Formation of a Company

Learning Objectives

• Specify the important stages in the formation of a company.
• Describe the steps involved in each stage of company formation.
• Specify the documents to be submitted to the registrar of companies.
• State the need for a certificate of incorporation and certificate to commence business.

Summary

• Stages in Formation of a Company:
  • Promotion: Involves conceiving a business idea and taking initiative to form a company.
  • Incorporation: Application made to the Registrar of Companies along with necessary documents.
  • Capital Subscription: Public company raises funds through the issue of securities.
• Key Steps in Promotion:
  1. Approval of company's name from the Registrar of Companies.
  2. Fixing signatories to the Memorandum of Association.
  3. Appointment of professionals to assist in document preparation.
  4. Preparation of necessary documents (Memorandum of Association, Articles of Association, etc.).
• Documents Required for Incorporation:
  • Memorandum of Association
  • Articles of Association
  • Consent of proposed directors
  • Agreement with proposed managing or whole-time director
  • Statutory declaration
• Capital Subscription Steps:
  1. SEBI approval.
  2. Filing of prospectus with the Registrar of Companies.
  3. Appointment of bankers, brokers, and underwriters.
  4. Ensure minimum subscription is received (90% of shares).
  5. Refund/adjust excess application money.
  6. Issue allotment letters to successful applicants.
  7. File return of allotment with the Registrar of Companies.
• Certificates:
  • Certificate of Incorporation signifies legal existence of the company.
  • Certificate to Commence Business is required for public companies to start operations.

Chapter 7: Formation of a Company

Learning Objectives

• Specify the important stages in the formation of a company.
• Describe the steps involved in each stage of company formation.
• Specify the documents to be submitted to the registrar of companies.
• State the need for a certificate of incorporation and certificate to commence business.

Stages in the Formation of a Company

1. Promotion: This is the first stage where a business idea is conceived and steps are taken to form a company.
   • Steps in Promotion:
     • Approval of the company's name from the Registrar of Companies.
     • Fixing signatories to the Memorandum of Association.
     • Appointment of professionals to assist in document preparation.
     • Preparation of necessary documents:
       • Memorandum of Association
       • Articles of Association
       • Consent of proposed directors
       • Agreement with proposed managing or whole-time director
       • Statutory declaration
2. Incorporation: An application is made to the Registrar of Companies along with necessary documents and registration fee. The Registrar issues a certificate of incorporation after scrutiny.
   • Certificate of Incorporation: This is conclusive evidence of the legal existence of the company.
3. Capital Subscription: A public company raising funds from the public must follow these steps:
   • SEBI approval.
   • File a copy of the prospectus with the Registrar of Companies.
   • Appointment of brokers, bankers, and underwriters.
   • Ensure minimum subscription is received (90% of shares to be issued).
   • 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).

Important Documents Required for Incorporation

• Memorandum of Association: Defines the objectives for which the company is formed.
• Articles of Association: Rules of internal management of the company.
• Consent of Proposed Directors: Written consent confirming their agreement to act as directors.
• Agreement with Proposed Managing Director: If applicable.
• Statutory Declaration: Affirmation that all legal requirements for registration have been complied with.

Key Terms

• Promotion: The process of initiating the formation of a company.
• Prospectus: An invitation to the public to apply for securities of the company.
• Memorandum of Association: The main document defining the company's objectives.
• Incorporation: The legal process of forming a company.
• Articles of Association: Internal rules governing the company.
• Capital Subscription: The process of raising funds from the public.
• Commencement of Business: The stage when a company can start its operations.

Common Mistakes and Exam Tips

Common Pitfalls

• Misunderstanding the Stages of Company Formation: Students often confuse the stages of promotion, incorporation, and capital subscription. Ensure you can clearly define and differentiate each stage.
• Confusing Memorandum of Association with Articles of Association: Memorandum defines the company's objectives and relationship with outsiders, while Articles govern internal management. Be clear on their differences.
• Neglecting the Importance of the Certificate of Incorporation: Some students overlook the significance of this document, which is crucial as it serves as conclusive evidence of the company's legal existence.
• Ignoring Minimum Subscription Requirements: Failing to understand that a public company must receive applications for at least 90% of the shares before allotment can lead to confusion.

Exam Tips

• Review Key Documents: Familiarize yourself with the Memorandum of Association and Articles of Association, including their clauses and purposes.
• Understand the Role of SEBI: Know the importance of SEBI approval in the capital subscription stage and what it entails for companies raising funds.
• Practice Differentiating Terms: Be prepared to explain terms like 'preliminary contracts' and 'provisional contracts' and their relevance in company formation.
• Use Diagrams: If applicable, use flowcharts or diagrams to illustrate the stages of company formation during your exam to enhance clarity.
• Time Management: Allocate time wisely during the exam to ensure you can address all questions thoroughly.