Class 11
Business Studies
Chapter - 7
Formation of a
Company
Shradha Bidasaria
Stages of Company Formation
Promotion
Incorporation
Subscription of
Capital
Commencement
of business
Stages of Company Formation
A private company has to
complete only the first 2
stages
Promotion & Incorporation
1. Promotion
Promotion
Promotion is the discovery of business
opportunities and organization of funds,
property and management ability into business
concern for the purpose of making profit
Promotion
Promotion means the establishment of
business into reality
Promoter
Promoter
The persons who perform the work of
promotion and bring an enterprise into
existence are known as promoters
Promoter
A promoter is an entrepreneur or businessman
who gives birth to a business concern
A promoter may be an individual, a firm or a
company
Functions of
Promoters
Functions of Promoters
1 Identification of business opportunity
Promoters have to discover a
business idea
It may be about a new line of business or the
expansion of an existing business
Functions of Promoters
2 Feasibility studies
It involves the evaluation and analysis of
the potential of the proposed project
Types of
Feasibility
Studies
Functions of Promoters
a) Technical feasibility
Here the promoters have to ensure the project
is technically possible such as availability of
raw materials, infrastructure, adequate
technology etc.
Functions of Promoters
b) Financial feasibility
If the project requires large funds which cannot be
raised within the available means, it is better to
stop that project
Functions of Promoters
c) Economic feasibility
Even if the project is technically and financially
viable, it may have poor profitability, so that the
promoters have to take expert advice
Only when the above feasibility studies give
positive results, the promoters can launch the
new project
Functions of Promoters
3 Name approval
They have to select a name for the
company and it should not be identical or
same to an existing company
If it is satisfied by the Registrar of Companies,
it will approved
Functions of Promoters
4 Fixing up of signatories to the
Memorandum of Association
Promoters have to fix the members who
are willing to sign the MoA and obtain
their written consent to act as directors
and to take the qualification shares
Functions of Promoters
5 Appointment of professionals
Promoters are entitled to appoint
professionals like mercantile bankers,
auditors etc. to assist them in the
formalities of registration of the company
Functions of Promoters
6 Preparing necessary documents
Promoters are bound to prepare necessary
documents for registration such as
Memorandum of Association, Articles of
Association, Prospectus or Statement in
lieu of prospectus, list of directors etc.
Documents for the
Registration of a
Company
Documents for the Registration
1.Memorandum of Association (MoA)
2.Articles of Association (AoA)
3.Consent of Proposed Directors
4.Agreements if any
5.Statutory Declaration
6.Payment of Fees
1
Memorandum of
Association
Memorandum of Association
MoA is the most important document of a
company
It defines the objects and powers of a
company and the company’s relationship with
the outside world
Memorandum of Association
While preparing the Memorandum of
Association, great care should be taken,
because the company cannot go beyond the
limits laid down in it as it is the charter or
magna carta of the company
Magna Carta
Contents of
Memorandum
(Clauses of MoA)
1
Name Clause
It contains the name of the company
Name Clause
A company can have any name subject to
the following conditions: -
● It must not be identical to the name of an
existing company.
● It should not give an impression that the
company has a connection with the
government or national heroes.
● It should end with the word “Limited” or
“Pvt. Limited”
2
Domicile Clause or
Situation Clause
It contains the place or State where in
the company’s registered office is
situated
Domicile Clause
Exact address is not required at the time of
registration but it should be informed to the
Registrar within 30 days
3
Object Clause
It defines the purpose for which the
company is formed
Object Clause
The aim of the company be disclosed in the
object clause
Eg: Car Manufacturing
4
Liability Clause
It defines the liability of members is
limited
Liability Clause
This clause limits the liability of members to
the amount unpaid on the shares
owned by them
Eg: Face value of a share is Rs.10, on which Rs.6
paid, the liability of the shareholder is limited to the
balance amount of Rs.4 only.
5
Capital Clause
It defines the maximum amount of
capital that can be raised by the
company
Capital Clause
This clause states the maximum capital
(authorized capital) with which the company
is to be incorporated along with its division,
ie: 1 lakh shares of Rs.10 each comprises a
total capital of Rs.10 lakhs.
6
Association Clause
It is a declaration stating the willingness
of the members to associate in order to
form a company and to take shares in
the company
Association Clause
It must be signed by at least 7 persons in
case of a public company and by at least 2 in
case of a private company
Contents of Memorandum
1. Name Clause
2. Domicile Clause
3. Object Clause
4. Liability Clause
5. Capital Clause
6. Association Clause
2
Articles of Association
Articles of Association
It is the bye-law of a company
It contains the rules and regulations for the
internal management of the company
It is subsidiary to MoA and hence it should not
contradict with anything stated in MoA
Articles of Association
A public company may have its own AoA
or may adopt Table A
Table A is a model AoA given in
Companies Act
If a company adopts Table A, it need not
prepare separate AoA
3
Consent of
Proposed Directors
Consent of Proposed Directors
A written consent of proposed directors is also
required to confirm that they agree to act as
directors and to undertake
qualification shares
4
Agreement
Agreement
Agreement with any individual for appointing
him as Managing Director or whole time
director or manager is another document to
be submitted to the Registrar
5
Statutory Declaration
Statutory Declaration
It should be submitted to the Registrar stating
that all legal formalities have been
complied with
It must be signed by any one of the following:
An advocate of high court or supreme court, a
chartered accountant, a director of the company,
manager or secretary of the company
6
Payment of Fees
Payment of Fees
Along with all the above documents,
necessary fee has to be paid for registration
based on the authorized capital of the
company
Documents Required for
Registration
1.Memorandum of Association (MoA)
2.Articles of Association (AoA)
3.Consent of Proposed Directors
4.Agreements if any
5.Statutory Declaration
6.Payment of Fees
Position of Promoters
Position of Promoters
The promoter is deemed to act as a trustee of
the company under promotion
Actually he is not an agent or trustee
Position of Promoters
The contracts entered by the promoter with
various parties will be ratified (approved) by
the company on incorporation
Position of Promoters
He has the right to get remuneration for the
services rendered and be reimbursed for the
expenses incurred by him
He should not make any secret profits
Position of Promoters
The promoter is personally liable for all the
preliminary contracts even after incorporation
He is also liable to the shareholders and
debenture holders for any mis-statement in the
prospectus at the time of issue of company
securities
2. Incorporation
Incorporation
Incorporation means the registration of the
company under the Indian Companies Act
It is the second stage in formation of a company
Certificate of Incorporation
After scrutiny of the documents submitted, the
Registrar issues a certificate of registration
which is called the
Certificate of Incorporation
It is also called the birth certificate of the company
Certificate of Incorporation
Incorporation
Effect of Certificate of Incorporation
1. A company becomes a legal entity with
perpetual succession
2. It can enter into valid contracts
Incorporation
Effect of Certificate of Incorporation
On the issue of certificate of incorporation, a
private company can commence its business
But a public company has to go through two
more stages in the formation
3. Capital Subscription
Capital Subscription
A public company can raise funds from the
public by issuing shares and debentures
Share Capital
Procedure for raising
funds from the public
Capital Subscription Procedure
1. SEBI Approval
Approval from Securities and Exchange
Board of India (SEBI) is to be obtained for
raising funds from the public
SEBI is the regulatory authority of
security market in India
Capital Subscription Procedure
2. Filing of Prospectus
A copy of prospectus or statement in lieu of
prospectus must be filed with the Registrar
of Companies
Capital Subscription Procedure
3. Appointment of Bankers, Brokers and
Underwriters
● Bankers collect the application money from
the public
● Brokers distribute the application form and
encourage the public to apply for shares
● Underwriters give guarantee to the issue of
shares by giving an undertaking to buy the
shares for a commission if not subscribed
by the public
Capital Subscription Procedure
4. 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
Capital Subscription Procedure
Minimum Subscription
90% of the issued amount as per the SEBI guidelines
It is decided by the directors and stated in the
prospectus
Capital Subscription Procedure
Minimum Subscription
Minimum subscription is used to purchase property,
to meet all preliminary expense and as working
capital
Capital Subscription Procedure
Minimum Subscription
If minimum subscription is not received within 120
days from the date of issue, amount collected must
be returned to the applicants
If not, the directors are liable to repay the money with
6% interest from 130th day onwards
Capital Subscription Procedure
5. Application to stock exchange
Company should give an application to at
least one stock exchange for permission to
deal in its shares or debentures
Capital Subscription Procedure
6. Allotment of shares
Once the permission is obtained from the
stock exchange, the company can allot
shares to the applicants
Procedure for Capital Subscription
1.SEBI Approval
2.Filing of Prospectus
3.Appointment of Bankers etc.
4.Minimum Subscription
5.Application to Stock Exchange
6.Allotment of Shares
Prospectus
Prospectus
It is a document, notice, circular or
advertisement inviting offers for subscription
or purchase of any shares or debentures of a
company from the public
Prospectus
A public limited company limited by shares
must issue the prospectus if it intends to issue
the shares to the public and a copy of the
same should be filed with the Registrar
Statement in lieu of
Prospectus
Statement in lieu of Prospectus
In case a public company is confident of
raising capital privately, they need not issue
the prospectus
Statement in lieu of
But they have to prepare a Statement in Lieu
of Prospectus and it must be filed with the
Registrar for registration
Differences between
Memorandum and
Articles
Memorandum Vs. Articles
1 Objectives
MoA AoA
Defines the Defines the
objects of the rules of internal
Company management
Memorandum Vs. Articles
2 Position
MoA AoA
Subsidiary
Main document document
of the Company
Subordinate to
Subordinate to MoA and
Companies Act Companies Act
Memorandum Vs. Articles
3 Relationship
MoA AoA
Defines the Defines the
relationship of relationship of
Company with members and
outsiders the company
Memorandum Vs. Articles
4 Validity
MoA AoA
Acts beyond AoA
can be ratified by
Acts beyond the members,
MoA is invalid provided they do
not violate MoA
Memorandum Vs. Articles
5 Necessity
MoA AoA
Not necessary
Every company for public Co.
has to file MoA It can adopt
Table A
Memorandum Vs. Articles
6 Alteration
MoA AoA
Alteration of MoA
is difficult and It can be altered
by passing a
approval of
special resolution
statutory authority by the members
is required
Memorandum Vs. Articles
Basis MoA AoA
Rules of internal
Objectives Defines the objects
management
Main document of the
Position Subsidiary document
company
Defines the relationship
Defines the relationship of
Relationship of company with
members and the company
outsiders
Acts beyond the MoA are Acts which are beyond AoA
Validity
invalid can be ratified
Every company has to It is not necessary for a
Necessity
file a MoA public ltd. company
