MODULE II

PART A

Q1: E-TEXT
Module ID 2: Registration, incorporation and commencement of business by companies
Module Overview:
Once you have determined to start your business and you're ready to set up your business, few
common questions which come to your mind are what is the type of business organization in
which you want to run your business, what do you need to do for forming your company and
how to proceed and from where should you start? To guide the students through the process,
the following module will help in answering the above questions. One of the first steps is to
register your proposed company with the Registrar of companies of the State in which you are
establishing your business.
In India, the incorporation of a company is governed by the Companies Act 2013. It is the
most important piece of legislation that empowers the Central Government to regulate the
formation, financing, functioning and winding up of companies. It applies to whole of India
and to all types of companies, whether registered under the Act or any earlier Act. But it does
not apply to universities, co-operative societies, unincorporated trading, scientific and other
societies.
The present module will give you an overview on registration and incorporation of
companies.
Subject Name: Law
Paper Name: Corporate Law
Module ID: 2
Pre-requisites: For understanding the module, basic understanding of different types of
business organizations is required.

1
Learning Objectives:

After incorporation, a body corporate comes into

existence. Incorporation is the act of forming a
new “body corporate” business structure. The
students will know what is meant by registration
and incorporation of a company;

What is the process of registration and

incorporation of a company and the documents
which are required to be prepared by companies
for their incorporation;

What advantages are accrued after incorporation

of a company?

Keywords: Incorporation of Company, Business Law, Companies, Certificate of

Incorporation, Corporate Personality, Registration, Memorandum of Articles, Association of
Articles
Introduction
The Companies Act, 2013 stipulates the process for registration and incorporation of
companies in India for all types of companies including private and public companies.
Minimum two directors and two shareholders are required for incorporating a private
company1 whereas minimum three directors and seven shareholders are required for
incorporating a public company2. Minimum paid- up capital of a private company at the time
of incorporation was required to be Rs. 1 Lakh (INR 100,000) and Rs. 5 lakhs (INR 500,000)
for a public company. This requirement no longer exists for incorporation of any private or
public company. Companies which are set up with Foreign Investment (FDI) have to be
incorporated under the Companies Act, 2013 with the Registrar of Companies (ROC). Once a
company is registered in India, it is guided by the Indian laws.3
A company is formed by registering the Memorandum and Articles of Association with the
Registrar of Companies of the State in which the main office of the company is to be located.

1
S 3(3) The Companies Act 1956
2
S 3(4) The Companies Act 1956
3
< http://www.registerinindia.com/procedure-for-incorporating-a-company-in-india.html >accessed 8
August 2014

2
Learning outcomes

Introduction to the first and the most important

step in forming a company – Incorporation under
the Companies Act, 2013

Understanding the basic documents of a company

which are memorandum of association and articles
of association and understanding their importance
in incorporating a company under the law.

Understanding the changes brought in the process

of incorporation by the 2013 Act.

REGISTRATION OF COMPANIES
Doing business in a company form of organization gives its promoters all the advantages of a
corporate personality which include separate corporate existence. Besides, the promoters get
many advantages for instance, tax benefits, and safe guarding the name of business etc.
Another benefit of registration is receiving some legal liability protection. If you incorporate a
company, you will not be held personally responsible for certain accidents and other
liabilities. Consequently, you may find it easier to obtain business insurance, or attract
investors, since they will know you are not personally responsible for the company’s well-
being. Following the above reasons registration of a company is an important part of starting
a business. Therefore, before registering a company one needs to fulfill some legal formalities
for which promoters must make a decision regarding the type of company they want to start
i.e a public company or a private company or limited or an unlimited company and
accordingly prepare the documents for incorporation of the company. In this connection the
Memorandum and Articles of Association (now known as Memorandum and Articles
respectively) are fundamental documents to be prepared.

3
Benefits of Registration:

3. 4. Easier to
1. Legal
2. Tax Safeguarding obtain
liability
benifits the name of business
protection
the business insurenace

FORMATION OF A COMPANY

Section 3 of the Companies Act, 2013 lays down the process for forming a company. The
section states that a company can be formed for any lawful purpose by seven or more persons
in case of public company and two or more persons in case of private company and by one
person in the case of One Person Company which is regarding as a private company by the
Act by subscribing their names to a memorandum and complying with the requirements of the
Act of 2013 in respect of registration. Section also states that the companies formed under
sub-section (1) may be either- a company limited by shares; or a company limited by
guarantee; or an unlimited company. Provided that memorandum of One Person Company.
Shall indicate the name of the other person with his prior consent for the same for the purpose
of becoming a member of the company, in the event of the subscriber’s death or his
incapacity to contract. It is also laid down in the Act that a written consent should be filed
with the Registrar at the time of incorporation of the One Person Company along with it
memorandum and articles by the said other person nominated. It is further provided by the

4
Act that if such other person wants to withdraw his consent he can do the same in the
prescribed manner only. In case of One Person Company if some changes are brought in, in
regards of change in the name of the person or any other change, then the company shall
intimate this to the Registrar in the manner prescribed.4

The declaration must be submitted with the following annexure:5

Document evidencing payment of fee

Memorandum and Articles

Copy of agreement, if any, which the proposed company

wishes to enter into with any individual for appointment as
its managing or whole-time director or manager

Form 18
Form 32 (except for companies for charitable purposes)
Form 29 (only in case of public companies)
Power of Attorney from subscribers
Letter from Registrar of Companies making names available
No objection letters from directors/promoters
Requisite fees either in cash or demand draft

PART B

Memorandum and Articles6

For the purpose of incorporation Memorandum and Articles the most important documents to
be submitted to the ROC. Memorandum is a document that sets out the foundation of the
company. It contains the objectives and the scope of activity of the company as well also
defines the relationship of the company with the outside world.7
Articles contain the rules and regulations of the company for the management of its internal
affairs. Objectives and purposes for which the company has been formed are contained in

4
Section 3 of the Companies Act,2013
5
Ibid
6
<http://www.legalserviceindia.com/company%20law/company_formation_procedure.htm >accessed
8 August 2014
7
<http://www.registerinindia.com/procedure-for-incorporating-a-company-in-india.html >accessed 8
August 2014

5
Memorandum of Association, and the rules and the regulations for achieving the objectives of
the company are laid down in the Articles.
After the required documents have been presented to the ROC along with the required
registration fees, he will give the certificate of incorporation to the company if all formalities
are complied with.
Approval of the name by the Central Government is the first step towards the formation of a
company. Registrar of the company who is authorized to do this legal formality should be in
the State/Union Territory in which the company has their registered office. This approval is
provided subject to certain conditions: for instance-
 There should not be an existing company by the same name.
 In the case of private company, the last words of the name of the company should
include “Private Ltd.” And in case of a public company the name of the company
should include “Limited” word at the end of its name in case the company is
incorporated with limited liability of its shareholders.
 In order of preference, the application filed by the company for the allotment of the
names should mention at least four suitable names to be proposed for the company.

Within seven days from the date of submission of the application, the ROC should inform the
concerned company about the availability of names applied for is available or not. Once a
name is approved, it is valid for a period of six months, within which time Memorandum and
Articles together with miscellaneous documents should be filed. If one is unable to do so, an
application may be made for renewal of name by paying additional fees. After obtaining the
approval of name, it normally takes approximately two to three weeks to incorporate a
company depending on where the company is registered.8
Certificate of Incorporation
After the duly stamped Memorandum and Articles, documents and forms are filed and the
filing fees are paid, the ROC examines the documents and, if required, instructs the
authorized person to make necessary corrections. Thereafter, a Certificate of Incorporation is
issued by the ROC which brings the company into existence; it also is “the conclusive
evidence that all the requirements of this Act have been complied with in respect of
registration and matters precedent and incidental thereto and the company is authorized to be
registered under this Act”.9 It takes one to two weeks from the date of filing Memorandum
and Articles to receive a Certificate of Incorporation.

8
<http://www.registerinindia.com/procedure-for-incorporating-a-company-in-india.html >accessed 8
August 2014
9
S 35 of the Companies Act, 1956

6
In the case of Moosa Goolam Arif v. Ebrahim Goolam Ariff 10, only two adult persons signed
the memorandum and one of them signed as a guardian of the other five members who were
all minors at the time. Lord Macnaghten in the Privy Council said: “Their Lordships will
assume that the conditions of registration prescribed by the Indian Companies Act were not
duly complied with; that there were no seven subscribers to the memorandum and that the
Registrar ought not to have granted the certificate. But the certificate is conclusive for all
purposes.”
Pre-Incorporation Contracts

Sometimes contracts are made on behalf of a company even before it is duly incorporated.
But no contract can bind a company before it becomes capable of contracting by
incorporation. “Two consenting parties are necessary to a contract, whereas the company,
before incorporation, is a non-entity”. 11A company has no status prior to incorporation. It can
have no income before incorporation for tax purposes. 12 Shares cannot be acquired in the
name of the company before incorporation, a transfer form is liable to be rejected where the
name of a proposed company is entered in the column of the transferee, was held in the case
of English & Colonial Produce Co. Re13. In order to get the benefits of a ‘corporate
personality', it is very necessary for ‘an association of persons' to become incorporated under
the Companies Act.

It would be a matter of inconvenience that ‘an association of persons' cannot perform any
official business operation in the name of company before its incorporation or the issue of
certificate of commencement of business; they may have to make arrangement for office,
place of work, workers, etc. Promoters of a company may enter into the agreements for the
benefit of ‘association of persons' or prospective company; these agreements are known as
pre-incorporation contracts.

One might question that ‘why is company not liable, even if it is a beneficiary to contract' or
one might also question that ‘doesn't promoter work under Principal-Agent relationship'?

Answer to such questions is simple. The company is not in legal existence at time of pre-
incorporation contract. A person not in legal existence cannot be a party to contract, and

10
ILR (1913) 40 Cal 1 PC
11
Kelner v Baxter, (1866) LR 2 CP 174
12
CIT v City Mills Distributors (P) Ltd, (1996) 2SCC 375
13
A solicitor, on the instruction of certain gentlemen, prepared the necessary documents and obtained
the registration of a company. He paid the registration fee and incurred the incidental expenses of
registration. But the company was held not bound to pay for those services and expenses because the
company was not in existence at the time of expenses done in its name. (1906) 2 Ch 435

7
‘Privity to Contract' doctrine excludes company from the liability. In Kelner v Baxter14,
Phonogram Limited v Lane15 this position was confirmed.

In pure common law sense, pre-incorporation contract does not bind the company. But there
are certain exceptions to this contract, and these exceptions were developed in USA, India
and later in England.

Exceptions mentioned above are the following:

1. Under the Specific Relief Act 1963, section 15(h) and 19(e) are the two important
sections for pre-incorporation contract. Section 15 is about stranger's right to sue if he
is entitled to a benefit or has any interest under the contract, although it has certain
limitations. Section 15(h) talks about the company, being a stranger to pre-
incorporation contract, has the right to sue to the other contracting party. But the
necessary condition is that the contract should be warranted by the terms of its
incorporation. This provision clearly negates the common law doctrine which says
that the company cannot ratify or adopt the pre-incorporation contract. Under this
provision promoter can give his right to sue to the company. Whereas, the relevant
portion of section 19(e) states that “Except as otherwise provided by this Chapter,
specific performance of a contract may be enforced against, – when promoters of a
company have before its incorporation, entered into a contract warranted by the terms
of the incorporation, provided that the company has accepted the contract and
communicated such acceptance to the other party to the contract. Therefore, so far as
the company is concerned, it is neither bound by, nor can have the benefit of, a pre-
incorporation contract. In Vali Pattabhirama Rao v Sri Ramanuja Ginning and Rice
Factory Pvt. Ltd16 this position was accepted. S. 19(e) is not explained.
2. Novation of contract is defined in Scarf v Jardine17 as, ‘being a contract in existence,
some new contract is substituted for it either between the same parties (for that might
be) or different parties, the consideration mutually being the discharge of the old
contract'. In the situation of novation of contract, the company can replace the
promoter from the pre-incorporation contract. But one might say that such contract
would not be called pre-incorporation contract, but it should be called post-
incorporation contract because novation of contract result into a new contract. In

14
(1866) LR 2 CP 174
15
[1982] QB 938
16
1986 60 Comp Cas 568 AP
17
(1882) 7 AC 345)

8
 Howard v Patent Ivory Manufacturing18, the English Court accepted the novation of
contract.

Commencement of Business19

Provisions relating to ‘commencement of business’ under section 11 of Companies Act, 2013

were omitted by the Companies (Amendment) Act, 2015. 20 No company is required to obtain
the certificate of commencement of business from the Registrar of Companies after
registration for commencing its business.

However, obtaining such a certificate has been an important task for companies earlier both
under Companies Act, 1956 and Companies Act, 2013. Such earlier provisions have been
given below in order to make you understand the stringent requirements of obtaining such a
certificate and commence business.

Under the Companies Act, 1956, a private company had the right to commence its business
right from the date of its incorporation. 21 However, in the case of a public company, a
certificate for the commencement of the business had to be obtained. For this purpose, the
following additional formalities had to be complied with:

If a company had share capital and had issued a prospectus, then:

18
[1888] 38 Ch. D. 156
19
<http://www.legalserviceindia.com/company%20law/com_1.htm> accessed 8 August 2014
20
Act 21 of 2015
21
S 149(7) of the Companies Act, 1956

9
  Shares up to the amount of minimum subscription must be allotted;
 Every director must have paid to the company on each of the shares which he has
taken the same amount as the public have paid on such shares;
 No money is or may become payable to the applicants of shares or debentures for
failure to apply for or to obtain permission to deal in those shares or debentures in
any recognized stock exchange;
 A statutory declaration in Form 19 signed by one director or the employee - company
secretary or a company secretary in whole time practice that the above provisions
have been complied with must be filed22.

If a company had share capital but did not issue a prospectus, then:

 It must file a statement in lieu of prospectus with the Registrar of Companies;

 Every director must have paid to the company on each of the shares which he has
taken the same amount as the other members have paid on such shares;
 A statutory declaration in Form 20 signed by one director or the employee - company
secretary or a company secretary in whole time practice that the above provisions
have been complied with must be filed23.

Once the above provisions have been complied with, the Registrar of Companies grants
"Certificate of Commencement of Business" after which the company can commence its
activities.

Under the Companies Act, 2013, a company having a share capital was not entitled to
commence its business or exercise borrowing powers unless firstly, a declaration is filed by a
director of the company with the Registrar of the Companies (ROC) that every subscriber to
the memorandum has paid the value of the shares agreed to have been taken by him and that
the paid-up share capital of the company is Rs 5, 00, 000/- in case of a public company and
Rs 1, 00, 000/- in case of a private company. Secondly, the company has filed with the
Registrar of the Companies (ROC) a verification of its registered office. In case, no
declaration is filed by a director of any company within 180 days of the incorporation of the
company and the ROC has reasonable belief that the company is not carrying on business or
is not in operation, he may initiate action for removal of company’s name from the register of
companies.
Insertion of new section S. 10 A for Commencement of Business, etc:

22
S 149 (1) of the Companies Act, 1956
23
S 149 (2)

10
The Companies (Amendment) Act, 2019 has inserted a new section 10-A which provides for
commencement of business. It provides under sub.s.(1) that a company incorporated after the
commencement of the Companies (Amendment) Act, 2019 and having a share capital shall
not commence any business or exercise any borrowing power unless-
a. a declaration is filed by a director within a period of 182 days of the date of
incorporation of the company with the Registrar that every subscriber has to the
memorandum has paid the value of the shares agreed to be taken by him on the date
of making such declaration, and
b. the company has filed with the Registrar a verification of its registered office as
provided in s. 12 (2).

The declaration has to be in the prescribed form and verified in the prescribed manner. If any
default is made in compliance of s. 10 A, the company will be liable to a penalty of Rs.
50000/-. Every officer of the company in default shall also be liable to a penalty of Rs. 1000/-
for each day during which such default continues with the maximum cap of Rs 1, 00, 000/-
(sub.s.2).

If no declaration is filed by the company within 182 days of the date of incorporation and the
Registrar has reasonable cause to believe that the company is not carrying on any business or
operations, he may initiate action for removal of the name of the company from the register of
companies under Chapter XVIII. Such an action by the Registrar will be without prejudice to
sub.s (2).

Incorporation of Company under the Companies Act, 2013

Under the Companies Act, 1956 for incorporation all the important documents are filed with
the Registrar by the Company, under 2013 Act section 7 talks about the incorporation of
company, it states that the documents shall be filed by the company to the Registrar within
whose jurisdiction the registered office of a company is proposed to be situated.

Sub-section (1) of section 7 lays down the list following documents and information which is
required to be filed by the company for incorporation24:

- Duly signed memorandum and articles of the company by the subscribers of the
memorandum in the manner prescribed.

24
Section 7 of the Companies Act,2013

11
 - A declaration in the prescribed form by an advocate, a charted accountant, company
secretary, a person named in the articles as a director, manager or secretary of the
company that all the requirements have been complied with.
- An affidavit from each of the subscriber to the memorandum, that he is not convicted
of any fraud or offence in connection with the promotion, formation or management
of the company.
- The particulars of name, surname, residential address, nationality of every subscriber
to the memorandum with an identity proof and in case of a subscriber being a body
corporate, such particulars as may be prescribed
- The particulars of the person mentioned in the articles as the first directors of the
company.

On the basis of documents and information filed under the sub-section (1), the Registrar shall
issue a certificate of incorporation in the prescribed form, to this effect the proposed company
is incorporated under this Act. Sub-section (3) of section 7 of this Act states that on and from
the date mentioned in the certificate of incorporation, the Registrar shall allot to the company
a corporate identity number, which will provide a distinct identity to the company and will
also be mentioned in the certificate. Under the present Act of 2013 the company shall also
maintain and preserve at its registered office all the documents and information filed and if
any person furnishes any false information, he shall be liable for action under section 477 of
the given Act. Regarding the above penal action, a Tribunal may pass an order, as it may
think fit, for regulation of the management of the company, or may direct to remove the name
of the company from the register of the companies on being satisfied of the situation under
sub-section (7).

After the certificate of incorporation issued, the Registrar shall allot to the company a
corporate identity number. Provided that before passing any order in this regard the Tribunal
should give the company a reasonable opportunity of being heard and the Tribunal shall take
into consideration the transaction entered by the company, including the obligations, if any,
contracted or payment of any liability.

PART C

Procedure for formation of a company in India:

1. Obtain directors identification number for the proposed directors of the company.
2. Obtain digital signature certificate for at least one director for the purpose of filing
the forms electronically.

12
 3. File an application for the approval of name for the company.
4. Preparing the Memorandum of Association and Articles of Association of the
company.
5. Have the appropriate number of persons to subscribe to the Memorandum of the
company (minimum two in case of private company and minimum seven in the case
of public company).
6. Submit all the documents along with the required fees to the ROC.
7. ROC issues a receipt of certificate of incorporation.
8. In case of a public company obtain a certificate of commencement of business from
ROC.
9. Introduction to the first and the most important step in forming a company –
Incorporation under the Companies Act, 2013
10. Understanding the basic documents of a company which are memorandum of
association and articles of association and understanding their importance in
incorporating a company under the law.

Companies (Incorporation) Fourth Amendment Rules, 2016 25 and Simplified

Process for Incorporating Company Electronically (SPICe) e-Form.

The Ministry of Corporate Affairs In exercise of the powers conferred by sub-sections

(1) and (2) of section 469 of the Companies Act, 2013 (18 of 2013), vide its
notification dated October 01, 2016, amended the rule and introduced rule 38 in the
principal rules. This amendment comes in light of ease of doing business and
government’s initiative in Government Process Re-engineering (GPR). The rule 38
amendment/addition introduced a new measure known as Simplified Process for
Incorporating Company Electronically (SPICe) e-Form26, the objective of which is to
provide faster incorporation and related services within stipulate times frames which
are in sync with international best practices.

The main features of SPICe are as follows: -

1. Simplified and integrated Digital form for Company Incorporation.

25
Companies (Incorporation) Fourth Amendment Rules, 2016,
<https://www.mca.gov.in/Ministry/pdf/CompaniesIncorporationFourthAmendmentRules_01102016.pd
f> accessed 10 November 2016
26
Form NO. INC 32, <
<https://www.mca.gov.in/Ministry/pdf/CompaniesIncorporationFourthAmendmentRules_01102016.pd
f> accessed 10 November 2016

13
2. Introduction of standard format of e-Memorandum of Association as per
Companies Act, 201327
3. Standard format of e-Articles of Association as per Companies Act, 201328
4. Memorandum and Articles will now be filed as linked e-forms (except for Section
8 companies)
5. Provision to apply for Company Incorporation with a pre-approved Company
Name.

Regulatory Update: Incorporation

MCA vide its notification dated 20 January 2018 has amended the Companies
(Incorporation) Rules 2014 and the Companies (Registration Offices and Fees) Rules
2014 notified the Companies (Incorporation) Amendment Rules 2018 and the
Companies (Registration Offices and Fees) Amendment Rules 2018 respectively
which shall be effective from 26 January 2018.

Highlights:

1. Form INC-1 (Application for reservation of Name) has been replaced with form RUN
(Reserve Unique Name).
2. Name application can be made without DSC requirement.
3. Form INC-7 (Application for Incorporation of Company) has been done away with.
4. Form INC-3 (One Person Company- Nominee Consent Form), Form INC-12
(Application for grant of License under Section 8), Form INC-22 (Notice of situation
or change of situation of registered office, Form INC-24(Application for approval of
Central Government for change of name) and Form INC-32 (SPICe) has been
amended. 29

RUN Service:

27
Form No. INC 33, <
<https://www.mca.gov.in/Ministry/pdf/CompaniesIncorporationFourthAmendmentRules_01102016.pd
f> accessed November 10, 2016
28
Form No. INC 34, <
https://www.mca.gov.in/Ministry/pdf/CompaniesIncorporationFourthAmendmentRules_01102016.pdf
> accessed 10 November 2016
29
https://novojuris.com/2018/01/31/regulatory-update-ministry-of-corporate-affairs/
assessed 23 May 2018

14
 1. RUN is a simple web-based form for reserving the name of the company.
2. To apply for a name using RUN web form, the applicant must first create a free MCA
account through which user can choose the type of company and one name choice.
3. Alternatively, if the applicant wants directly incorporate a company without reserving
the name (through RUN), he can file for incorporation forms using SPICe form.
4. If the applicant wants to incorporate a company with a name that could be similar to
an existing Company or LLP or Trademark then prior approval can be obtained from
MCA for use of the name.
5. Further, NOC from such registered trademark user shall be obtained which shall be
attached to the RUN web form.
6. Maximum Attachments size shall not exceed 6 MB.
7. Under RUN service, the fee for name reservation through the RUN form is Rs.1000/-
per form submission, irrespective of whether the name is approved or not.
8. Resubmission option is not available , the proposed name may either be accepted or
rejected directly.
9. Pay later option is not available in RUN service.
10. Processing will be in Non-STP mode.
11. The Central Registration Centre (CRC) may on the basis of information and
documents provided, reserve the name as follows:
20 days from the date of approval (in case name is being reserved for a new
company)
60 days from the date of approval (in case of change of name of existing company)
12. After verification by the MCA personnel at the Central Registration Centre (CRC),
name approval/rejection letter would be provided by the MCA subject to the test of
similarity and the applicant will be intimated through the email address registered
with MCA.
13. Further, zero fees for incorporation of all the companies with authorized capital up to
10 Lakhs and registration of company without share capital whose number of
members does not exceed 20 members although stamp duty has to be paid for the
same as per the applicable state act.30

Summary:
In the module, students were informed about the incorporation of companies under the
Companies Cat, 2013, commencement of business by companies, documents which are
required to be prepared by promoters of companies for incorporation purposes. An effort has
been made to provide all aspects of incorporation including pre-incorporation contracts and
30
https://novojuris.com/2018/01/31/regulatory-update-ministry-of-corporate-affairs/
assessed 23 May 2018

15
comparison between provisions regarding incorporation under the Companies Act, 1956 and
the Companies Act, 2013.

16