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Kerala Plus One Business Studies Notes Chapter 7 Formation of a Company
- Promotion- Functions and Legal position of promoter
- Capital subscription-Steps
- Commencement of business- Steps
- Memorandum of Association and its clauses- Articles of Association and its clauses- Prospectus and its clauses
- Differences between Memorandum and Articles of Association
The steps involved in the formation of a company are:
- Capital subscription
- Commencement of business
Promotion is the first stage in the formation of a company. The identification of business opportunities, analysis of its prospects and initiating steps to form a joint stock company is called promotion. The person who undertakes to form a company is called promoter.
Functions of a Promoter:
1. Identification of business opportunity:
The first and foremost activity of a promoter is to identify a business opportunity.
2. Feasibility studies:
After identifying a business opportunity, the promoters undertake some feasibility studies to determine the viability and profitability of the proposed activity.
- Technical feasibility: To determine whether the raw materials or technology is easily available
- Financial feasibility: To determine the total estimated cost of the project
- Economic feasibility: To determine the I profitability of the proposed project
3. Name approval:
After selecting the name of company the promoters submit an application to the Registrar of companies for its approval. The selected name is not the same or identical to an existing company.
4. Fixing up signatories to the Memorandum of Association:
Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company.
5. Appointment of professional:
Promoters appoint merchant bankers, auditors etc. to assist them in the preparation of necessary documents.
6. Preparation of necessary documents:
The promoters prepare certain legal documents which are to be submitted to the Registrar of companies. They are
- Memorandum of Association
- Articles of Association,
- Consent of proposed Directors
- Agreement, if any, with proposed managing or whole time director
- Statutory declaration
Position of Promoters
The promoter is neither an agent nor a trustee of the company. The promoter stands in the fiduciary relationship with the company. He should not make any secret profits out of the dealings. Any, such gains are to be disclosed.
The promoter must act honestly, in good faith and in the best interest of the company. The promoter is personally liable for all the preliminary contracts with the other parties before incorporation. The promoter is also liable for any omission of facts or false statements in the prospectus.
A company comes into existence only when it is registered with the Registrar of Companies. For this purpose the promoter has to take the following steps.
Steps for Incorporation:
(a) Application for incorporation:
Promoters make an application for the incorporation of the company to the Registrar of companies.
(b) Filing of documents:
The following documents must be filed with the Registrar of Companies for incorporation.
- The Memorandum of Association duly stamped, signed and witnessed
- Articles of Association duly stamped, signed and witnessed
- Written consent of the proposed directors
- Agreement, if any, with proposed managing or whole time director
- A copy of the Registrar’s letter approving the name of the company.
- Statutory declaration
- A notice about the exact address of the registered office.
- Documentary evidence of payment of registration fees.
The Registrar verifies the entire document submitted. If he is satisfied then he enters the name of the company in his Register. After the registration, the Registrar issues a Certificate called Certificate of Incorporation.
This is called the birth certificate of the company. With effect from November 1, 2000, the Registrar of Companies allots a CIN (Corporate Identity Number) to the Company.
Effect of the Certificate of Incorporation Certificate of Incorporation is the conclusive evidence of the legal existence of the company. A private company can commence its business after receiving Certificate of Incorporation. The certificate of incorporation is the birth certificate of the company.
A public company can raise funds from the public by issuing shares and Debentures. Forthis it has to issue prospectus. The following steps are required for raising funds from the public:
- A.public company is required to take approval from SEBI. (Securities and Exchange Board of India)
- File a copy of prospectus or a statement in lieu of prospectus with the Registrar of Companies.
- Appointment of Bankers, Brokers, Underwriters:
- Ensure that minimum subscription is received;
- Application for listing of company’s securities;
- Refund/adjust excess application money received;
- Issue allotment letters to successful applicants;
- File return of allotment with the Registrar of Companies (ROC).
Commencement of Business:
A public company can commence business only after getting certificate of commencement of business from the Registrar. The company must file the following documents to obtain the certificate of commencement of business.
- Declaration that the minimum subscription has been received in cash to allot shares.
- A declaration that all directors have taken up and paid for their qualification shares
- A statutory declaration stating that necessary legal formalities have been complied with has to be filed.
The Registrar shall examine these documents. If these are found satisfactory, a ‘Certificate of Commencement of Business’ will be issued. This certificate is conclusive evidence that the company is entitled to do business.
With the grant of this certificate the formation of a public company is complete and the company can legally start doing business. Documents used in the formation of a company.
Memorandum of Association:
It is the charter or magnacarta of the company. It defines the objects of the company and provides the framework beyond which the company cannot operate. It lays down the relationship of the company with outside world.
Memorandum of Association must be printed, divided into paragraphs, numbered consecutively. The Memorandum of Association must be signed by at least seven persons in case of a public company and by two persons in case of a private company.
Contents of Memorandum of Association:
1. The name clause: Under this clause the name of the company is mentioned. A company can select any name subject to the following restrictions.
- The proposed name should not be identical with the name of another company
- A name which can mislead the public
- In case of a public company the name should end with the word ‘Limited’ and in case of a private company the name should end with the word ‘Private Limited’
- The name must not directly or indirectly imply any participation of the Central or State Govt.
- The name must not suggest any connection or patronage of a national hero
- It should not include the word co operative.
2. Registered office clause:
This clause contains the name of the state, in which the registered office of the company is proposed to be situated. It must be informed to the Registrar within thirty days of the incorporation of the company.
3. Objects clause:
This is the most important clause of the memorandum. It defines the purpose for which the company is formed. A company is not legally entitled to undertake an activity, which is beyond the objects stated in this clause.
4. Liability clause:
It states that the liability of members is limited to the face value of shares held by them or the amount guaranteed to be paid on winding up.
5. Capital clause:
This clause specifies the maximum capital which the company will be authorised to raise through, the issue of shares.
6. Association clause:
In this clause, the signatories to the Memorandum of Association state their intention to be associated with the company and also give their consent to purchase qualification shares.
Articles of Association:
The Articles of Association is the second important document of a company. The Articles define the rights, duties and powers of the officers and the Board of directors. It contains the rules regarding internal management of the company. It shows the relationship between the company and its members.
Contents of Articles of Association:
- The share capital of the company and its division.
- Rights of each class of shareholders.
- Details of contracts made with different parties.
- Procedure for making allotment of shares.
- Procedure for issuing share certificate.
- Procedure for transfer and transmission of shares.
- Procedure for forfeiture and reissue of shares.
- Procedure for conducting meetings, voting, proxy and poll
- Procedure for appointing, removal and remuneration of directors.
- Procedure for declaration of and payment of dividend.
- Keeping books of account and audit of the company.
- Procedure regarding alteration of share capital.
- Procedure regarding winding up of the company.
A public limited company may adopt Table A which is a model set of articles given in the Companies Act. Table A is a document containing rules and regulations for the internal management of a company. If a company adopts Table A, there is no need to prepare separate Articles of Association.
Difference between Memorandum of Association and Articles of Association:
|Memorandum of Association||Articles of Association|
|It defines the object for which the company is formed||They are rules of internal management of the company. They indicate how the objectives of the company are to be achieved|
|It is the main document of the company||It is a subsidiary document of the Memorandum of Association|
|It defines the relationship of the company with outsiders||It defines the relationship of the company with members|
|Acts beyond the Memorandum of Association are invalid and cannot be ratified.||Acts beyond the Articles of Association can be ratified by the members. But they do not violate memorandum|
|Filing of Memorandum is compulsory||Filing of Articles is not compulsory for public company|
|Alteration of Memorandum is very difficult||It can be altered by passing a special resolution|
Prospectus is a document issued by the public companies inviting the public to subscribe for shares or debentures of the company. It contains all information regarding the company’s affairs and its future prospects.
A prospectus must be dated and signed by all the directors. A copy of the prospectus must be filed with Registrar before it is issued to public.
Contents of prospectus:
- Name and address of the registered office of the company.
- Main objects of the company.
- Classes of shares and debentures.
- Name, address and occupation of the signatories to the memorandum.
- Details of the borrowing powers of the company.
- Name, address and occupation of the directors and managing director.
- Name and address of the promoters.
- Minimum subscription.
- Time of opening and closing of subscription.
- The amount payable on application and allotment of each class of shares.
- Name of underwriters.
- Details of preliminary expenses.
Companies which do not want to issue a prospectus may submit a statement in lieu of prospectus to the Registrar of Companies. It is a copy of the prospectus but is not issued to the public.
Statement in lieu of prospectus:
Sometimes a company may not invite public subscription and hence may not issue a prospectus. In such a case the Companies Act provides that at least three days before the first allotment, a statement called Statement in lieu of prospectus must be filled with the Registrar for registration of a company. It is drafted according to the Part 1 of Schedule 3 of the Act.
Minimum subscription is the minimum amount of shares that must be subscribed by the public. A company can make allotment of shares only after receiving the minimum subscription. Otherwise, the application money received must be returned to the applicants. Minimum subscription is 90% of the total number of shares offered to the public.
During the promotion of the company, promoters enter into certain contracts with third parties on behalf of the company. These are called preliminary contracts. Promoters are personally liable to third parties for these contracts.
According to the Articles of Association, a director must take a certain number of shares in a company to act as a director. These are called Qualification Shares. They have to pay for these shares before the company obtains Certificate of Commencement of Business.
The process of appointing underwriters to ensure the minimum subscription of capital is known as underwriting. Underwriters undertake to buy the shares if these are not subscribed by the public. For this, they get underwriting commission.