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What are the stages in the formation of a company.

Formation of a company involves a lot of complex activities like getting into a lot of legal dealings and procedures. For a better understanding, we can divide the steps into four:

(i) Promotion;

(ii) Incorporation;

(iii) Subscription of capital; and

(iv) Commencement of business.

But these steps are appropriate only for the formation of a public limited company. As far as the private limited companies only the first two steps needed. It means a person can start a private company as soon as he gets the appropriate certifications. Since it is restricted to raise funds from public, it does not require to issue a prospectus and complete the formality of minimum subscription. But a public company receives the certificate of commencement as soon as it goes through the capital subscription stage and hence has to undergo all the four stages. We will discuss the four steps in detail in the next section.


List out the difference between Memorandum of Association and Articles of Association.


Basis of Difference

Memorandum of Association

Articles of Association



Memorandum of Association defines the objects for which the company is formed

Articles of Association are rules of internal management of the company. They indicate how the objectives of the company are to be achieved.


This is the main document of the company and is subordinate to the Companies Act.

This is a subsidiary document and is subordinate to both the Memorandum of Association and the Companies Act.


Memorandum of Association defines the relationship of the company with outsiders.

Articles define the relationship of the members and the company


Acts beyond the Memorandum of Association are invalid and cannot be ratified even by a unanimous vote of the members.

Acts which are beyond Articles can be ratified by the members, provided they do not violate the Memorandum.


Every company has to file a Memorandum of Association.

It is not compulsory for a public ltd. company to file Articles of Association. It may adopt Table A of the Companies Act


Alteration of Memorandum of Association is quite difficult and in many cases, approval of certain statutory authority is required.

Articles can be altered by passing a special resolution by the members.



List the documents required for the incorporation of a company.

1. The first document required is the Memorandum of Association duly stamped, signed and witnessed.

2. The Articles of Association duly stamped and witnessed. But however if the company adopts table A then its not required.

3. Written approval of the suggested directors to act as directors and should undertake to purchase of qualification shares.

4. The agreement with the proposed Managing Director or Manager or whole-time director if required.

5. A copy of the Registrar’s approval letter for the company‘s name.

6. A statutory declaration confirming that all legal documents for registration have been complied. The signatories are also suppose to give their address, occupation and the number of shares subscribed by them.

7. A notice about the exact address of the registered office should be submitted along with these documents and if its not submitted at the time of incorporation, it can be done within 30 days of the receipt of the certificate of incorporation.

8. Documentary evidence that the registration fees has been paid. The Registrar upon submission of the application with all the other required documents has to check that all the documents are in order and that all the statutory requirements regarding the registration are complied.


What is a prospectus? Is it necessary for every company to file a prospectus?

A prospectus is ‘any document described or issued as a prospectus including any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of, a body corporate’. so it can be said that it is an invitation to the public to apply for shares or debentures of the company or to make deposits in the company. Investors set their minds about investment in a company solely on the basis of the information present in this document. Hence, there is not suppose to be a mis-statement in the prospectus and all important information must be fully disclosed.


Explain the term, ‘Minimum Subscription’.

For the companies to commence business with adequate resources, it has been presented that the company must receive applications for a certain minimum number of shares before going ahead with the allotment of shares. According to the Companies Act, it is known as the ‘minimum subscription’. If applications received for the shares are for an amount less than 90 per cent of the issue size, the allotment is not allowed to be made and the application money received is suppose to be returned to the applicants.


Briefly explain the term ‘Return of Allotment’

If the number of shares allotted becomes less than the number applied for, or where no shares are allotted to the applicant, the excess application money, if any, has to be returned to applicants or adjusted towards allotment money due from them. A Return of allotment, within 30 days, signed by the director or secretary is suppose to be submitted.


At which stage in the formation of a company does it interact with SEBI?

The Securities and Exchange Board of India which is our country’s regulatory authority has published guidelines for the disclosure of information and investor protection. A company which has invited for funds from the general public must make sufficient disclosure of all relevant information and must not conceal any material information. This is needed for the protection of the investors.


Distinguish between preliminary contracts and provisional contracts


S. No

Preliminary Contracts

Provisional Contracts


preliminary contracts or pre-incorporation contracts are those contracts entered with third parties on behalf of the company.

These are contracts which are signed after incorporation but before the commencement of business.


A company after coming into existence may, if it so chooses, decide to enter into fresh contracts with the same terms and conditions to honour the contracts made by the promoters.

These become enforceable only after the company gets the Certificate of Commencement of Business.



Explain the steps taken by promoters in the promotion of a company

The important ones are given below:

(i) Identification of business opportunity: This is the first and the foremost aspect necessary. The opportunity may include any opportunity like producing a new product or service or making some product available through a different channel and which has an investment potential. The technical and economic feasibility is later examined.

(ii) Feasibility studies: Its always not feasible or profitable to setup real projects through the given opportunity. Hence the promoter has to take detailed feasibility studies to investigate the business with all respects which they intend to accomplish. The promoters are normally advised to seek the help of the specialists like engineers, chartered accountants etc., depending on the nature of the project to see if it can be profitably exploited.

(a) Technical feasibility: Sometimes even good ideas are not feasible to execute. The reason for that can vary like non availability of raw materials, improper market, etc., For example, in our previous story avtar required a particular metal to manufacture his product. If suppose that metal is not produced in our country and its difficult to import it then his project may not be feasible until other arrangements are made.

(b) Financial feasibility: Funds are mandatory required for any business. The promoters has to estimate the required amount of funds before trying to setup the company. The project has to be given up if the outlay is very large and the necessary arrangements cannot be made. For example, we may imagine that setting up a township maybe a lucrative job. It maybe that the required investment is so large that it may become impossible by the promoters.

(c) Economic feasibility: Sometimes the project turn out not to be profitable even though all the other factors are favorable and hence the idea may have to be abandoned in such cases also. Promoters normally seek help from the experts to study this problem. But the experts do not become promoters just because they help out the promoters. After all these investigations, if the project turns out to give positive results then the promoters may launch their project.

(iii) Name approval: After finalsing to launch a company, the promoters have to decide a name for it and submit, an application to the registrar of companies of the state where the registered office of the company is to be situated, for its approval. It may happen that another company with the same name or a similar one may exists. This case may lead to misleading the company and hence another name has to be suggested. Hence normally three names are given in the order we prefer from which the registrar approves the appropriate one. (Performa application for availability of names (Form 1A) is given at the end of the chapter.)

(iv) Fixing up Signatories to the Memorandum of Association: Memorandum of Association of the proposed company is signed by the people who have been decided by the promoters. The first Directors of the Company are the people who first sign the memorandum. And its necessary to get their written consent to act as Directors and to take up the qualification shares in the company.

(v) Appointment of professionals: Some professionals such as mercantile bankers, auditors etc., are appointed to help the promoters in the preparation of necessary documents as required by the Registrar of Companies. The name, address and the number of shares allotted to each share holder is submitted to the Registrar in a statement called return of allotment.

(vi) Preparation of necessary documents: According to the law the promoters have to prepare certain legal documents and submit to the Registrar of the companies for getting the company registered like the Memorandum of Association, Articles of Association and Consent of Directors.


What is the effect of conclusiveness of the ‘certificates of incorporation’ and ‘commencement of business’?

Effect of the Certificate of Incorporation

A company is said to be legally born on the date as printed on the Certificate of incorporation. It thus becomes one legal unit with continuous succession on such date. Its then allowed to enter under valid contracts. This certificate is a decisive evidence of the regularity of the company‘s incorporation. Imagine, what would happen if an unsuspecting party enters into a contract with a company whose certificate of incorporation was improper and hence invalid. Hence only when a Certificate of Incorporation has been issued, the company has become a legal business unit irrespective of any flaw in its registration. Therefore the Certificate of Incorporation is a very decisive evidence of the legal existence of a company. Some interesting examples showing the importance of this certificate is given below: (a) Documents for registration were filed on 7th feb and the Certificate of Incorporation was issued on 9th feb. But 7th feb is the mentioned date on the certificate. It was decided that the company was in existence and the agreements signed on 7th feb were considered valid. (b) The signatures of others were forged on the Memorandum by a person and The Incorporation is still valid. Hence, whatever be the shortcome in the formalities, the Certificate of Incorporation once issued, is a decisive evidence of the existence of the company. Even when a company is getting registered illegally, the company’s birth cannot be questioned and the only solution present is to wind it up. Because the Certificate of Incorporation is so important, the Registrar is suppose to be very careful before issuing it. A private company can at once start its business as soon as the certification of incorporation is issued but a public company will have to undergo two more stages for its formation.

If the minimum subscription amount is raised through new issue of shares, a public company applies to the Registrar of Companies for the issue of Certificate of Commencement of Business. The document needed for that purpose is:

1. A declaration that shares payable by cash are subscribed for and allotted up to the amount of minimum subscription as mentioned in the Prospectus;

2. A declaration that all the directors have paid in cash, the money for the application and allotment on his shares in the same proportion as others;

3. A declaration that no money is payable or liable to become payable to the applicants due to failure of the company to either apply for or get authorization to deal in its securities on a stock exchange; and

4. A statutory declaration that the above necessary things are complied with and this declaration can be signed by a director or secretary of the company. A public company for private fund raising, which earlier filed a Statement in lieu of prospectus, has to submit only 2 out of the 4 listed above. The Registrar examines all the documents and if these are found satisfactory, a ‘Certificate of Commencement of Business’ is issued. With this grant the company can start doing its business.


Is it necessary for a public company to get its share listed on a stock exchange? What happens if a public company going for a public issue fails to apply to a stock exchange for permission to deal in its securities or fails to get such permission?

The Securities and Exchange Board of India which is our country’s regulatory authority has published guidelines for the disclosure of information and investor protection. A company which has invited for funds from the general public must make sufficient disclosure of all relevant information and must not conceal any material information. This is needed for the protection of the investors.

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