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PUC 1ST YEAR, BUSINESS STUDIES NOTES, , 7. FORMATION OF A COMPANY, Introduction: Now a day’s business is concerned about large amount of money,, due to increasing competition, speed variation in technology and increase in risk, factor. As a result the company form of organisation being preferred for more, business forms i.e. medium and large size business., To start a business in a legal ways referred as stages of formation of a, company. Person who takes all these steps and the associated risk are promoting, a company are called its promoters., Formation of a company:, Formation of a Company includes difficult tasks or activity involving, completion of a lot of legal formalities and procedures. This process divides the, formalities into three (3) distinct stages:, 1. Promotion, 2. Incorporation, 3. Subscription of capital, It may, however, be noted that these stages are appropriate from the point, of view of formation of any kind of company. Private company as against the, public limited company is prohibited to raise funds from public, it does not need, to issue a prospectus and complete the formality of minimum subscription., Stages in the formation of a company:, , 1. Promotion: Promotion is the first stage in the formation of a company which, involves discovery of a potential business opportunity and taking an initiative, to form a company so that practical shape can be given to exploiting the, available business opportunity., 1|Page, , Thus, it begins with somebody having

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discovered a potential business idea. Any person or a group of persons or even, a company may have discovered an opportunity. If such a person or a group, of persons or a company proceeds to form a company, then, they are said to, be the promoters of the company., A promoter is said to be the one who undertakes to from a company with, reference to a given project and to set it going and who takes the necessary, steps to accomplish that purpose., Or, In short, promoters are the persons who perform various functions to, bring a company into existence., IMP-(4m)Functions of a Promoter:, 1. Identification of business opportunity: The first and foremost activity of, a promoter is to identify a business opportunity. The opportunity may be, in respect of producing a new product or service or making some product, available through a different channel. Such opportunity is then analysed, to see its technical and economic feasibility., 2. Feasibility studies: It means, in detail study in particular factor. All factors, cannot be profitable. So, promoters who undertake detail study, on only, that business which they want to start., a) Technical Feasibility: It may not possible to execute technically. It may, be because of the required raw material or technology is not easily, available., b) Financial Feasibility: Every business activity requires funds. The, promoters have to estimate the fund requirements for the identified, business opportunity., c) Economic Feasibility: If project or business is technically viable and, financially feasible but the chance of it being profitable is very little., 2|Page

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3. Name approval: Having decided to launch a company, the promoters have, to select a name for it and submit, an application to the registrar of, companies, for its approval. If it is found proper, the proposed name is, approved by the Registrar of companies., 4. Fixing up Signatories to the Memorandum of Association: Promoters, have to decide about the members who will be signing the Memorandum, of Association of the proposed company., 5. Appointment of professionals: Professionals like mercantile bankers,, auditors etc., are appointed by the promoters to assist them in the, preparation of necessary documents which are required to be with the, Registrar of companies., 6. Preparation of necessary documents: The promoter takes up steps to, prepare certain legal documents such as memorandum of association,, articles of association and consent of directors which have to be submitted, to the Registrar of Companies for getting the company registered., Documents Required to be Submitted:, A) Memorandum of Association(MOA): The Memorandum of Association, contains different clauses:, i., , The name clause: This clause contains the name of the company, with which the company will be known, which has already been, approved by the Registrar of companies., , ii., , Registered office clause: This clause contains the name of the state,, in which the registered office of the company is proposed to be, situated., , iii., , Objects clause: This is probably the most important clause of the, memorandum. It defines the purpose for which the company is, formed. This clause states the objects of the company., , iv., , Liability clause: This clause limits the liability of the members to, the amount unpaid on the shared owned by them., , 3|Page

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v., , Capital clause: This clause specifies the maximum capital which, the company will be authorised to raise through the issue of shares., The authorized share capital of the proposed company along with its, division into the number of shares having a fixed value is mentioned, in this clause., , vi., , Association clause: In this clause, the signatories to the MOA state, their intention to be associated with the company and also give their, consent to purchase qualification shares. The MOA must be signed, by at least 7 persons in case of a public co. and by 2 persons in case, of a private co., , B) Articles of Association (AOA): are the rules regarding internal, management of a company. These rules are subsidiary to the MOA and, hence, should not contradict or exceed anything stated in the MOA., C) Consent of Proposed Directors: Apart from the Memorandum and AOA,, a written consent of each person named as a director is required confirming, that they agree to act in that capacity and undertake to buy and pay for, qualification shares., D) Agreement: The agreement, if any, which the co. proposes to enter with, any individual for appointment as its Managing Director or a whole time, Director or Manager is another document which is required to be submitted, to the Registrar for getting the co. registered under the act., E) Statutory Declaration: A declaration stating that all the legal, requirements pertaining to registration have been complied with is to be, submitted to the Registrar with above mentioned documents for getting the, company registered under the law. This statement can be signed by an, advocate of High Court or Supreme Court or by a Chartered Accountant in, full time practice or by a person named in the articles as a director or, manger or secretary of the co., , 4|Page

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F) Receipt of Payment of Fee: Along with the above-mentioned documents, necessary fees has to be paid for the registration of the co. The amount of, such fees shall depend on the authorised share capital of the co., , Position of Promoters:, Promoters undertake various activities to get a company registered and get, it to the position of commencement of business. But they are neither the agents, nor the trustees of the co. They can’t be the agents as the co is yet to be, incorporated. Therefore, they are personally liable for the contracts which are, entered by them., Promoters of a company enjoy a fiduciary position with co. which they, must not misuse. They can make a profit only if it is disclosed but must not make, any secret profits., , 2. Incorporation: After completing the aforesaid formalities, promoters make, an application for the incorporation of the co. The application is to be filed, with the Registrar of companies of the state within which they plan to establish, the registered office of the co., Documents required for Registration:, 1) The MOA duly stamped, signed and witnessed. In case of a public co., at, least 7 members must sign it. For a private co. however the signatures of 2, members are sufficient. The signatories must also give information about, their address, occupation and the no. Of shares subscribed by them., 2) The AOA duly stamped and witnessed as in case of the memorandum., However, as stated earlier, a public co. may adopt table A, which is a model, set of Articles, given in the companies act., 3) Written consent of proposed directors to act as directors and an undertaking, to purchase qualification shares., 4) The agreement, if any, with the proposed Managing Director Manager or, Whole-time director., 5|Page

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5) A copy of the Registrar’s letter approving the name of the co., 6) A statutory declaration affirming that all legal requirements for registration, have been complied with. This must be signed., 7) A notice about the exact address of the registered office may also be, submitted along with these documents., 8) Documentary evidence of payment of registration fees., Difference between MOA and AOA:, Basis of Difference, , Objectives, , Position, , Relationship, , Validity, , Necessity, , 6|Page, , MOA, , AOA, AOA are rules of, internal management of, MOA defines the, the co. They indicate, objects for which the co., how the objectives of, is formed, the co. are to be, achieved., This is a subsidiary, This is the main, document and is, document of the co. and, subordinate to both the, is subordinate to the, MOA and the, companies act., companies act., MOA defines the, Articles define the, relationship of the co., relationship of the, with outsiders., members and the co., Acts which are beyond, Acts beyond the MOA, articles can be ratified, are invalid and cannot, by the members,, be ratified even by a, provided they do not, unanimous vote of the, violate the, members., Memorandum., It is not compulsory for, Every co. has to file a, a public ltd. Co. to file, Memorandum of, AOA. It may adopt table, Association., F of the companies act,, 2013.

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3. Capital Subscription: Raising funds from the public by the issue of shares, and debentures by a public company is called capital subscription. For doing, the same, it has to issue a prospectus., The following steps are required for raising funds from the public:, i., , SEBI Approval: SEBI (Security and Exchange Board of India), which is the regulatory authority in our country has issued guidelines, for the disclosure of information and investor protection. A company, inviting funds from the general public must make adequate, disclosure of all relevant information and must not conceal any, material information from the potential investors. This is necessary, for protecting the interest of the investors., , ii., , Filling of 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., In other words, it is an invitation to the public to apply for, shares or debentures of the company or to make deposits in the, company., , iii., , Appointment of Bankers, Brokers, Underwriters: Raising funds, from the public is a stupendous (difficult) task. The application, money is to be received by the bankers of the company. If the, company is not reasonably assured of a good public response to the, issue, it may appoint underwriters to the issue. Appointment of, underwriters is not necessary., , iv., , Minimum Subscription: In order to prevent companies from, commencing business with inadequate resources, it has been, provided that the company must receive applications for a certain, minimum no. of shares before going ahead with the allotment of, shares. According to the companies Act, this is called the ‘minimum, , 7|Page

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subscription’. The limit of minimum subscription is 90% of the size, of the issue., v., , Application to stock Exchange: An application is made to at least, one stock exchange for permission to deal in its shares or debentures., If such permission is not granted before the expiry of ten weeks from, the date of closure of subscription list, the allotment shall become, void and all money received from the applicants will have to be, returned to them within 8 days. Ex: BSE (Bombay Stock Exchange, and NSE (National Stock Exchange)., , vi., , Allotment of Shares: In case the number of shares allotted is less, than the number applied for, or where no shares are allotted to the, applicant, the excess application money, if any, is to be returned to, applicants or adjusted towards allotment money due from them., Allotment letters are issued to the successful allottees., A public company may not invite public to subscribe to its, shares or debentures. Instead, it can raise the funds through friends,, relatives or some private arrangements as done by a private, company., , ***********, , 8|Page