FORMATION OF COMPANY
Introduction
Formation of a company is a long and complicated process. The first step involved in forming the company is
the incorporation of the company. After the incorporation of the company, there are other procedures that are to
be followed by the company before it can commence its business.
The formation of the company is very early and the initial stage. It involves a lot of legal formalities and procedures
initially to be done. A company can only be formed once all the legal formalities are being done with the proper procedures.
The authorities have the special powers and a system that has to be followed by each and every business organization for the
commencement of its business.
For example: when an individual takes birth, its body parts are the immense element which is being formed before taking the
birth, similarly, when a company is formed, before that it has its several aspects and parts which has to be build after which the
company is taken into an account to commence its business:
Promotion of a company
Registration of a company
Certificate of incorporation
Commencement of business
► Promotion of a Company:
A business enterprise does not come on its own. The process of business promotions comes when someone comes up with
an idea and ends when that idea is converted into the process of action. i.e. the formation of business enterprise and commencement
of its business. It is an overall effort that the members of the company put to make the company.
The formation of a public company is a long and arduous process. First, the company is floated by its promoters, and the
process of gathering financial backing begins. The promotion of a company is the very first step in this long process. Let us
take a look.
It is the first stage in the formation of a company. It begins with a person or a group of persons having thought of or conceived
a possible future business opportunity and then taking an initiative to give it a practical shape by way of forming a company.
Such a person or a group of persons who proceed to form a company are known as promoters of the company.
Promoters not only conceive a business opportunity but also analyze its prospects and bring together the men, materials,
machinery, managerial abilities and financial resources that are necessary for the formation and existence of the company.
► Formation of a Company:
Formation of a company involves completion of several legal formalities and procedures. The process of formation of the
company can be divided into four stages, viz.,
Promotion of a company.
Incorporation.
Subscription of capital
Commencement of business.
However, only a public limited company is required to fulfil all these four stages. A private limited company is required to
fulfil only the first two stages. In other words, it can start business immediately after obtaining the certificate of incorporation.
► Promoter of a Company:
A successful promoter is a creator of wealth and an economic prophet. The person who is concerned with the promotion of
the company, an enterprise is known as a promoter. He conceives the idea of starting a business and takes all the measures
required for bringing the enterprise into the existence. For example, Dhirubhai Ambani is the promoter of Reliance Industries.
The promoter finds out the way to generate the money, search business idea, arranges for finance, gather resource and establish
a going concern. The company law has not given any legal status to promoters. He stands in fiduciary position.
► Functions of a Promoter:
• Identification of Business Opportunity: The promoter first identifies a potential business opportunity. This opportunity
may be regarding the production of a new product or service or making a product available through a different channel than before
or production of an old product with new updated features or any other such opportunity having an investment potential.
• Feasibility Studies: The promoter after having conceived a business opportunity analyzes the opportunity to see whether it is
feasible, technically as well as economically. All identified business opportunities cannot be converted into real projects. Therefore,
the promoters undertake detailed feasibility studies so as to investigate all aspects of the business that they intend to begin with the
help of various tools like a study of the market trend, industry trend, market survey, etc. and with the help of specialists like engineers,
chartered accountants etc. A venture is only feasible when it passes all the three below mentioned tests.
Technical feasibility: Sometimes an idea may be good and unique but technically not possible to execute because the
required raw material or technology may not be easily available. Every business requires funds.
Financial feasibility: Sometimes it may not be feasible to arrange a large amount of funds needed for the business in
the limited available means. Also, financial institutions may hesitate to grant huge amounts of loan for the new businesses.
Economical feasibility: A business opportunity may be technically and financially feasible but not economically feasible.
It may not be a profitable venture or may not yield enough profits. In such a case, the promoters refrain from starting the business.
• Name Approval: Once the promoters have decided to launch a company next step is to select a name for the company and
get it registered with the registrar of companies of the state in which the registered office of the company is to be situated. An
application with three names, in the order of their priority, is filed with the registrar to get the name approved.
• Fixing up Signatories to the Memorandum of Association: The promoters decide upon the members who will be signing
the Memorandum of Association of the proposed company. Usually the signatories of the memorandum are the first Directors of
the Company. However, the written consent of the persons signing the memorandum is required to act as Directors and to take up
the qualification shares in the company.
• Appointment of Professionals: Promoters are also required to appoint certain professionals. These professionals help them in
the preparation of necessary documents that are required to be filed with the Registrar of Companies such as mercantile bankers,
auditors, lawyers, etc.
• Preparation of Necessary Documents: The promoters are required to prepare necessary legal documents that have to be
submitted to the Registrar of the Companies for getting the company registered. These documents are return of allotment,
Memorandum of Association, Articles of Association, consent of Directors and statutory declaration.
► Registration of a Company:
It is the registration that gives the company a birth or existence. A company is properly formed when it is properly registered
under the Company Act. There is a procedure for the registration process that every organization must follow. It involves the
following documents and procedures,
• Memorandum of Association: It is to be signed by the minimum member that is 7 persons for the public company and
2 in case of private company. It must be duly stamped.
The following clauses are included in the MoA:
Name Clause: This section contains the name of the business that has already been approved by the Registrar of Companies.
Registered office clause: It specifies the state in which the company's registered office is proposed to be located. Although an
exact address is not required, it must be provided to the Registrar within thirty days of the company's formation.
Object’s clause: This specifies the reason for the company's formation. A firm is not legally permitted to engage in any action
that is not related to the objectives set forth in this clause.
Liability clause: This clause restricts the members' liability to the amount owed on the shares they own.
Capital clause: This clause establishes the maximum amount of capital that the company may raise through the issuance of
shares. The proposed company's permitted share capital, as well as its partition into the number of shares with a fixed face value, is defined.
Subscription Clause: The subscription provision, which is the sixth and last clause of the MOA, shall declare the subscribers'
intent to incorporate the company and agree to take shares in the firm based on the number stated in the Memorandum.
• Articles of Association: The document is signed by all those persons who all have signed the memorandum of association.
• List of directors: A list of directors with their names, address, and occupation is prepared and filed with the registrar of the companies.
• Written consent of the directors: A written consent of the directors that they have agreed to act as directors has to be filed with the
registrar of the company along with a written approval to the effect that they will take the qualification shares and will pay for them.
• Notice of the address of the registrar office: It is also customary to file the notice of the address of the company’s registered office at
the time of incorporation. It is to be provided within 30 days after the date of incorporation.
• Statutory declaration: A statutory declaration mentioning that the requisites of the act and the rules thereunder have been compiled.
It must be signed by an advocate of the supreme court or of a high court or an attorney or leader entitled to appear before a high
court or a practicing chartered accountant in India, who engages in the company formation or by a person indicated in the article
as a director, managing director, secretary or manager of a company. It is also to be filed with the registrar of the company.
♦ Certificate of Incorporation:
The registration of the memorandum of the association, the article of association and other documents are filed with the registrar.
After getting satisfied with the application & documents submitted, Registrar will issue the Certificate of incorporation’. A certificate
of incorporation is the ultimate proof of the existence of a company.
♦ Effect of the Certificate of Incorporation:
• The date inscribed on the Certificate of Incorporation marks the beginning of a company's legal existence.
• On that date, it becomes a legal entity with eternal succession. It gains the ability to enter legally binding contracts.
• The Certificate of Incorporation is indisputable documentation of a company's regular incorporation.
♦ Certificate of Commencement of Business:
As soon as a private company gets the certification of incorporation it can start its business. Once the certificate of incorporation
is received by the company, a public company issues a prospectus for inviting a public to subscribe to its share capital. It fixes the
minimum subscription in the prospectus. Then it is required to sell the minimum number of shares mentioned in the prospectus.
After completing the sale of the required number of shares, the certificate is sent to the registrar along with the letter from the
bank stating that all the money is received.
The registrar then scrutinizes the documents. If all the legal formalities are done then the registrar issues a certificate known as
‘certificate of commencement of business’. This is the conclusive evidence for the commencement of business for the public company.
♦ Capital Subscription:
• SEBI clearance is required to raise funds from the public. The Registrar of Companies will receive a copy of the prospectus
or a statement in lieu of the prospectus. Bankers, brokers, underwriters, and other professionals are hired.
• A request for approval to trade in shares or debentures must be made to the stock exchange.
♦ Process of Capital Subscription:
• SEBI Approval:
SEBI (Securities and Exchange Board of India), our country's regulatory body, has developed recommendations for information
disclosure and investor protection.
A public firm seeking funding from the public must make full disclosure of all relevant facts to potential investors and must not
withhold any material information.
• Filing of Prospectus:
Section 2(70) of the Companies Act of 2013 defines a prospectus as. “Any document that is described or issued as a prospectus”
is how a prospectus is defined. This includes any notification, circular, advertisement, or other document that serves as an invitation
to public offers.
The Registrar of Companies receives a copy of the prospectus or a statement in lieu of the prospectus. A Statement in Lieu of Prospectus
is submitted with the Registrar of Companies (ROC) when a company does not issue a prospectus to the public for the subscription of the
shares.
All of the directors or their authorized agents must sign the declaration in writing. It's similar to a prospectus, with the exception that
it's only a few pages long.
• Appointment of Bankers, Brokers, Underwriters:
Raising money from the general people is a huge undertaking. The money for the application will be received by the company's bankers.
The brokers try to sell the shares by handing out application forms and pushing others to apply. If the public does not subscribe to
the shares, the underwriters promise to buy them.
♦ Minimum Subscription:
• To prevent enterprises from starting into business with insufficient resources, the company must obtain applications for a particular
minimum number of shares before proceeding with the issuance of shares. This is referred to as the ‘minimum subscription' under the
Companies Act.
• If the number of applications for the shares received is less than 90% of the issue size, the allocation cannot be made, and the application
money must be refunded to the applicants.
♦ Application to Stock Exchange:
• At least one stock exchange is approached for approval to trade in its shares or debentures.
• If such approval is not obtained within ten weeks of the subscription list's closing date, the allotment becomes worthless, and any money
received from applicants must be returned to them within eight days.
♦ Allotment of Shares:
• The money received for the application should be kept in a separate bank account and not used by the company until the shares are distributed.
• If the number of shares allocated is fewer than the number applied for, or if no shares are assigned to the applicant, any excess application
money must be returned to the applicants or applied to allotment money owed to them.
• Successful allottees receive their allotment letters. Within 30 days of allotment, a ‘return of allotment' signed by a director or secretary is filed
with the Registrar of Companies.