FORMATION OF A COMPANY
A company which is formed and registered under the Indian
Companies Act 1956 is known as Joint Stock Company. The peoples who contribute capital for the
business is to be considered as members. The portion of capital to which each
member is entitled as his share , for that he will get dividend as return .the
members are known as Shareholders.
Stages of promotion
Promotion Incorporation Raising
of capital Commencement
of business
Promotion
Promoters:
A company is promoted or formed to run an industrial or trading or service enterprise.
The persons who thus bring a company into existence are known as ‘promoters’
Document
like memorandum of association, articles of association etc. are [prepared by
them and preliminary expenses are met by them. Promotion is risky business. The
promoters may be an individual, a firm, or an association or a body corporate
Types
of promoters
Professional
promoters: Promote A Company And Hand It Over The Shareholders
Occasional
promoters: Do Promotional Works Occasionally
Particular
promoters: Undertakes Promotion Of A Particular Business Alone
Functions
of promoters
Discovery
of business idea: the idea may be about an entirely new line of business or it
may be about the expiration of an existing business. the work begins when he
gets such an idea
Detailed
investigation: he makes an estimate of quality of products to be sold, cost of
production, expected profits, capital requirements, market conditions, competition,
availability of raw materials, power labor, transport, etc.
Assembling:
once satisfied with practicability and profitability of the proposal the
promoter assemble the factors of production
Financing:
the financial plan should include the type of securities like shared and
debenture to be issued for public subscription. To raise capital by public
issue he must draft a prospects inviting the public to subscribe
Incorporation:
the promoters prepare various documents to be filed with the registrar of companies.
Once a certificate is issued by the registrar the company comes into existence.
Legal
position of promoters
A
promoter is deemed to act as trustee of the company under promotion. The
contracts entered into by the promoter with the various parties are ratified by
the company on incorporation. He should to make any secret profits. He is enmities
to get remuneration for the service rendered and be reimbursed for the expenses
incurred by him. The promoter is personally liable for all the preliminary
contracts with the other parties before incorporation. He continues to be
personally liable for such contracts even after incorporation of the company.
Incorporation
of a company
Form
of a company: the promoters should first decide upon the form of the proposed
company- private or public
Name
of the company: as per the companies act a company cannot be registered by a
name which is undesirable in the opinion of central government. Any name which is
identical with , or which closely resembles the name of an existing company is
undesirable
SEBI’s
approval of the draft prospectus: a draft prospectus has to be submitted to
SEBI
Industrial
license: industrial act.1951 insists that for starting certain industries a license
must be obtained from the central government
Procedure for incorporation
The following documents are to be filed
with the registrar of joint stock companies along with necessary filling fees,
stamp duty and registration fee.
Memorandum
of association: signed by at least seven persons in a public company and two
persons in a private company. It should be stamped and witnessed properly
Articles
of association: duly stamped and signed by the signatories to the memorandum of
association
List
of directors: containing names, address and occupation
Written
consent of directors: to act in that capacity
Undertaking
of the directors: to the effect that they will take up and pay for
qualification shares.
Notice
of registered office: showing the address of registered office of the company.
It need be filed within 28 days of registration
Statutory
declaration: by an advocate of the supreme court or a high court or chartered
accountant or a director or secretary pr manager of the company that all
requirements of the act have been complied with.
After
scrutiny, the registrar issues a certificate called ‘certificate of
incorporation’
Effect
of certificate of incorporation
This certificate is a conclusive proof of
the registration of the company. It may rightly be called the birth certificate
of the company. The date show in the certificate denote the date on which the
company comes into existence.
It
also evidence that the memorandum and articles are within law.
A private company can start business
immediately on receipt of certificate of incorporation. But a public company
can start business only after getting another certificate called certificate of
commencement of business.
Rising
of capital
The raise capital the directors of a public
company have to take the following steps:
1)
Agreement with underwriters
2)
Application to the stock exchange for listing of shares
3)
Appointment of bankers and auditors
4)
Invitation to the public for subscription to the share capital
5)
Allotment of shares on receiving application for shares
6)
Filling a statement called “return of allotment “with the registrar.
Commencement of business
Certificate of
commencement of business is granted by the registrar only when the following
formalities are fulfilled.
The
company filed with the registrar a prospectus or a statement in lieu of
prospectus
The
number of shares allotted is not less than the minimum subscription stated in
the prospectus
The
directors have taken up and paid for their qualification shares
Return
of allotment containing names and address of shareholders and the number of
shares allotted to each, should be submitted
Declaration
to the effect that the company was applied for or obtained permission for
dealing its shares in a recognized stock exchange should be filed
Declaration
by the secretary or directors of the company is filed with the registrar to the
effect that all provisions of the Act in respect of allotment of shares and
commencement of business have been complied.
Effect of certificate of commencement
of business
It entitles a company to start business
and exercise its borrowing powers. All the contracts entered into by the
company in between the date of incorporation and the dates of issue of
certificate of commencement of business are provisional. They would now become
binding on the company.
Basic company documents
Ø
Memorandum of association
The memorandum of association is the most
important document of the company with which a company is registered. It is described
ads the charter of Magna Carta of the company. It defines the company’s
objects, capital and power. The relation of the company with the outsiders is
governed by the provisions of the memorandum.
·
Contents of memorandum
The
memorandum of association of a company limited by shares contains the following
clauses:
1)
Name clause
2)
Domicile clause or situation clause
3)
Objects clause
4)
Liability clause
5)
Capital clause
6)
Association clause or subscription clause
1)
Name clause
The name of the company must be stated in
this clause. The name should not be identical with, or similar to, the name of
an existing company. The name selected must not suggest any connection with or
association or patronage of a national hero. These restrictions are imposed to
avoid confusion in the mind of public. The name should end with the word
“limited” or “ltd”.
2)
Domicile clause
This clause specifies the name of the
state where the registered office of the company is situated. This clause
determines the jurisdiction of the registrar of joint stock companies and of
the courts. The registrar of the state concerned will be the authority for registration,
administration and winding up of the company. Full address of the company must
be filled with the registrar within 30 days of incorporation of the company.
3)
Object clause
It
specifies objects of the company. It indicates the extent of company’s powers
and the sphere of its activities.
The
objective of clause serves two purposes:
It
informs the shareholders and others about the kind of business in which their
money is invested
It
informs the creditors and outsiders what the company is permitted to do.
4)
Liability clause
It
state whether the liability of members is limited by shares or by guarantee. In
the latter case the amount to be contributed by each member towards debts and liabilities
of the company on winding up is mentioned.
5)
Capital clause
This
clause state the total capital of the company with which the company is registered.
It is known as registered capital or authorized capital or nominal capital.
This is the maximum limit of capital that can be issued. The value and number
of shares should also be stated in this clause.
6)
Association or subscription clause
This clause is in the form of a declaration.
It states that the subscribers express their willingness and agreement to form
a company.
·
Alteration of memorandum
Alteration
of memorandum alteration must be just and equitable in the best interest of the
company. It should not defeat the main objects of the company. Legal
formalities for alteration are described below:
1)
Alteration of name clause:
A
company can change its name at any time by passing a special resolution and
obtaining the approval of central government. If a private company is converted
into a public company the word ‘private, is deleted. Similarly, when a public
company is converted into a private company the word “private” is added to the
name.
2) Alteration of domicile clause:
Change of registered office from one locality to another in the same
city or town is effected by a resolution of board of directors. If the changes
are from one place to another in the same state a special resolution is
required. In both cases the change is notified to the registrar within 30 days.
A public notice is also required.
3) Alteration of objects clause;
The objects clause can be altered only for some specific purpose
mentioned in the companies act. The company has passed a special resolution and
obtains conformation of the company law board. A copy of the conformation order
and a printed copy of altered memorandum must be filed with the registrar.
4) Alteration of liability clause:
If all the members of a limited or guarantee company give their consent
in writing , liability an be altered. Liability of directors, managing
directors or manager can be altered by passing a special resolution if the
articles of association permit. The registrar should be intimated about the
alteration.
5) Alteration of capital clause:
To increase the share capital an orderly resolution will suffice. A
special resolution is a must for reduction of capital. Confirmation of the
resolution by the court is also necessary for reduction of capital. Copy of
resolution and confirmation by the court should be filed with the registrar.
6) Association clause:
This clause cannot be altered.
Ø
Articles of association:
The articles are to be filed with the registrar to get the company registered.
It contains the rules and regulations for internal management and
administration of the company.
Contents of articles of association
1)
Share capital and its sub-division into different classes’ of shares
2)
Rights of different classes of shareholders
3)
Allotment of shares by directors
4)
The procedure for making calls on shares, transfer, transmission, forfeiture
and surrender of shares
5)
Minimum subscription
6)
Issue of shares certificate and share warrants
7)
Company, s lien on shares
8)
Alteration of capital
9)
Conversion of shares into stocks
10)
Borrowing powers of the company
11)
Conduct of meeting of shareholders and the board of directors
12)
Number, appointment t, remuneration, power and duties of directors.
13)
Appointment of manager, managing directors and secretary
14)
Dividends and reserve funds
15)
Maintenance of books of accounts and their audit
16)
Execution or adoption of preliminary contracts
17)
Common seal of the company
18)
Winding up of the company
19)
Arbitration
The
article must be printed, dividend into paragraph and numbered consecutively and
signed by every subscriber to the memorandum in the presence of a witness, who
shall attest the signatures. It must also be stamped.
Ø Table
A
The companies act gives table A containing
rules and regulations relating to the management of companies. According to
section 26 of the companies act, registration of articles is not compulsory for
public limited companies
Alteration
of articles
The
articles of association can be altered with a special resolution and the fact
should be intimated to the registrar. But such alteration must be subject to
certain conditions
1.
Such alteration shall not be against
the companies act the memorandum.
2.
It should not lead to conversion of a
public company into a previous company unless approved by the central
government
3.
It should not increase the liability of
a member without his written consent
4.
It should not violate any existing
contract
5.
It should not be fraudulent or illegal
6.
It should be in the interest of the
company.
Prospectus
The object of prospects is to arouse interest
of the investing public in the proposed company. It therefore contains all
material essentials information regarding the company’s affaires and its future
prospects. A private company is prohibited from inviting the public to
subscribe to its shares
A copy of the prospectus must be
filed with the registrar before it is issued to the public. It must be
published within 90 days from the date of filling with the registrar.
Contents of prospectus
Ø The
main object of a company
Ø Name
and registered address of the company
Ø Name
, address and occupations of the signatories to the memorandum and the number
of shares taken by them
Ø Number
and class of shares issued and rights of different classes of shareholders
Ø Number
of redeemable preference shares to be issued, the date of redemption , notice
and the method of redemption
Ø The
qualification shares, if any , of the directors
Ø Names,
address and description of directors, managing directors, manager, etc.
Ø Name
and address of the promoters of the
company and their remuneration
Ø Minimum
subscription required for allotment of shares
Ø Amount
payable on application and allotment on each shares
Ø Information
on listing of shares on a stock exchange
Ø Time
opening and closing the subscription list
Ø Particulars
of any option given to any person to subscribe for shares and debentures of the
company
Ø Details
of borrowing power of the company
Ø Particulars
of all contracts made
Ø Particulars
of all contracts made
Ø Particulars
of shares or debentures issued or to be issued for consideration other than
cash
Ø Particulars
of property purchased , name of the vendor and the payment of purchase
consideration
Ø Name
of underwriters and details of underwriting agreement
Ø Name
of auditors , bankers and brokers
Ø Nature
and extent of interest of directors or promoters in the promotion and in any
property proposed to be purchased
Ø Particulars
of shares issued at premium
Ø Restrictions
on members and directors
Ø Capitalization
of profits
Ø Where
the prospectus is issued by an existing company, the audited profit and loss
accounts and balance sheets for the last 5 years must be attached.
Liability
for misstatement of prospectus
Prospectus forms the basis of a contract
between the company and shareholders. Therefore, if the prospectus contains any
mis-statement, misrepresentation or suppression of facts, the contract is violated.
The shareholders in such a case can proceed to a court of law to cancel the allotment.
To protect the investors, the companies act contains penal provisions to deal
with such cases.
a)
Civil liability: a person who purchases shares or debenture on the strength of
mis-statement or mis-preprecentaion in a prospectus, to claim compensation or
refund of money from any directors, promoter or any person authorized to issue such
a misleading prospectus.
b)
Criminal liability: Every person who has authorized issue of such a prospectus
is punishable with imprisonment unto two years or fine unto rs. 5000 or both.
Statement
in lieu of prospectus
When
a public company wants to raise capital privately it must file a statement
called “statement in lieu of prospectus” with the registrar at least three days
before the first allotment of shares.
Allotment
of shares
Applications for shares duly filled in are
sent to the company or its banks along with application money .The shares are
allotted by the board of directors, whose decision is final. a letter of allotment
is sent to each applicant to whom shares are allotted, while a letter of regret
with refund of application to whom shares are not allotted.
Restrictions
on allotment
·
Send a copy of the prospectus or
statement in lieu of prospectus to the registrar
·
Deposit all application money received
in a scheduled bank
·
See that the minimum subscription
stated in the prospectus has been achieved and application money received.
Minimum
subscription
The
minimum amount of capital which must be subscribed by the public before a
public company can allot shares is known as minimum subscription, and is
decided by the directors and stated in the prospectus.
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