FORMATION OF A COMPANY

Introduction
Formation of a company is a complex activity involving completion of legal
formalities and procedure.
It is divided into following stages.
1. Promotion
2. Incorporation and
3. Subscription of capital
4. Commencement of Business.

It may be noted that for private limited companies only two stages that is
Promotion and Incorporation is appropriate. On the other hand, Public
companies must follow all the four stages of formation as they offer their
shares to the public for subscription.

PROMOTION OF A COMPANY
Promotion is the first stage in the formation of a company. It involves
conceiving and developing a business idea. A person or a group of persons or
even a company proceeds to form Joint stock company are said to be the
promoters of the company.

Functions of a promoter
1. Identification of business opportunity:
The promoter has to identify those business opportunities which have
investment potentiality.

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 2. Feasibility studies:
The promoters must undertake a detailed feasibility to studies to
investigate all aspects of the business they intend to start. Depending
upon the nature of the Business, they may conduct technical, financial n
economic feasibility study.

3. Name approval:
The promoter have to select a name for the company and submit and
apply to the Registrar of Companies for its approval. The name should
not carry the government name or emblem. Name should not be
identical or closely resembles the name of an existing company and
should not be objected to anyone.

4. Fixing up o Signatories to the Memorandum of Association:

Promoters have to decide about the members who will be signing the
Memorandum of Association of a proposed company.

5. Appointment of professionals:
certain professionals such as auditors, company secretaries are to be
appointed by the promoters to assist them in the preparation of
document which are required to be submitted to the Registrar of
Companies.

6. Preparation of necessary documents

The promoters must prepare certain legal documents which has to be
submitted to the registrar of the company. The document to be registered
are.

Memorandum of Association (MOA):

The most important document as it defines the objectives of the company. It
contains different clauses, they are:
Name clause:
This clause contains the name of the company which is already been approved
by the Registrar of Companies.

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Registered office clause:
This clause contains the name of the state in which the registered office of the
company is proposed to be situated.
Objects clause:
It defines the purpose for which the company is formed.
Liability clause:
This clause limits the liability of the members to the amount unpaid on the
shares held by the shareholders.
Capital clause:
It specifies the maximum capital which the company will be authorized to rise
through issue of shares.
Association clause
In this clause the signatories to the Memorandum of Association state their
intension to be associated with the company and also give their consent to
purchase the shares of the company.
The MOA must be signed by at least seven members in case of public
companies and two members in case of private companies.

Articles of Association
Articles of Association are the rules regarding internal management of a
company. These rules are subsidiary to the Memorandum of Association and
hence, should not contradict or exceed anything stated in the memorandum of
association. A public company may adopt table which is model set of Articles
given in the Companies Act.

Consent of proposed directors

Apart from Memorandum of Association n Articles of Association a written
consent of each person named as directors is required confirming that they
agree to act in that capacity and undertake to buy and pay for qualification
shares, as mentioned in the Articles of Association.

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Agreement
The agreement, if any, which the company proposes to enter with any
individual for appointment as its Manager or Director is another document
which id required to be submitted to the Registrar for getting the company
registered.
Statuary Declaration
A declaration stating that all the legal requirements pertaining to registration
have been compiled with is to be submitted to the Registrar with the above-
mentioned documents for getting the company registered under the law.

Receipt of payment of fee

Along with the above-mentioned documents, necessary fees has to be paid for
the registration of the company. The amount of such fees shall depend on the
authorized share capital of the company.

Incorporation

After completion of above formalities, promoters make an application for the

incorporation of the company. The documents to be submitted are:
a. Memorandum of Association must be duly stamped, signed, and witnessed.
In case of public company, at least seven members must sign it and two
members in case of private company.
b. Articles of association must be stamped, signed, and witnessed in case of
MOA.
c. The written consent of proposed directors to act as directors and an
undertaking to purchase qualification shares.
d. The agreement, if any, with the proposed Managing Director, Manager, or
whole-time director.
e. A copy of the Registrar’s letter approving the name of the company.
f. A statutory declaration stating that all the legal requirements for
registration have been compiled with. This must be duly stamped.

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g. A notice about the exact address of the registered office may also
submitted along with these documents.
h. A documentary evidence of payment of registration fees.

If the Registrar is satisfied, about the completion of formalities for registration,

a certificate of incorporation is issued to the company, which signify the birth
of the company.

Capital subscription.
A public company can raise the required funds from the public by means of
issue of securities (shares and debentures). The following steps are required
for raising funds from the public:

• SEBI approval [ Securities and Exchange Board of India]:

SEBI is a regulatory authority in our country has issued guidelines for the
disclosure of information and investor protection. The companies
inviting the funds from the public must make adequate disclosure of all
relevant information to the public and SEBI.

• Filing of Prospectus:
A copy of prospectus or statement in lieu of prospectus is filed with the
Registrar of Companies and SEBI. A prospectus is an invitation to the
public which helps them to apply for the share of the company.

• Appointment OF Bankers, brokers, and underwriters:

The application money is to be received by the bankers of the company.
The brokers try to sale the shares by encouraging the public to apply for
the shares of the company. If the company is not assured of the good
public response it may appoint underwriters. Underwriters undertake to
buy the shares if these are not subscribed by the public. They receive a
commission for underwriting the issue.

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• Minimum Subscription:
To prevent companies from commencing business with inadequate
resources, it has been provided that the Company must receive
application of certain minimum number of shares before going ahead
with the allotment of shares. According to the Companies Act, the
minimum subscription is 90% of the issue.

• Application to Stock Exchange:

An application is made to at least one stock exchange for permission to
deal in its shares and debentures of the company.

• Allotment of Shares:
Allotment means distribution of shares among shareholders. Allotment
letters are issued to the successful allottees(applicants). After
submission of the above documents and completion of the above
formalities if the registrar is satisfied about the submitted documents,
he will issue the company the certificate of commencement of business.
The public companies can start their business operation after they
receive the certificate.