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NCERT Class 11 Business Studies Chapter 7 Formation of a Company
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Formation of a Company
Chapter: 7
| PART – ⅠⅠ |
| EXERCISES |
Short Answer Questions:
1. Name the stages in the formation of a company.
Ans: The formation of a company divided into three distinct stages, which are:
(i) Promotion.
(ii) Incorporation. and
(iii) Subscription of capital.
2. List the documents required for the incorporation of a company.
Ans: The documents required for the incorporation of a company are as follows:
(i) The Memorandum of Association duly stamped, signed and witnessed.
(ii) The Articles of Association duly stamped and witnessed as in case of Memorandum.
(iii) A copy of the Registrar.s letter approving the name of the company.
(iv) A statutory declaration affirming that all legal requirements for registration have been complied with.
(v) A notice about the exact address of the registered office may also be submitted along with these documents.
(vi) Documentary evidence of payment of registration fees.
3. What is a prospectus? Is it necessary for every company to file a prospectus?
Ans: 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 securities of, a body corporate’.
Only a company that needs to raise funds from the general public by issuing shares or debentures is required to file a prospectus.Therefore, there must not be a mis-statement in the prospectus and all material significant information must be fully disclosed.
4. Briefly explain the term ‘Return of Allotment’.
Ans: The names and addresses of shareholders and the number of shares allotted to each is submitted to the Registrar in a statement called return of allotment.
5. At which stage in the formation of a company does it interact with SEBI.
Ans: A company interacts with the Securities and Exchange Board of India (SEBI) at the stage of capital subscription. As per the SEBI Guidelines the limit of minimum subscription is 90 percent of the size of the issue. Thus, if applications received for the shares are for an amount less than 90 percent of the issue size, the allotment cannot be made and the application money received must be returned to the applicants.
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.
Ans: Promotion is the first stage in the formation of a company. It involves conceiving a business idea and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity. Thus, it begins with somebody having 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.
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 company. They can’t be the agents as the company is yet to be incorporated. Therefore, they are personally liable for all the contracts which are entered by them, for the company before its incorporation, in case the same are not ratified by the company later on. Also promoters are not the trustees of the company.
Promoters of a company enjoy a fiduciary position with the company, which they must not misuse. They can make a profit only if it is disclosed but must not make any secret profits. In the event of a non-disclosure, the company can rescind the contract and recover the purchase price paid to the promoters. It can also claim damages for the loss suffered due to the non disclosure of material information. Promoters are not legally entitled to claim the expenses incurred in the promotion of the company. However, the company may choose to reimburse them for the pre-incorporation expenses.
The company may, however, choose to reward promoters in various ways, such as:
(i) Paying a lump sum amount.
(ii) Granting a commission on property purchased or shares sold.
(iii) Allotting shares or debentures, or.
(iv) Offering them an option to purchase securities at a future date.
2. Explain the steps taken by promoters in the promotion of a company.
Ans: The important functions of promoters may be listed as below:
(i) Identification of business opportunity: The first and the 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 or any other opportunity having an investment potential. Such an opportunity is then analysed to see its technical and economic feasibility.
(ii) Feasibility studies: It may not be feasible or profitable to convert all identified business opportunities into real projects. The promoters, therefore, undertake detailed feasibility studies to investigate all aspects of the business they intend to start.
(a) Technical feasibility: Sometimes an idea may be good but technically not possible to execute. It may be so because 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. If the required outlay for the project is so large that it cannot easily be arranged within the available means, the project has to be given up.
(c) Economic feasibility: Sometimes it so happens that a project is technically viable and financially feasible but the chance of it being profitable is very little. In such cases as well, the idea may have to be abandoned.
(iii) Name approval: Having decided incorporate to a company, the promoters have to select a name for it and submit, an application to the registrar of companies of the state in which the registered office of the company is to be situated, for its approval. The proposed name may be approved if it is not considered undesirable.
(iv) 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. Usually the people signing memorandum are also the first Directors of the Company.
(v) Appointment of professionals: Certain professionals such as 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. The names and addresses of shareholders and the number of shares allotted to each is submitted to the Registrar in a statement called return of allotment.
(vi) Preparation of necessary documents: The promoter takes up steps to prepare certain legal documents, which have to be submitted under the law, to the Registrar of the Companies for getting the company registered. These documents are Memorandum of Association, Articles of Association and Consent of Directors.
3. What is a ‘Memorandum of Association’? Briefly explain its clauses.
Ans: Memorandum of Association is the most important document as it defines the objectives of the company. No company can legally undertake activities that are not contained in its Memorandum of Association. As per section 2(56) of The Companies Act, 2013 “memorandum” means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.
The Memorandum of Association contains different clauses, which are given as follows:
(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 officeclause: This clause contains the name of the state, in which the registered office of the company is proposed to be situated. The exact address of the registered office is not required at this stage but the same must be notified to the Registrar within thirty days of the incorporation of the company.
(iii) Objects clause: This is probably the most important clause of the memorandum. It defines the purpose for which the company is formed. A company is not legally entitled to undertake an activity, which is beyond the objects stated in this clause. The main objects for which the company is formed are listed in this sub-clause.
(iv) Liability clause: This clause limits the liability of the members to the amount unpaid on the shares owned by them. For example, if a shareholder has purchased 1000 shares of Rs.10 each and has already paid Rs. 6 per share, his/her liability is limited to Rs. 4 per share. Thus, even in the worst case, he/she may be called upon to pay Rs. 4, 000 only.
(v) Capital clause: This clause specifies the maximum capital which the company will be authorised to raise through the issue of shares. The authorised share capital of the proposed company along with its division into the number of shares having a fixed face value is specified in this clause. For example, the authorised share capital of the company may be ` 25 lakhs divided into 2.5 lakh shares of Rs. 10 each. The said company cannot issue share capital in excess of the amount mentioned in this clause.
4. Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’
Ans:
| Basis of Difference | Memorandum of Association | Articles of Association |
| Objectives | 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. |
| Position | 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. |
| Relationship | Memorandum of Association defines the relationship of the company with outsiders. | Articles define the relationship of the members and the company. |
| Validity | 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. |
| Necessity | 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 F of The Companies Act, 2013 |
5. What is the meaning of ‘Certificate of Incorporation’?
Ans: When the Registrar is satisfied, about the completion of formalities for registration, a Certificate of Incorporation is issued to the company, which signifies the birth of the company. The certificate of incorporation may therefore be called the birth certificate of the company. With effect from November 1, 2000, the Registrar of Companies allots a CIN (Corporate Identity Number) to the Company.
A company is legally born on the date printed on the Certificate of Incorporation. It becomes a legal entity with perpetual succession on such date. It becomes entitled to enter into valid contracts. The Certificate of Incorporation is a conclusive evidence of the regularity of the incorporation of a company.
Certificate of Incorporation has been issued, the company has become a legal business entity irrespective of any law inits registration. The Certificate of Incorporation is thus conclusive evidence of the legal existence of the company. Some interesting examples showing the impact of the conclusiveness of the Certificate of Incorporation are as under:
(a) Documents for registration were filed on 6th January. Certificate of Incorporation was issued on 8th January. But the date mentioned on the Certificate was 6th January. It was decided that the company was in existence and the contracts signed on 6th January were considered valid.
(b) A person forged the signatures of others on the Memorandum. The Incorporation was still considered valid.
Thus, whatever be the deficiency in the formalities, the Certificate of Incorporation once issued, is conclusive evidence of the existence of the company. Even when a company gets registered with illegal objects, the birth of the company cannot be questioned. The only remedy available is to wind it up. Because the Certificate of Incorporation is so crucial, the Registrar has to go very carefully before issuing it.
6. Discuss the stages of formation of a company?
Ans: The stages of formation of a company are as follows:
(i) Promotion of a Company: Promotion is the first stage in the formation of a company. It involves conceiving a business idea and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity. Thus, it begins with somebody having 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 form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose.
(ii) Incorporation: After completing the aforesaid formalities, promoters make an application for the incorporation of the company. 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 company. The application for registration must be accompanied with certain documents about which we have already discussed in the previous sections.
(iii) Subscription of capital: The subscribed capital is the capital that is subscribed by the public and called up capital is the capital called up by the company. Once the company is incorporated, it moves on to the capital subscription stage. If the company is a public limited company, it invites the public to subscribe to its shares through the issuance of a prospectus. Initially, shares are allotted to persons who are signatories to documents and have agreed to subscribe to the prescribed number of shares.
