Company Law

Assignment

Topic: Formation of a Joint Stock Company

Submitted to:

Submitted by:

Rishabh Rastogi

B.B.A. - VI Semester

National P.G. College

2008-2011
Acknowledgements

No man is an island unto himself, it would be unfair on my part if we fail to mention the names
of those who at different moments in their respective ways facilitated the completion of this
project and to whom we are deeply indebted.

We are extremely grateful to Mr. to have taken us under her guidance; providing us with expert
guidance along with reasonable freedom and autonomy.

The project would not have been completed without the cooperation of our friends .

We feel an unbound sense of gratitude towards our parents who allowed us to pursue this course
and continuously coaxed us to complete this project.

I thank God for all that is.

RISHABH RASTOGI
Introduction

What is a Joint Stock Company ?

A joint-stock company (JSC) is a type of corporation or partnership involving two or more

individuals that own shares of stock in thecompany. Certificates of ownership ("shares") are

issued by the company in return for each financial contribution, and the shareholders are free to

transfer their ownership interest at any time by selling their shareholding to others.

In modern company law the existence of a joint-stock company is often synonymous with

incorporation (i.e. possession of legal personality separate from shareholders) and limited

liability (meaning that the shareholders are only liable for the company's debts to the value of the

money they invested in the company). And as a consequence joint-stock companies are

commonly known as corporations or limited companies.

Some jurisdictions still provide the possibility of registering joint-stock companies without

limited liability. In the United Kingdom and other countries which have adopted their model of

company law, these are known as unlimited companies. In the United States they are, somewhat

confusingly known as joint-stock companies.

Characteristics of Joint Stock Company

i. Legal formation
No single individual or a group of individuals can start a business and call it a joint stock
company. A joint stock company comes into existence only when it has been registered

ii. Artificial person

Just like an individual, who takes birth, grows, enters into relationships and dies, a joint
stock company takes birth, grows, enters into relationships and dies. However, it is called
an artificial person as its birth, existence and death are regulated by law and it does not
possess physical attributes like that of a normal person.

iii. Separate legal entity

Being an artificial person, a joint stock company has its own separate existence independent
of its members. It means that a joint stock company can own property, enter into contracts
and conduct any lawful business in its own name. It can sue and can be sued by others in the
court of law. The shareholders are not the owners of the property owned by the company.
Also, the shareholders cannot be held responsible for the acts of the company

iv. Common seal

A joint stock company has a seal, which is used while dealing with others or entering into
contracts with outsiders. It is called a common seal as it can be used by any officer at any
level of the organisation working on behalf of the company. Any document, on which the
company's seal is put and is duly signed by any official of the company, become binding on
the company. For example, a purchase manager may enter into a contract for buying raw
materials from a supplier. Once the contract paper is sealed and signed by the purchase
manager, it becomes valid. The purchase manager may leave the company thereafter or
may be removed from the job or may have taken a wrong decision, yet for all purposes the
contract is valid till a new contract is made or the existing contract expires.
v. Perpetual existence
A joint stock company continues to exist as long as it fulfils the requirements of law. It is not
affected by the death, lunacy, insolvency or retirement of any of its members. For example,
in case of a private limited company having four members, if all of them die in an accident the
company will not be closed. It will continue to exist. The shares of the company will be
transferred to the legal heirs of the deceased members.

vi. Limited liability

In a joint stock company, the liability of a member is limited to the extent of the value of
shares held by him. While repaying debts, for example, if a person owns 1000 shares of Rs.
10 each, then he is liable only upto Rs 10,000 towards payment of debts. That is, even if
there is liquidation of the company, the personal property of the shareholder can not be
attached and he will lose only his shares worth Rs. 10,000.

vii. Democratic management

Joint stock companies have democratic management and control. That is, even though the
shareholders are owners of the company, all of them cannot participate in the management
of the company. Normally, the shareholders elect representatives from among themselves known
as ‘Directors’ to manage the affairs of the company.
Limitations of Joint Stock Company
.
(i) Difficult to form: The formation or registration of joint stock company involves a
complicated procedure. A number of legal documents and formalities have to be
completed before a company can start its business. It requires the services of
specialists such as Chartered Accountants, Company Secretaries, etc. Therefore,
cost of formation of a company is very high.

(ii) Excessive government control: Joint stock companies are regulated by

government through Companies Act and other economic legislations. Particularly,
public limited companies are required to adhere to various legal formalities as
provided in the Companies Act and other legislations. Non-compliance with these
invites heavy penalty. This affects the smooth functioning of the companies.

(iii) Delay in policy decisions: Generally policy decisions are taken at the Board
meetings of the company. Further the company has to fulfill certain procedural
formalities. These procedures are time consuming and therefore, may delay action
on the decisions.

(iv) Concentration of economic power and wealth in few hands: A joint stock
company is a large-scale business organisation having huge resources. This gives a
lot of economic and other power to the persons who manage the company. Any
misuse of such power creates unhealthy conditions in the society, e.g., having
monopoly over a particular business or industry or product; exploitation of workers,
consumers and investors.
Advantages of Joint Stock Company
You must be keen to know why we should form a company for carrying out business?
Obviously, this is because there are many advantages which the company form of business
organisation enjoys over other forms of business organisation. Let us read about those
advantages.
The main advantages of Joint Stock Company are -

(i) Large financial resources: A joint stock company is able to collect a large amount
of capital through small contributions from a large number of people. In public limited
company shares can be offered to the general public to raise capital. They can also
accept deposits from the public and issue debentures to raise funds.

(ii) Limited Liability: In case of a company, the liability of its members is limited to the
extent of the value of shares held by them. Private property of members cannot be
attached for debts of the company. This advantage attracts many people to invest
their savings in the company and it encourages the owners to take more risk.

(iii) Professional management: Management of a company is vested in the hands of

directors, who are elected democratically by the members or shareholders. These
directors as a group known as Board of Directors ( or simply Board) manage the
affairs of the company and are accountable to all the members. So members elect
capable persons having sound financial, legal and business knowledge to the board
so that they can manage the company efficiently.

(iv) Large-scale production: Due to the availability of large financial resources and
technical expertise it is possible for the companies to have large-scale production. It
enables the company to produce more efficiently and at lower cost.

(v) Contribution to society: A joint stock company offers employment to a large number
of people. It facilitates promotion of various ancillary industries, trade and auxiliaries
to trade. Sometimes it also donates money towards education, health and
community services.

(vi) Research and Development: Only in company form of business it is possible to

invest a lot of money on research and development for improved processes of production,
new design, better quality products, etc. It also takes care of training and
development of its employees.
STAGES IN THE FORMATION OF A JOINT STOCK
COMPANY
It is very easy to establish a sole proprietorship business or a partnership firm as there are
a few regulations to meet. But for the establishment of a company, a lot of formalities are
to be complied with. The registration of the company is mandatory before starting its
operation. The formation of a company, right from the origin of idea to establish a company
goes through four different stages, like:

Stage –I Promotion
Stage- II Incorporation
Stage- III Raising of Capital
Stage- IV Commencement of Business

PROMOTION
Promotion of a business simply refers to all those activities that are required to be undertaken
to establish a new business unit for manufacturing or distribution of any product or provide
any service to the people. It starts with conceiving an idea of business or discover an
opportunity for doing a business, assess its feasibility and then take the necessary steps to
launch the business unit. This involves ascertaining as to whether all the basic requirements
such as land, building, raw material, machine, equipments etc. are available or not. If they
are available one can assemble them, arrange the necessary funds and set up the business
unit to give shape to the initial idea of establishing the business. The whole process is called
business ‘promotion’ and the person who does it is called the ‘promoter’.

STEPS INVOLVED IN PROMOTION OF A COMPANY

The task of promotion usually involves the following four steps or phases.
1. Discovery of a business idea
2. Investigation and Verification
3. Assembling
4. Financing the Proposition
INCORPORATION

A sole proprietorship or partnership firm can be formed to carry out its business even
without any registration. But a company can not be formed or permitted to run its business
without registration. Infact, 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:
(a) Approval of Name
It has to be ensured that the name selected for the company does not match with the name
of any other company. For this, the promoter has to fill in a “Name Availability Form” and
submit it to the Registrar of Companies along with necessary fees. The name must include
the words(s) ‘Limited’ or ‘Private limited’ at the end. Once it is approved, the promoter
can proceed with other formalities for the incorporation of the Company.
(b) Filing of Documents
After getting the name approved the promoter makes an application to the Registrar of
Companies of the State in which the Registered Office of the company is to be situated for
registration of the company. The application for registration must be accompanied by the
following documents.
(i) Memorandum of Association (MOA): It defines the objectives of the company and

states about the range of activities or operation. It must be duly stamped, signed and
witnessed.
(ii) Articles of Association (AOA). It contains the rules and regulations regarding the
internal management of the company. It must be properly stamped, duly signed by
the signatories to the Memorandum of Association and witnessed.
(iii) A list of persons who have agreed to become Directors with their addresses etc.
(iv) Written consent of the proposed Directors to act in that capacity, duly signed by
each Director.
(v) The notice about the exact address of the Registered Office of the company. It may,
however, be filed within 30 days of incorporation or registration.
(vi) A copy of the name approval letter received from the Registrar of Companies.
(vii) A statutory declaration that all the legal requirements of the Companies Act in regard
to incorporation have been complied with.
(c) Payment of Filing and Registration Fees
Along with the above documents, necessary filing fees and registration fees at the prescribed
rates are also to be paid.
The Registrar will scrutinise all the documents and if he finds them in order, he will issue a
Certificate of Incorporation. The moment the certificate is issued, the company comes into
(i) existence. So this certificate may be called as the Birth Certificate of a Joint Stock
Company.
RAISING CAPITAL OR SUBSCRIPTION OF CAPITAL

After the company is incorporated, the next stage is to raise the necessary capital. In case
of a private limited company, funds are raised from the members or through arrangement
from banks and other sources. In case of a public limited company the share capital has to
be raised from the public. This involves the following:
(a) Preparation of a draft prospectus and get it inspected (vetted) by SEBI to ensure that
all information given in the prospectus fully complies with the guidelines laid down by
SEBI in this regard.
(b) Filing a copy of the prospectus with the Registrar of Companies.
(c) Issue of prospectus to the public by notifying in a newspaper and inviting the public to
apply for shares as prescribed in the prospectus.
(d) If the minimum subscription has been received, shares should be allotted to the
applicants as per SEBI guidelines and file a return of allotment with the Registrar of
Companies.
(e) Listing of shares in a recognised stock exchange so that the shares can be traded
there. Preferably, consent of a stock exchange for listing should be obtained before
issue of the prospectus to the public.

COMMENCEMENT OF BUSINESS

In case of a private limited company, it can immediately start its business as soon as it is
registered. However, in case of public limited company a certificate, known as ‘certificate
of commencement of business’, must be obtained from the Registrar of Companies before
starting its operation. For this purpose it has to file a statement with the following declarations
to the Registrar of Companies.
(a) That a prospectus has been filed with the Registrar of Companies.
(b) That the shares have been allotted upto the amount of the minimum subscription.

(c) That the Directors have taken up or purchased the minimum number of shares required
to qualify themselves to be Director.
(d) That no money is liable to become refundable to the applicants by reason of failure to
obtain permission for shares to be traded in a recognised stock exchange.
(e) A statutory declaration by a Director or the Secretary of the company stating that the
requirements relating to the commencement of business have been duly complied with.
The Registrar of Companies will scrutinise all these documents and if he is satisfied that
the process of securing the minimum prescribed capital has been done honestly and efficiently
and the minimum prescribed capital has been obtained from the public, then he shall issue
a Certificate of Commencement of Business.

IMPORTANT DOCUMENTS PREPARED WHILE FORMING A COMPANY

There are three basic documents, which are prepared and filed with the Registrar during
the formation of a company. These are:
(1) Memorandum of Association (MOA)
(2) Articles of Association (AOA)
(3) Prospectus
Out of these three documents, MOA and AOA are filed with the Registrar of Companies
before the registration along with other supporting documents while asking for certificate
of incorporation. The prospectus is issued to the public at the time of subscription to
capital. Of course, a copy of the prospectus is submitted to the Registrar also. Let us now
have a brief idea about these documents.
1. MEMORANDUM OF ASSOCIATION (MOA)
The Memorandum of Association is the principal document in the formation of a company.
It is called the charter of the company. It contains the fundamental conditions upon which
the company is allowed to be incorporated or registered. It defines the limitations of the
powers of the company. The purpose of memorandum is to enable the shareholders,
creditors and those who deal with the company to know what is its permitted range of
activities or operations. It defines the relationship of the company with the outside world.
The Memorandum of Association usually contains the following six clauses:
(a) Name Clause: It contains the name by which the company will be established. As
you know, the approval of the proposed name is taken in advance from the Registrar
of the companies.
(b) Situation Clause: It contains the name of the state in which the registered office of
the company is or will be situated. The exact address of the company’s registered
office may be communicated within 30 days of its incorporation to the Registrar of
Companies.
(c) Objects Clause: It contains detailed description of the objects and rights of the
company, for which it is being established. A company can undertake only those activities
which are mentioned in the objects clause of its memorandum.
(d) Liability Clause: It contains financial limit upto which the shareholders are liable to
pay off to the outsiders on the event of the company being dissolved or closed down.
(e) Capital Clause: It contains the proposed authorised capital of the company. It gives
the classification of the authorised capital into various types of shares, (like equity and
preference shares) with their numbers and nominal value. A company is not allowed
to raise more capital than the amount mentioned as its authorised capital. However,
the company is permitted to alter this clause as per the guidelines prescribed by the
companies Act.
(f) Subscription Clause: It contains the name and address of at least seven members in
case of public limited company and two members in case of a private limited company,
who agree to associate or join hands to get the undertaking registered as a company.
It contains a declaration by persons who are desirous of being formed into and agree
to subscribe to the number of shares mentioned against their names.

2. ARTICLES OF ASSOCIATION (AOA)

The Articles of Association of a company contains the various rules and regulations for the
day to day management of the company. These rules are also called the bye-laws. It
covers various rights and powers of its members, duties of the management and the manner
in which they can be changed. It defines the relationship between the company and its
members and also among the members themselves. The rules given in the AOA must be in
conformity with the Memorandum of Association.
Articles of Association of a company generally contain rules and regulations with regard to
the following matters:
(a) Preliminary contracts
(b) Use and custody of common seal
(c) Allotment, calls and lien on shares
(d) Transfer and transmission of shares
(e) Forfeiture and re-issue of shares
(f) Alteration of share capital
(g) Issue of share certificates and share warrants
(h) Conversion of shares into stock
(i) Procedure of holding and conducting company meetings
(j) Voting rights and proxies of members
(k) Qualification, appointment, remuneration and power of Directors
(l) Borrowing powers and methods of raising loans
(m) Payment of dividends and creation of reserves
(n) Accounts and audit
(o) Winding up.
A company can register its own Articles of Association or adopt Table A, which contains
a model set of rules as given in the Schedule I of the Companies Act.
After knowing about the meaning and the contents of Memorandum of Association and
Articles of Association you must be thinking, how these two documents are different from
each other. Let us have a comparison between these two.

PROSPECTUS
After getting the Certificate of Incorporation or Registration a public limited company
invites the public to subscribe to its shares. This is done by issuing a document called
Prospectus. Under the Companies Act, a prospectus has been defined as “any document
described or issued as a prospectus and includes any notice, circular, advertisement or
other document, inviting deposits from the public or inviting offers from the public for the
subscription or purchase of shares or debentures of a company or body corporate”.
The main objectives of issue of a prospectus are:
(a) to inform the public about the company;
(b) to induce people to invest in the shares or debentures of the company; and
(c) to provide an authentic information about the company and the terms and conditions
of issue of shares and debentures.
The prospectus usually contains the following information which is considered important
for the prospective investors of shares and debentures of the company.

(a) General information regarding the name, office of the company, stock exchange where
shares are to be listed, date of opening and closing of the issue, credit rating information,
name of underwriters, brokers and bankers.
(b) Capital structure of the company.
(c) Terms of payment and application procedure.
(d) Company management and details of the project and project report.
(e) Other listed companies under the same management.
(f) Outstanding litigations and defaults.
(g) Management perception of risk factors.
The prospectus must be prepared with great care because on the basis of its details the
public subscribes to the capital of the company. No facts should be withheld in this. It must
not contain even an idea of falsehood. It should contain only truth, complete truth and
nothing but truth. The future schemes and bright futures of the company are presented
through this.
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.
Bibliography:

 www.wikipedia.org

 www.indiaknowhow.com

 Classroom Notes

 Joint Stock Company : A Critical Analysis By Praveen Thapre , TOI New

Delhi , 7 Septemper 2010.