FORMATION OF A COMPANY 163

PART-II

Corporate Organisation,
Finance and Trade

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CHAPTER 7

FORMATION OF A COMPANY

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• specify the important stages in the formation of a company;

• describe the steps involved in each stage of company formation;

• specify the documents to be submitted to the registrar of

companies; and

• state the need of certificate of incorporation and certificate to

commence business.

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Avtar, a brilliant automobile engineer, has recently developed a new carburettor

in his factory which he is running as a sole proprietor. The new carburettor can
cut down petrol consumption of a car engine by 40 percent. He is now thinking
of producing it on a large scale for which he requires a large amount of money.
He is to evaluate different forms of organisations for doing the business of
manufacturing and marketing his carburettor. He decides against converting
his sole proprietorship to partnership as the requirement of funds for the project
is large and the product being new, there is a lot of risk involved. He is advised
to form a company. He wants to know about the formalities required for the
formation of a company.

7.1 INTRODUCTION formalities and procedures. To fully

understand the process one can divide
Modern day business requires large
the formalities into three distinct stages,
amount of money. Also, due to
which are: (i) Promotion; (ii)
increasing competition and fast
Incorporation and (iii) Subscription of
changing technological environment,
capital.
the element of risk is increasing. As a
It may, however, be noted that these
result, the company form of
stages are appropriate from the point
organisation is being preferred by more
of view of formation of any kind of
and more business firms, particularly
company. Private company as against
for setting up medium and large sized
organisations. the public limited company is prohibited
The steps which are required from to raise funds from public, it does not
the time a business idea originates to need to issue a prospectus and complete
the time, a company is legally ready to the formality of minimum subscription.
commence business are referred to as In the next section, we shall discuss
stages in the formation of a company. the stages in the formation of a
Those who are taking these steps and company in detail.
the associated risks are promoting a
company and are called its promoters. 7.2.1 Promotion of a Company
The present chapter describes in Promotion is the first stage in the
some details the stages in the formation formation of a company. It involves
of a company and also the steps conceiving a business idea and taking
required to be taken in each stage so an initiative to form a company so that
that a fair idea about these aspects can practical shape can be given to
be made. exploiting the available business
opportunity. Thus, it begins with
7.2 FORMATION OF A COMPANY somebody having discovered a potential
Formation of a company is a complex business idea. Any person or a group
activity involving completion of legal of persons or even a company may have

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discovered an opportunity. If such a company registered and obtain the

person or a group of persons or a necessary certificate enabling the
company proceeds to form a company, company to commence business.
then, they are said to be the promoters Thus, the promoters perform various
of the company. functions to bring a company into
A promoter is said to be the one who existence.
undertakes to form a company with
reference to a given project and to set it Functions of a Promoter
going and who takes the necessary The important functions of promoters
steps to accomplish that purpose. may be listed as below:
Thus, apart from conceiving a business (i) I d e n t i f i c a t i o n o f b u s i n e s s
opportunity the promoters analyse its opportunity: The first and foremost
prospects and bring together the men, activity of a promoter is to identify a
materials, machinery, managerial business opportunity. The
abilities and financial resources and set opportunity may be in respect of
the organisation going. producing a new product or service or
As per section 69, a promoter making some product available
means a person through a different channel or any
(a) Who has been named as such in a other opportunity having an
prospectus or is identified by the investment potential. Such
company in the annual return opportunity is then analysed to see its
referred to in section 92; or technical and economic feasibility.
(b) Who has control over the affairs of (ii) Feasibility studies: It may not be
the company, directly or indirectly feasible or profitable to convert all
whether as a shareholder, director identified business opportunities into
or otherwise; or real projects. The promoters, therefore,
(c) In accordance with whose advice, undertake detailed feasibility studies
directions or instructions the Board to investigate all aspects of the business
of Directors of the company is they intend to start. Depending upon
accustomed to act. However, it is the nature of the project, the following
provided that nothing in this sub- feasibility studies may be undertaken,
clause shall apply to a person who with the help of the specialists like
is acting merely in a professional engineers, chartered accountants etc.,
capacity. to examine whether the perceived
After thoroughly examining the business opportunity can be profitably
feasibility of the idea, the promoters exploited.
assemble resources, prepare necessary (a) Technical feasibility: Sometimes
documents, give a name and perform an idea may be good but
various other activities to get a technically not possible to execute.

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It may be so because the required that developing townships is very

raw material or technology is not lucrative. It may turn out that the
easily available. For example, in our required funds are in several crores
earlier story suppose Avtar needs of rupees, which cannot be
a particular metal to produce the arranged by floating a company by
carburettor. If that metal is not the promoters. The idea may be
produced in the country and abandoned because of the lack of
because of poor political relations, financial feasibility of the project.
it can not be imported from the (c) Economic feasibility: Sometimes
country which produces it, the it so happens that a project is
project would be technically technically viable and financially
unfeasible until arrangements are feasible but the chance of it being
made to make the metal available profitable is very little. In such cases
from alternative sources. as well, the idea may have to be
(b) Financial feasibility: Every abondoned. Promoters usually take
business activity requires funds. the help of experts to conduct these
The promoters have to estimate the studies. It may be noted that these
fund requirements for the identified experts do not become promoters
business opportunity. If the just because they are assisting the
required outlay for the project is so promoters in these studies.
large that it cannot easily be Only when these investigations
arranged within the available throw up positive results, the
means, the project has to be given promoters may decide to actually
up. For example, one may think launch a company.

Name Clause
A name is considered undesirable in the following cases:
(a) If it is identical with or too closely resembles the name of an existing
company
(b) If it is misleading. It is so considered if the name suggests that the company
is in a particular business or it is an association of a particular type when
it is not true
(c) If it is violative of the provisions of ‘The Emblem and Names (Prevention of
Improper Use) Act 1950, as given in the schedule to this Act. This schedule
specifies, inter alia, the name, emblem or official seal of the UNO and its
bodies like WHO, UNESCO etc. Government of India, State Governments,
President of India or Governer of any State, the Indian National Flag. The
Act also prohibits use of any name which may suggest patronage of
Government of India, or any state government or any local authority

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(iii) Name approval: Having decided with the Registrar of Companies. The
incorporate to a company, the names and addresses of shareholders
promoters have to select a name for it and the number of shares allotted to
and submit, an application to the each is submitted to the Registrar in a
registrar of companies of the state in statement called return of allotment.
which the registered office of the (vi) P r e p a r a t i o n o f n e c e s s a r y
company is to be situated, for its documents: The promoter takes up
approval. The proposed name may be steps to prepare certain legal
approved if it is not considered documents, which have to be
undesirable. It may happen that submitted under the law, to the
another company exists with the same Registrar of the Companies for getting
name or a very similar name or the the company registered. These
preferred name is misleading, say, to documents are Memorandum of
suggest that the company is in a Association, Articles of Association and
particular business when it is not true. Consent of Directors.
In such cases the proposed name is not
accepted but some alternate name may Documents Required to be
be approved. Therefore, three names, Submitted
in order of their priority are given in the
application to the Registrar of A. Memorandum of Association:
Companies. (Proforma INC1 is given at Memorandum of Association is the
the end of the Book). most important document as it
(iv) Fixing up Signatories to the defines the objectives of the
Memorandum of Association: company. No company can legally
Promoters have to decide about the undertake activities that are not
members who will be signing the contained in its Memorandum of
Memorandum of Association of the Association. As per section 2(56)
proposed company. Usually the people of The Companies Act, 2013
signing memorandum are also the first “memorandum” means the
Directors of the Company. Their written memorandum of association of a
consent to act as Directors and to take company as originally framed or as
up the qualification shares in the altered from time to time in
company is necessary. pursuance of any previous
(v) Appointment of professionals: company law or of this Act. The
Certain professionals such as Memorandum of Association
mercantile bankers, auditors etc., are contains different clauses, which are
appointed by the promoters to assist given as follows:
them in the preparation of necessary (i) The name clause: This clause
documents which are required to be contains the name of the company with

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which the company will be known, clause of the memorandum. It

which has already been approved by defines the purpose for which the
the Registrar of Companies. company is formed. A company is
(ii) Registered office clause: This not legally entitled to undertake an
clause contains the name of the state, activity, which is beyond the objects
in which the registered office of the stated in this clause. The main
company is proposed to be situated. objects for which the company is
The exact address of the registered formed are listed in this sub-
office is not required at this stage but clause. It must be observed that an
the same must be notified to the act which is either essential or
Registrar within thirty days of the incidental for the attainment of the
incorporation of the company. main objects of the company is
(iii ) O b j e c t s c l a u s e : T h i s i s deemed to be valid, although it may
probably the most important not have been stated explicitly.

Respective forms for Memorandum of Association

1. Table A MOA of a company limited by shares

2. Table B MOA of a company limited by guarantee and not having
share capital
3. Table C MOA of a company limited by guarantee and not having
share capital
4. Table D MOA of an unlimited company and not having share capital
5. Table E MOA of an unlimited company and having share capital
Respective forms for Articles of a Company
6. Table F AOA of a company limited by shares
7. Table G AOA of a company limited by guarantee and having share
capital
8. Table H AOA of a company limited by guarantee and not having
share capital
9. Table I AOA of an unlimited company and having share capital
10. Table J AOA of an unlimited company and not having share capital

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(iv) Liability clause: This clause A copy of a Memorandum of

limits the liability of the members to the Association is given at the end of the
amount unpaid on the shares owned chapter.
by them. B. Articles of Association: Articles of
For example, if a shareholder has Association are the rules regarding
purchased 1000 shares of `10 each internal management of a company.
and has already paid ` 6 per share, his/ These rules are subsidiary to the
her liability is limited to ` 4 per share. Memorandum of Association and
Thus, even in the worst case, hence, should not contradict or
he/she may be called upon to pay exceed anything stated in the
` 4, 000 only. Memorandum of Association.
(v) Capital clause: This clause According to section 2(5) of The
specifies the maximum capital which Companies Act, 2013, ‘articles’
the company will be authorised to raise means the article of association of a
through the issue of shares. The company as originally framed or as
authorised share capital of the altered from time to time or applied
proposed company along with its in pursuance of any previous
division into the number of shares company law or of this Act. The
having a fixed face value is specified in articles of a company shall be in
this clause. For example, the respective forms as specified in Table
authorised share capital of the F, G, H, I and J in schedule I as may
company may be ` 25 lakhs with be applicable to such company.
divided into 2.5 lakh shares of ` 10 However, the companies are free to
each. The said company cannot issue make their own articles of association
share capital in excess of the amount which may be contrary to the clauses
mentioned in this clause. of Table F,G,H,I,J and in that case
The signatories to the articles of association as adopted by
Memorandum of Association state their the company shall apply.
intention to be associated with the C. Consent of Proposed Directors:
company and give their undertaking to Apart from the Memorandum and
subscribe to the shares mentioned Articles of Association, a written
against their names. The memorandum consent of each person named as a
of a company shall be in respective director is required confirming that
forms specified in Tables A, B, C, D and they agree to act in that capacity and
E in Schedule I as may be applicable undertake to buy and pay for
to such company. qualification shares, as mentioned in
The Memorandum of Association the Articles of Association.
must be signed by at least seven D. Agreement: The agreement, if any,
persons in case of a public company which the company proposes to
and by two persons in case of a private enter with any individual for
company. appointment as its Managing

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Qualification Shares
To ensure that the directors have some stake in the proposed company, the
Articles usually have a provision requiring them to buy a certain number of
shares. They have to pay for these shares before the company obtains Certificate
of Commencement of Business. These are called Qualification Shares.

The Articles generally contains the following matters:

1. Exclusion wholly or in part of Table F.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back.
13. Share certificates.
14. Dematerialization.
15. Conversion of shares into stock. Incorporation of Companies and Matters
Incidental Thereto
16. Voting rights and proxies.
17. Meetings and rules regarding committees.
18. Directors, their appointment and delegations of powers.
19. Nominee directors.
20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager, Secretary.
23. Additional directors.
24. Seal.
25. Remuneration of directors.
26. General meetings.
27. Directors meetings.
28. Borrowing powers.
29. Dividends and reserves.
30. Accounts and audit.
31. Winding up.
32. Indemnity.
33. Capitalisation of reserves.

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Director or a whole time Director or all the contracts which are entered by
Manager is another document them, for the company before its
which is required to be submitted incorporation, in case the same are not
to the Registrar for getting the ratified by the company later on. Also
company registered under the Act. promoters are not the trustees of
E. Statutory Declaration: A the company.
declaration stating that all the legal Promoters of a company enjoy a
requirements pertaining to fiduciary position with the company,
registration have been complied which they must not misuse. They
with is to be submitted to the can make a profit only if it is disclosed
Registrar with the above mentioned but must not make any secret profits.
documents for getting the company In the event of a non-disclosure, the
registered under the law. This company can rescind the contract
statement can be signed by an and recover the purchase price paid
advocate or by a Chartered to the promoters. It can also claim
Accountant or a Cost Accountant damages for the loss suffered due to
or a Company Secretary in practice the non-disclosure of material
who is engaged in the formation of information.
a company and by a person named Promoters are not legally entitled
in the articles as a director or to claim the expenses incurred in the
manager or secretary of the promotion of the company. However,
company. the company may choose to
F. Receipt of Payment of fee: Along reimburse them for the pre-
with the above-mentioned incorporation expenses. The company
documents, necessary fees has to be may also remunerate the promoters
paid for the registration of the for their efforts by paying a lump sum
company. The amount of such fees amount or a commission on the
shall depend on the authorised purchase price of property purchased
share capital of the company. through them or on the shares sold.
The company may also allot them
Position of Promoters shares or debentures or give them an
Promoters undertake various activities option to purchase the securities at a
to get a company registered and get it future date.
to the position of commencement of
7.2.2 Incorporation
business. But they are neither the
agents nor the trustees of the company. After completing the aforesaid
They can’t be the agents as the formalities, promoters make an
company is yet to be incorporated. application for the incorporation of
Therefore, they are personally liable for the company. The application is to be

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filed with the Registrar of Companies 3. Written consent of the proposed

of the state within which they plan to directors to act as directors and
establish the registered office of the an undertaking to purchase
company. The application for qualification shares.
registration must be accompanied 4. The agreement, if any, with the
with certain documents about which proposed Managing Director,
we have already discussed in the Manager or whole-time director.
previous sections. These may be
5. A copy of the Registrar’s letter
briefly mentioned again:
approving the name of the
1. The Memorandum of Association company.
duly stamped, signed and 6. A statutory declaration affirming
witnessed. In case of a public that all legal requirements for
company, at least seven members registration have been complied
must sign it. For a private with. This must be duly signed.
company however the signatures
7. A notice about the exact address
of two members are sufficient.
of the registered office may also
The signatories must also give
be submitted along with these
information about their address,
documents. However, if the same
occupation and the number of
is not submitted at the time of
shares subscribed by them.
incorporation, it can be
2. The Articles of Association duly
submitted within 30 days of the
stamped and witnessed as in case
receipt of the certificate of
of the Memorandum. However, as
stated earlier, a public company incorporation.
may adopt Table A, which is a 8. Documentary evidence of payment
model set of Articles, given in the of registration fees.
Companies Act. In that case a The Registrar upon submission of
statement in lieu of the prospectus the application along with the required
is submitted, instead of Articles documents has to be satisfied that the
of Association. documents are in order and that all the

Preliminary Contracts
During the promotion of the company, promoters enter into certain contracts
with third parties on behalf of the company. These are called preliminary
contracts or pre-incorporation contracts. These are not legally binding on
the company. 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. Note that it cannot ratify a
preliminary contract. A company thus cannot be forced to honour a preliminary
contract. Promoters, however, remain personally liable to third parties for
these contracts.

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statutory requirements regarding the a company. Imagine, what would

registration have been complied with. happen to an unsuspecting party with
However, it is not his duty to carry out which the company enters into a
a thorough investigation about the contract, if it is later found that the
authenticity of the facts mentioned in incorporation of the company was
the documents. improper and hence invalid. Therefore,
When the Registrar is satisfied, the legal situation is that once a
about the completion of formalities Certificate of Incorporation has been
for registration, a Certificate of issued, the company has become a
Incorporation is issued to the company, legal business entity irrespective of any
which signify the birth of the company. flaw in its registration. The Certificate
The certificate of incorporation may of Incorporation is thus conclusive
therefore be called the birth certificate evidence of the legal existence of the
of the company. company. Some interesting examples
With effect from November 1, 2000, showing the impact of the
the Registrar of Companies allots a conclusiveness of the Certificate of
CIN (Corporate Identity Number) to Incorporation are as under:
the Company. (a) Documents for registration were
filed on 6th January. Certificate of
Effect of the Certificate of Incorporation was issued on 8th
Incorporation January. But the date mentioned
on the Certificate was 6th January.
A company is legally born on the date It was decided that the company
printed on the Certificate of was in existence and the contracts
Incorporation. It becomes a legal entity signed on 6th January were
with perpetual succession on such considered valid.
date. It becomes entitled to enter into (b) A person forged the signatures
valid contracts. The Certificate of of others on the Memorandum.
Incorporation is a conclusive evidence The Incorporation was still
of the regularity of the incorporation of considered valid.

Director Identification Number (DIN)

Every Individual intending to be appointed as director of a company shall make
an application for allotment of Director Identification Number (DIN) to the Central
Government in prescribed form along with fees.
The Central Government shall allot a Director Identification Number to an
application within one month from the receipt of the application.
No individual, who has already been allotted a Director Identification Number,
shall apply for, obtain or possess another Director Identification Number

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Thus, whatever be the deficiency in and must not conceal any material
the formalities, the Certificate of information from the potential
Incorporation once issued, is a investors. This is necessary for
conclusive evidence of the existence of protecting the interest of the investors.
the company. Even when a company Prior approval from SEBI is, therefore,
gets registered with illegal objects, the required before going ahead with
birth of the company cannot be raising funds from public.
questioned. The only remedy available (ii) Filing of Prospectus: A copy of
is to wind it up. Because the Certificate the prospectus or statement in lieu of
of Incorporation is so crucial, the prospectus is filed with the Registrar
Registrar has to go very carefully before of Companies. A prospectus is ‘any
issuing it. document described or issued as a
On the issue of Certificate of prospectus including any notice,
Incorporation, a private company can circular, advertisement or other
immediately commence its business. It document inviting deposits from the
can raise necessary funds from public or inviting offers from the
friends, relatives or through private public for the subscription or
arrangement and proceed to start purchase of any securities of, a body
business. corporate’. In other words, it is an
invitation to the public to apply for
7.2.3 Capital Subscription securities (shares, debentures etc.) of
A public company can raise the the company or to make deposits in
required funds from the public by the company. Investors make up
means of issue of securities (shares and their minds about investment in a
debentures etc.). For doing the same, company primarily on the basis of the
it has to issue a prospectus which is information contained in this
an invitation to the public to subscribe document. Therefore, there must not
to the capital of the company and be a mis-statement in the prospectus
undergo various other formalities. The and all material significant
following steps are required for raising information must be fully disclosed.
funds from the public: (iii) A p p o i n t m e n t o f B a n k e r s ,
(i) SEBI Approval: SEBI (Securities Brokers, Underwriters: Raising funds
and Exchange Board of India) which is from the public is a stupendous task.
the regulatory authority in our country The application money is to be received
has issued guidelines for the disclosure by the bankers of the company. The
of information and investor protection. brokers try to sell the shares
A public company inviting funds from by distributing the forms and
the general public must make adequate encouraging the public to apply for the
disclosure of all relevant information shares. If the company is not

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Difference between Memorandum of Association and Articles of Association

Basis of Memorandum of Articles of
Difference Association Association
Objectives Memorandum of Association Articles of Association are
defines the objects for which rules of internal
the company is formed. management of the
company. They indicate
how the objectives of the
company are to be
achieved.
Position This is the main document This is a subsidiary
of the company and is document and is
subordinate to the subordinate to both the
Companies Act. Memorandum of
Association and the
Companies Act.
Relationship Memorandum of Association Articles define the
defines the relationship of relationship of the
the company with outsiders. members and the
company.
Validity Acts beyond the Acts which are beyond
Memorandum of Association Articles can be ratified by
are invalid and cannot be the members, provided
ratified even by a unanimous they do not violate the
vote of the members. Memorandum.
Necessity Every company has to file a It is not compulsory for a
Memorandum of Association. public ltd. company to file
Articles of Association. It
may adopt Table F of The
Companies Act, 2013

reasonably assured of a good public the issue. Appointment of underwriters

response to the issue, it may appoint is not necessary.
underwriters to the issue. Underwriters (iv) Minimum Subscription: In
undertake to buy the shares if these order to prevent companies from
are not subscribed by the public. They commencing business with inadequate
receive a commission for underwriting resources, it has been provided that the

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company must receive applications for (vi) Allotment of Shares: Till the time
a certain minimum number of shares shares are alloted, application money
before going ahead with the allotment received shoud remain in a seperate
of shares. According to the Companies bank account and must not be used
Act, this is called the ‘minimum by the company. In case the number of
subscription’. As per the SEBI shares allotted is less than the number
Guidelines the limit of minimum applied for, or where no shares are
subscription is 90 per cent of the size allotted to the applicant, the excess
application money, if any, is to be
of the issue. Thus, if applications
returned to applicants or adjusted
received for the shares are for an
towards allotment money due from
amount less than 90 per cent of the
them. Allotment letters are issued to the
issue size, the allotment cannot be
successful allottees. ‘Return of
made and the application money
allotment’, signed by a director or
received must be returned to the secretary is filed with the Registrar of
applicants. Companies within 30 days of allotment.
(v) Application to Stock Exchange: A public company may not invite
An application is made to at least one public to subscribe to its securities
stock exchange for permission to deal (shares, debentures etc.). Instead, it
in its shares or debentures. If such can raise the funds through friends,
permission is not granted before the relatives or some private
expiry of ten weeks from the date of arrangements as done by a private
closure of subscription list, the company. In such cases, there is no
allotment shall become void and all need to issue a prospectus. A
money received from the applicants ‘Statement in Lieu of Prospectus’ is
will have to be returned to them within filed with the Registrar at least three
eight days. days before making the allotment.

One Person Company

With the implementation of The Companies Act, 2013, a single person could
constitute a company, under the One Person Company (OPC) concept.
The introduction of OPC in the legal system is a move that would encourage
corporatisation of micro businesses and entrepreneurship.
In India, in the year 2005, the JJ Irani Expert Committee recommended the
formation of OPC. It had suggested that such an entity may be provided with a

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simpler legal regime through exemptions so that the small entrepreneur is not
compelled to devote considerable time, energy and resources on complex legal
compliance.
One Person Company is a company with only one person as a member. That one
person will be the shareholder of the company. It avails all the benefits of a
private limited company such as separate legal entity, protecting personal assets
from business liability and perpetual succession.
Characteristics
(1) Only a natural person who is an Indian citizen and resident in India-
(a) Shall be eligible to incorporate a One Person Company;
(b) Shall be a nominee for the sole member of a One Person Company.
Explanation – For the purposes of this rule, the term “resident in India”
means a person who has stayed in India for a period of not less than one
hundred and eighty two days during the immediately preceding one
calendar year.
(2) No person shall be eligible to incorporate more than a One Person Company
or become nominee in more than one such company.
(3) Where a natural person, being member in One Person Company in accordance
with this rule becomes a member in another such Company by virtue of his
being a nominee in that One Person Company, such person shall meet the
eligibility criteria specified in sub rule (2) within a period of one hundred
and eighty days.
(4) No minor shall become member or nominee of the One Person Company or
can hold share with beneficial interest.
(5) Such Company cannot be incorporated or converted into a company under
section 8 of the Act.
(6) Such Company cannot carry out Non-Banking Financial Investment
activities including investment in securities of anybody corporates.
(7) No such company can convert voluntarily into any kind of company unless
two years have expired from the date of incorporation of One Person Company,
except threshold limit (paid up share capital) is increased beyond fifty lakh
rupees or its average annual turnover during the relevant period exceeds
two crore rupees.

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“SCHEDULE I”
(See sections 4 and 5)
Table A
MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY SHARES
1st The name of the company is “.......................................... Limited/Private
Limited”.
2nd The registered office of the company will be situated in the State of ..................
3rd (a) The objects to be pursued by the company on its incorporation are:-

.........................................................................................................................

.........................................................................................................................
(b) Matters which are necessary for furtherance of the objects specified in
clause 3 (a) are:-

.........................................................................................................................

.........................................................................................................................
4th The liability of the member(s) is limited and this liability is limited to the
amount unpaid, if any, on the shares held by them.
5th The share capital of the company is ...................................................................
rupees, divided into ........................ shares of ........................ rupees each.
6th We, the several persons, whose names and addresses are subscribed, are
desirous of beingformed into a company in pursuance of this memorandum
of association, and we respectively agree to take the number of shares in the
capital of the company set against our respective names:-

Names, addresses, No. of shares Signature Signature, names

descriptions and taken by each of subscriber addresses,
occupations of descriptions and
subscribers occupations of
witnesses
A.B. of ................ Merchant ..................... Signed before me:
Signature ...............
C.D. of ................ Merchant ..................... Signed before me:
Signature ...............
E.F. of ................ Merchant ..................... Signed before me:
Signature ...............

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G.H. of ............... Merchant ..................... Signed before me:

Signature ..............
I.J. of ................ Merchant ..................... Signed before me:
Signature ..............
K.L. of ................ Merchant ..................... Signed before me:
Signature ..............
M.N. of ............... Merchant ..................... Signed before me:
Signature ..............
Total shares taken:

7th I, whose name and address is given below, am desirous of forming a

company in pursuance of this memorandum of association and agree to
take all the shares in the capital of the company (Applicable in case of one
person company):-

___________________________________________________________________________________
Names, addresses, Signature of subscribed Signature, name, address,
occupations of description and occupation
Subscribers of witness

___________________________________________________________________________________
8 th Shri/Smt ......................................, son/daughter of ......................................,
resident of .................................................................... aged ...................... years
shall be the nominee in the event of death of the sole member (Applicable in
case of one person company)

Dated ...................................... The day of ......................................

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FORMATION OF A COMPANY 181

Key Terms
Promotion Memorandum of Association Articles of Association
Prospectus Incorporation Capital subscription
Commencement of
Business

SUMMARY

There are two stages in the formation of a private company, promotion and
incorporation. A public company has to undergo capital subscription stage
to begin operations.
1. Promotion: It begins with a potential business idea. Certain feasibility
studies e.g., technical, financial and economic, are conducted to
determine whether the idea can be profitably exploited. In case, the
investigations yield favourable results, promoters may decide to form
the company. Persons who conceive the business idea, decide to form a
company, take necessary steps for the same, and assume associated
risks, are called promoters.
Steps in Promotion
i. Approval of company’s name is taken from the Registrar of
Companies
ii. Signatories to the Memorandum of Association are fixed
iii. Certain professionals are appropriated to assist the promoters
iv. Documents necessary for registration are prepared
Necessary Documents
a. Memorandum of Association
b. Articles of Association
c. Consent of proposed directors
d. Agreement, if any, with proposed managing or whole time director
e. Statutory declaration
2. Incorporation: An application is made by promoters to the Registrar of
Companies alongwith necessary documents and registration fee. The
Registrar, after due scrutiny, issues certificate of incorporation. The
certificate of incorporation is a conclusive evidence of the legal existence
of the company.
3. Capital Subscription: A public company raising funds from the public
needs to take following steps for fundraising:

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(i) SEBI approval;

(ii) File a copy of prospectus with the Registrar of Companies;
(iii) Appointment of brokers, bankers and underwriters etc.;
(iv) Ensure that minimum subscription is received;
(v) Application for listing of company’s securities;
(vi) Refund/adjust excess application money received;
(vii) Issue allotment letters to successful applicants; and
(viii) File return of allotment with the Registrar of Companies (ROC).
A public company, raising funds, raising funds from friends/relatives (not
public) has to file a statement in lieu of prospectus with the ROC at least
three days before allotment of shares and returns of allotment after
completing the allotment. As per the SEBI guidelines, minimum subcription
has to be 90% of the shares to be issued to be public.
Preliminary Contracts: Contracts signed by promoters with third parties
before the incorporation of company.
Provisional Contracts: Contracts signed after incorporation but before
commencement of business.

EXERCISES

Multiple Choice Questions

1. Minimum number of members to form a private company is
(a) 2 (b) 3
(c) 5 (d) 7
2. Minimum number of members to form a public company is
(a) 5 (b) 7
(c) 12 (d) 21
3. Application for approval of name of a company is to be made to
(a) SEBI (b) Registrar of Companies
(c) Government of India (d) Government of the State
in which Company is to
be registered

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FORMATION OF A COMPANY 183

4. A proposed name of Company is considered undesirable if

(a) It is identical with the name (b) It resembles closely with
of an existing company the name of an existing
company
(c) It is an emblem of Government (d) In case of any of the above
of India, United Nations etc.
5. A prospectus is issued by
(a) A private company (b) A public company seeking
investment from
public
(c) A public enterprise (d) A public company
6. Stages in the formation of a public company are in the following order
(a) Promotion, Commencement (b) Incorporation, Capital
of Business, Capital Subscription, Promotion
Subscription, Incorporation,
(c) Promotion, Incorporation, (d) Capital Subscription,
Capital Subscription, Promotion, Incorporation,
7. Preliminary Contracts are signed
(a) Before the incorporation (b) After incorporation but
before capital subscription
(c) After incorporation but before (d) After commencement of
commencement of business business
8. Preliminary Contracts are
(a) binding on the Company (b) binding on the Company, if
ratified after incorporation
(c) binding on the (d) not binding on the
Company, after incorporation Company

True/False Answer Questions

1. It is necessary to get every company incorporated, whether private or
public.
2. Statement in lieu of prospectus can be filed by a public company going
for a public issue.
3. A company can commence business after incorporation.
4. Experts who help promoters in the promotion of a company are also
called promoters.
5. A company can ratify preliminary contracts after incorporation.

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6. If a company is registered on the basis of fictitious names, its

incorporation is invalid.
7. ‘Articles of Association’ is the main document of a company.
8. Every company must file Articles of Association.
9. If a company suffers heavy issues and its assets are not enough to pay
off its liabilities, the balance can be recovered from the private assets of
its members.

Short Answer Questions

1. Name the stages in the formation of a company.
2. List the documents required for the incorporation of a company.
3. What is a prospectus? Is it necessary for every company to file a
prospectus?
4. Briefly explain the term ‘Return of Allotment’.
5. At which stage in the formation of a company does it interact with SEBI.

Long Answer Questions

1. What is meant by the term ‘Promotion’. Discuss the legal position of
promoters with respect to a company promoted by them.
2. Explain the steps taken by promoters in the promotion of a company.
3. What is a ‘Memorandum of Association’? Briefly explain its clauses.
4. Distinguish between ‘Memorandum of Association’ and ‘Articles of
Association.’
5. What is the meaning of ‘Certificate of Incorporation’?
6. Discuss the stages of formation of a company?

Project/Assignment
Find out from the office of the Registrar of Companies, the actual procedure
for formation of companies. Does it match with what you have studied.
What are the obstacles which companies face in getting themselves
registered.

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