: We need to explain the term 'Return of Allotment'.

Answer:

Return of Allotment refers to a document (return/statement) that a public company is required to file with the Registrar of Companies (ROC) after the allotment of shares has been completed.

Key Points:

- After a public company receives applications from the public and allots shares to successful applicants, it must file a Return of Allotment with the ROC.
- This document contains details such as the number of shares allotted, the names and addresses of allottees, and the amount paid on each share.
- It is a statutory requirement under company law to ensure transparency and maintain an official record of the company's share capital.
- Even a public company that raises funds from friends/relatives (not from the public) must file a return of allotment after completing the allotment process.

Significance: It serves as an official record with the ROC confirming that the company has successfully raised its capital and completed the allotment process in accordance with the law.

Given: We need to identify the stage at which a company interacts with SEBI.

Answer:

A company interacts with SEBI (Securities and Exchange Board of India) during the Capital Subscription Stage — the third stage in the formation of a public company.

Details:

- When a public company wishes to raise funds from the general public by issuing shares or debentures, it must first obtain approval from SEBI before proceeding.
- SEBI regulates the securities market and protects the interests of investors. Therefore, the company must ensure that its prospectus and the issue comply with SEBI guidelines.
- As per SEBI guidelines, the minimum subscription must be at least 90% of the shares offered to the public. If this minimum subscription is not received, the company cannot proceed with allotment and must refund the application money.

Conclusion: The interaction with SEBI takes place at the Capital Subscription Stage, and it is mandatory for every public company that intends to raise funds from the public.

MEANING OF PROMOTION:

Promotion is the first stage in the formation of a company. It refers to the entire process of conceiving a business idea, investigating its feasibility, and taking all necessary steps to bring the company into existence.

The process of promotion involves:
1. Identification of a business opportunity – A potential business idea is conceived.
2. Feasibility Studies – Various studies are conducted to assess whether the idea can be profitably exploited:
- Technical Feasibility: Whether the technology required is available.
- Financial Feasibility: Whether adequate funds can be arranged.
- Economic Feasibility: Whether the venture will be profitable.
3. Decision to form the company – If investigations yield favourable results, promoters decide to form the company.
4. Preliminary steps – Steps such as approval of the company's name, preparation of documents, and appointment of professionals are taken.

WHO ARE PROMOTERS?

Persons who conceive the business idea, decide to form a company, take necessary steps for its formation, and assume the associated risks are called promoters.

---

LEGAL POSITION OF PROMOTERS:

The legal position of promoters with respect to the company they promote is unique and important. The key aspects are:

(i) Promoters are neither agents nor trustees of the company:
Since the company does not exist before incorporation, promoters cannot technically be agents or trustees of the company. However, the courts have held that promoters stand in a fiduciary relationship with the company.

(ii) Fiduciary Position:
Promoters occupy a position of trust and confidence with respect to the company. This means:
- They must act in good faith and in the best interests of the company.
- They must not make any secret profits at the expense of the company. If they do, the company can compel them to account for such profits.
- They must disclose all material facts and any personal interest they have in transactions with the company.

(iii) Liability for Misstatements in Prospectus:
Promoters are liable for any misstatements or omissions in the prospectus. Investors who suffer loss due to such misstatements can claim compensation from the promoters.

(iv) Preliminary Contracts:
Contracts entered into by promoters with third parties before incorporation are called preliminary contracts. The company, after incorporation, is not automatically bound by these contracts. However, the company may choose to ratify (adopt) them.

(v) Remuneration:
Promoters are not entitled to any remuneration from the company unless the company specifically agrees to pay them. They may be compensated through:
- A lump sum payment.
- Commission on shares sold.
- Shares or debentures issued at a discount.

Conclusion: Promoters play a crucial role in the formation of a company, but their legal position requires them to act honestly, disclose all relevant information, and avoid making secret profits.

STEPS IN THE PROMOTION OF A COMPANY:

Promotion is the first and most important stage in the formation of a company. The following steps are taken by promoters during the promotion stage:

---

Step 1: Identification of Business Opportunity
- The promoter identifies a potential business idea or opportunity.
- This could be based on market research, personal experience, or observation of a gap in the market.

---

Step 2: Feasibility Studies
Before committing resources, promoters conduct detailed feasibility studies:
- (a) Technical Feasibility: Examines whether the required technology, machinery, and technical expertise are available.
- (b) Financial Feasibility: Assesses whether sufficient funds can be raised to start and run the business.
- (c) Economic/Commercial Feasibility: Determines whether the business will be profitable and sustainable in the long run.

If the feasibility studies yield favourable results, the promoters proceed to form the company.

---

Step 3: Approval of Company's Name
- The promoters decide a suitable name for the company.
- They apply to the Registrar of Companies (ROC) for approval of the name.
- The ROC checks that the name is not identical or similar to an existing company's name.

---

Step 4: Fixing Signatories to the Memorandum of Association
- The promoters decide who will be the initial members (signatories) of the Memorandum of Association.
- These signatories are the first members of the company.
- A public company requires at least 7 signatories and a private company requires at least 2 signatories.

---

Step 5: Appointment of Professionals
- Promoters appoint various professionals to assist them in the formation process, such as:
- Solicitors/Lawyers
- Chartered Accountants
- Company Secretaries
- Bankers

---

Step 6: Preparation of Necessary Documents
The following documents are prepared for registration:
- (a) Memorandum of Association (MoA)
- (b) Articles of Association (AoA)
- (c) Consent of proposed directors
- (d) Agreement with proposed Managing/Whole-Time Director (if any)
- (e) Statutory Declaration

---

Conclusion: These steps collectively constitute the promotion stage. Once all documents are ready, the promoters proceed to the next stage — Incorporation — by filing the documents with the Registrar of Companies.

MEANING OF MEMORANDUM OF ASSOCIATION (MoA):

The Memorandum of Association is the most fundamental document of a company. It defines the company's relationship with the outside world and lays down the scope and boundaries within which the company can operate. It is often called the 'charter' of the company.

No company can be registered without a Memorandum of Association. Any act done by the company beyond the scope of its MoA is called ultra vires (beyond powers) and is void.

---

CLAUSES OF THE MEMORANDUM OF ASSOCIATION:

The MoA contains the following important clauses:

---

(i) Name Clause:
- This clause states the name of the company.
- A public limited company must end its name with the word 'Limited' and a private limited company with 'Private Limited'.
- The name must not be identical or similar to an existing company's name.

---

(ii) Situation/Registered Office Clause:
- This clause specifies the state in which the registered office of the company is situated.
- The exact address of the registered office must be notified to the ROC within 30 days of incorporation.
- This determines the jurisdiction of the ROC and the domicile of the company.

---

(iii) Objects Clause:
- This is the most important clause of the MoA.
- It defines the objectives and purposes for which the company is formed.
- The company cannot carry on any business activity that is not covered by this clause.
- It is divided into:
- Main objects: The primary business activities.
- Incidental/Ancillary objects: Activities that support the main objects.
- Other objects: Any other lawful activities the company may pursue.

---

(iv) Liability Clause:
- This clause states the nature of liability of the members (shareholders).
- In a company limited by shares, the liability of members is limited to the unpaid amount on their shares.
- In a company limited by guarantee, liability is limited to the amount guaranteed by each member.

---

(v) Capital Clause:
- This clause states the total authorised (nominal) share capital of the company.
- It also mentions the division of capital into shares of fixed denomination (e.g., ₹10 each).
- The company cannot issue shares beyond this authorised capital without altering the MoA.

---

(vi) Association/Subscription Clause:
- This clause contains a declaration by the signatories (subscribers) that they desire to form a company and agree to take the shares mentioned against their names.
- A public company requires at least 7 subscribers and a private company requires at least 2 subscribers.

---

Conclusion: The MoA is a public document and anyone dealing with the company is presumed to have knowledge of its contents. It cannot be altered easily and any activity beyond its scope is void.

DISTINCTION BETWEEN MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION:

| Basis | Memorandum of Association (MoA) | Articles of Association (AoA) |
|---|---|---|
| Meaning | It is the fundamental/charter document that defines the company's relationship with the outside world. | It is a document containing rules and regulations for the internal management of the company. |
| Purpose | It defines the scope, objectives, and powers of the company. | It defines the rights, duties, and powers of the members and directors within the company. |
| Status | It is the supreme document of the company. | It is subordinate to the MoA. |
| Relationship | It governs the company's relationship with outsiders. | It governs the company's internal affairs. |
| Alteration | It is difficult to alter; requires special resolution and sometimes approval of the court/NCLT. | It can be altered more easily by passing a special resolution at a general meeting. |
| Compulsory | It is compulsory for every company to have an MoA. | A public company limited by shares may adopt Table A (model articles) and need not file its own AoA. However, private companies must file their own AoA. |
| Ultra Vires | Any act done beyond the MoA is ultra vires and absolutely void — cannot be ratified. | Any act done beyond the AoA but within the MoA can be ratified by the shareholders. |
| Contents | Contains Name Clause, Situation Clause, Objects Clause, Liability Clause, Capital Clause, and Subscription Clause. | Contains rules regarding issue of shares, transfer of shares, meetings, voting rights, appointment of directors, dividends, etc. |
| Binding Nature | It binds the company and its members in relation to the outside world. | It binds the company and its members inter se (among themselves). |

---

Conclusion: The MoA and AoA are both essential documents for a company, but they serve different purposes. The MoA defines what the company can do, while the AoA defines how it is to be done internally.

MEANING OF CERTIFICATE OF INCORPORATION:

The Certificate of Incorporation is an official document issued by the Registrar of Companies (ROC) certifying that a company has been duly registered and has come into legal existence.

---

How is it obtained?

After the promoters submit all the required documents (MoA, AoA, consent of directors, statutory declaration, etc.) along with the prescribed registration fee to the ROC, the Registrar examines the documents. If satisfied that all legal requirements have been complied with, the Registrar enters the company's name in the Register of Companies and issues the Certificate of Incorporation.

---

Significance and Legal Effect:

1. Birth of the Company: The Certificate of Incorporation marks the legal birth of the company. From the date mentioned on the certificate, the company comes into existence as a separate legal entity.

2. Conclusive Evidence: The certificate is a conclusive proof of the legal existence of the company. No one can challenge the validity of the company's incorporation after this certificate is issued, even if there were some irregularities in the registration process.

3. Perpetual Succession: Once incorporated, the company enjoys perpetual succession — it continues to exist regardless of changes in membership.

4. Separate Legal Entity: The company becomes a legal person distinct from its members. It can own property, enter into contracts, sue and be sued in its own name.

5. For Private Companies: A private company can commence business immediately after receiving the Certificate of Incorporation.

6. For Public Companies: A public company must obtain an additional Certificate of Commencement of Business (after completing the capital subscription stage) before it can start business operations.

---

Conclusion: The Certificate of Incorporation is a landmark document in the life of a company. It transforms a group of individuals into a legally recognised corporate entity with rights and obligations of its own.

STAGES OF FORMATION OF A COMPANY:

The formation of a company is a complex legal process that involves several stages. A private company goes through two stages, while a public company must complete three stages before it can commence business.

---

## STAGE 1: PROMOTION

Promotion is the first stage and involves conceiving a business idea and taking all necessary steps to form the company.

Steps in Promotion:

(i) Identification of Business Opportunity: The promoter identifies a viable business idea.

(ii) Feasibility Studies:
- Technical Feasibility – availability of technology and expertise.
- Financial Feasibility – availability of funds.
- Economic Feasibility – profitability of the venture.

(iii) Approval of Company's Name: Application is made to the ROC for approval of the proposed name.

(iv) Fixing Signatories to MoA: Initial members who will sign the MoA are identified.

(v) Appointment of Professionals: Lawyers, chartered accountants, and other professionals are appointed.

(vi) Preparation of Documents: MoA, AoA, consent of directors, statutory declaration, etc., are prepared.

---

## STAGE 2: INCORPORATION

Incorporation is the process of getting the company legally registered.

Steps in Incorporation:

(i) An application is submitted to the Registrar of Companies (ROC) along with:
- Memorandum of Association
- Articles of Association
- Consent of proposed directors
- Agreement with Managing/Whole-Time Director (if any)
- Statutory Declaration
- Prescribed registration fee

(ii) The ROC examines the documents. If satisfied, the ROC enters the company's name in the Register of Companies.

(iii) The ROC issues the Certificate of Incorporation, which is conclusive evidence of the company's legal existence.

Effect: A private company can commence business immediately after incorporation. A public company must proceed to the next stage.

---

## STAGE 3: CAPITAL SUBSCRIPTION (Only for Public Companies)

A public company that wishes to raise funds from the general public must complete this stage.

Steps in Capital Subscription:

(i) SEBI Approval: The company must obtain approval from SEBI before issuing securities to the public.

(ii) Filing of Prospectus: A copy of the prospectus is filed with the ROC. The prospectus invites the public to subscribe to the company's shares/debentures.

(iii) Appointment of Intermediaries: Brokers, bankers to the issue, and underwriters are appointed.

(iv) Minimum Subscription: As per SEBI guidelines, the company must receive a minimum subscription of 90% of the shares offered. If not received, the application money must be refunded.

(v) Application for Listing: The company applies to a recognised stock exchange for listing of its securities.

(vi) Refund/Adjustment of Excess Money: Excess application money received from unsuccessful applicants is refunded or adjusted.

(vii) Issue of Allotment Letters: Allotment letters are sent to successful applicants.

(viii) Return of Allotment: A return of allotment is filed with the ROC.

Note: A public company raising funds from friends/relatives (not from the public) must file a Statement in Lieu of Prospectus with the ROC at least three days before allotment.

---

Conclusion:

| Stage | Private Company | Public Company |
|---|---|---|
| Promotion | ✓ Required | ✓ Required |
| Incorporation | ✓ Required | ✓ Required |
| Capital Subscription | ✗ Not Required | ✓ Required |

Thus, the formation of a company is a systematic process that ensures the company is legally sound and adequately capitalised before it begins operations.