Formation of a company

FORMATION OF A
COMPANY
PRESENTED BY:
KANIKA GUPTA (4326)
SHEVANI GUPTA(4343)
MALIKA (4381)

PRESENTED TO:

COMPANY:-
 Is an Artificial Person created by Law.
 Company means an assocoation of many persons
who contribute money or money`s worth to a
common stock and employed for a common
purpose.The common stock so contributed is
denote in money and is capital of a company.The
person who contribute it or to whom it belongs are
members.The proportion of capital to which each
member is entitled is his share. Share are always
transferable although the right to transfer is often
more or less restricted.

STEPS INVOVED:-

 Promotion
 Incorporation

 Raising of Capital

 In case of PUBLIC LIMITED COMPANY, securing a
certificate for commencement of business.

INTRODUCTION..

 It may be noted that before a company is actually
formed, certain persons, who wish to form a
company, come together with a view to carry on
some business. Such persons have to decide
various questions a) which business they should
start b) They should form a company c) Which type
of company they required d) What should be the
capital of company.
 There are various stages in formation of company.

STAGES IN FORMATION OF A COMPANY

Promotion of a Company : The promotion of a
company refers to all those steps which are taken
from the time of having an idea of starting a
company to the time of actual starting of the
company business.
Who is a promoter?
1. People who think of forming a company
and take necessary steps in its formation
are known as “Promoters” or “Company
Promoters”.
2. The person who conceives such an idea is
called “Company Promoter”.

FUNCTIONS OF PROMOTERS:

 To discover an idea for establishing a company.
 To make detailed investigations about the demand
for the product, availability of power, labour, raw
material.
 To investigate the idea and know whether the
formation of the company is possible and profitable.
 To find out suitable persons who are willing to act
as first directors of the company.
 To settle the name of company.

 To select bank, legal advisor, auditor, underwriter for
the company.
 To submit all the documents required for
incorporation with the registrar.
 To meet all the preliminary expenses for floating of a
company.
 To make contracts with vendors, underwriters, and
managing directors of the company.
 To arrange for the loan etc. from various financial
resources.
 To make proper arrangement for the office of the
company.

DUTIES AND OBLIGATION OF PROMOTERS
 The promoters must disclose fully all the material facts
regarding the formation of a company.
 The promoters must faithfully disclose all the facts
relating to the property which they want to sell to the
company.
 The promoters must not make an unfair use their
position.
 To disclose the liability and pay the secret profits if
promoters have earned.
 The prospectus of the company should contain the true
statements.
 Liability on statutory mistakes or frauds in the property.

REMUNERATION OF PROMOTERS:

 He may be paid a certain lump sum.
 He may be given shares of the company.

 He may be given commission of the shares sold by
the company.
 He may be given an option to buy the shares of the
company at par when their market price is higher.
 He may sell his own property to the company at
higher price and earn profit.

IMPORTANT DOCUMENTS BEFORE
APPROACHING THE REGISTRAR :-
 AN INDUSTRIALIST LICENCE IF THE
PROPOSED BUSINESS IS COVERED BY
INDUSTRIES ACT 1951
 AN IMPORTANT LICENCE IS REQUIRED IF
MACHINERY IS IMPORTED
 APPROVAL OF GOVT. IN CASE OF FOREIGN
COLLABRATION
 APPROVAL OF GOVT. UNDER MONOPOLIES
AND RESTRICTIVE TRADE PRACTICE ACT 1961,
IF NECESSARY

DOCUMENTS NEEDED :-
 MEMORANDUM OF ASSOCIATION
 ARTICLES OF ASSOCIATION

 LIST OF THE DIRECTORS

 CONSENT LETTER FROM DIRECTORS

 STATEMENT OF CAPITAL

 STATUTORY DECLARATION

REGISTRATION AND INCORPORATION OF A
COMPANY:
 The second stage for establishment of a company
is to get the company incorporated or registered.
The promoters have to prepare and file a number of
documents with the registrar.
1-The memorandum of association signed by at least
seven persons
2-The articles of association signed by at least seven
persons

3-Promoters have to file a prospectus or statement in lieu
of prospectus with the registrar.
4-A list of directors and their willingness to act, duly
signed by each of them.
5-Notice of address at which the registered office of the
company will be situated.
 All the director whose names are in the list have to
submit a declaration certificate that they have
taken up qualifying shares and have paid up the
money.

MEMORANDUM OF ASSOCIATION

 Memorandum of association is the basic document
of a joint stock company.
 It is known as the charter of the company.

 It sets out limits outside which the company cannot
go.
 To enable the shareholders, creditors and all those
who deal with the company.

CLAUSES (CONTENTS) OF
MEMORANDUM OF ASSOCIATION
1. Name Clause.
2. Registered Office clause.
3. Objective Clause.
4. Liability Clause.
5. Capital Clause.
6. Association Clause.

NAME CLAUSE:-
 A company adopts any name but it should not be
identical to the name of the existing company.
 The name should not be prohibited one.

 The name of the company must end with the word
limited so all the persons dealing with the company
must know that their liability is limited up to the
extent of their of shares.
 In the case of private limited company the word
private limited to be used as the last word of the
name.

SITUATION CLAUSE :-
 The company is required to state the name of the
province in which the office is situated.
 To give the exact address and name of the
company where the company is located.
 A person can know through this the jurisdiction of
the court under which the company operates.
 It also indicates the place for holding annual
meeting of the company.
 The creditors, customers, government, know the
whereabouts of the company.
 All correspondence is done at the office of the
company.

OBJECTIVE CLAUSE :-
 It is the essence of memorandum. it clearly defines
the sphere of the company activities. It indicates a
series of objects for which the company is
established.
 HERE THE COMPANY SHOULD MENTION ITS
 MAIN OBJECTIVES
 SUBSIDARY OBJECTIVES
 OTHER OBJECTIVES

LIABILITY CLAUSE :-
 THE EXTENT AND NATURE OF THE LIABILITY
OF SHARESHOLDERS SHOULD BE STATED
LIKE
 LIMITED LIABILITY
 LIMITED BY GAURANTEE
 UNLIMITED

 The liability of the members is limited to the extent
of the value of shares purchased by them.
 In a case if a shareholder has to pay the unpaid
amount on the share investment, he can be
compelled to pay to the extent of unpaid amount on
the shares, nothing more.

CAPITAL CLAUSE :-
 DIVISION OF CAPITAL INTO SHARES OF
DIFFERENT DOMINATIONS
 THE EXTENT OF EACH CAPITAL SHOULD BE
SPECIFIED
 THE AUTHORISED CAPITAL SHOULD BE
MENTIONED
 A COMPANY IS NOT AUTHORISED TO ISSUE
ABOVE AUTHORISED CAPITAL

ASSOCIATION CLAUSE:-
 THIS CLAUSE CONTAINS DELCARATION OF
MEMBERS
 THE NAMES, ADDRESSESS AND OCCUPATIONS
OF THE SUBSCRIBERS SHOULD BE
MENTIONED
 THE SIGNATURES ARE TO BE ATTESTED BY
PROPER WITNESS

REQUIREMENT AS TO MEMORANDUM:

The memorandum of every
company must be:
 Printed
 Dividedinto paragraphs numbered
consecutively
 Signed by subscribers and witnessed
 Dated

SIGNING OF MEMORANDUM:
The memorandum must be:
Be signed by each member
 Who shall add his name and surname in full, any
former name or surname in full
 His occupation; and

 Father‟s name; or

 In the case of a married woman or widow, her
husband‟s name, in full
 His nationality of origin; and

 His usual residential address in full

ALTERATION OF MEMORANDUM
1. Alteration of Name Clause:
A company can change its name at any time by adopting the
following procedure:
 By passing a special resolution: Company name
can be changed only if two thirds (70%) of
shareholders vote for it.
 By obtaining the approval of Central Government
in writing: A name which is identical with the name
of an existing company.
 By passing an ordinary resolution: Government
urges the company to change its name because of
some lawful reasons, in this case only 51% votes
of shareholders are needed to change its name.
 By obtaining the previous approval of Central
Government

2. ALTERATION OF REGISTERED OFFICE CLAUSE:

 Change of registered office from one place
to another within the same city: Pass
ordinary resolution
 Change of registered office from one city to
another within the same state: pass
special resolution
 Change of registered office from one State to
another: by passing special
resolution (find about special and
ordinary resolutions in previous page
please)

3. ALTERATION OF OBJECTS CLAUSE:

 The company may change its objects by adopting
the following procedure
 By passing a special resolution

 By filing the special resolution with the Registrar of
Companies within one month from the date of such
resolution

4. ALTERATION OF CAPITAL CLAUSE:

 Following types of alterations can be made simply
by passing an ordinary resolution:
 Increase of share capital by issue of new shares.
 Consolidation or sub-division of existing shares into
shares of larger or smaller amount.
 Cancellation of unissued shares.

DOCTRINE OF ULTRA-VIRES

 The term „ultra‟ means beyond and the term
„vires‟ means powers
 An act ultra-vires the directors: It is an act
which is beyond the powers of the directors.
 An act ultra-vires the memorandum of
association: It is an act which is beyond the powers
given by the memorandum of association.
 An act ultra-vires the articles of
association: It is an act which is beyond the
powers given by the articles of association.

ARTICLES OF ASSOCIATION
 After memorandum of association, Articles of
Association is the most important document to
prepare and present to registrar for incorporation or
registration.
 Article of Association explains about the rules and
regulation of a company, it discusses the internal
points and boundaries that the company can‟t go
beyond that.

 Articles of association is a legal document second in
importance to memorandum.
 The articles of association are regulations which
governs the internal organization and conduct of the
company.
 The articles of association describe powers of the
directors, other officers and shareholders as to voting
etc.
 It also describes the mode and form in which
changes in the internal regulations of the company
may from time to time be made.
 The articles are subordinate to the memorandum and
they cannot go beyond the scope of the companies
act and memorandum of association.

CONTENTS OF ARTICLES OF
ASSOCIATION
1. Amount of share capital: company calculates
the face value of shares and mentions in the
Article of Association. For example: value of
shares (face value) in a company is $10, if
company sells share for $25, 10 is the face value
and 15 is earning, its also called premium. But if
you sell below face value of $10, it‟s called
discount.
2. Transmission: it means transfer according to law,
example: shareholder mentions in Article of
Association that if he/she dies, his shares should
be transferred to son/daughter etc. OR: in case of
bankruptcy, if shareholder loses everything, the
court will decide to sell his/her shares pay
creditors.

3- Rights of share holders regarding vote, dividend,
return of capital.
4- Rules regarding the issue of shares and debentures.
(Debenture is a certificate that is issued by a company
when it is in need of money, so investors buy it for a
specific period of time and get interest after maturity
date).
5- Procedure as well as regulations in respect of making
calls on shares. (Making calls: A company issues
1000 shares for $10per share, so people write
applications in order to buy some share & pay an
amount of $2 for application, then company call on
those people who applied to buy shares and ask them
to come and pay & get the shares, that is called
Making Calls. Sometimes companies receive more
application comparing to the number shares issued for
market, company selects that number of applications
to sell the specific number of shares issued for sell,
and rejects the rest, rejected applicants will get their
$2 application fee back).

6- Manner of transfer of shares. (means different
method/ways to issue different shares)
7- Rules regarding appointment of directors, managing
directors, agents, secretaries.
8- Number, qualification, remuneration, powers and
liabilities of directors. (Number of directors differs in
public and private companies. Qualification:
Eligibility of person like age, capability to work,
experience, education, should be free of criminal
charges etc. Remuneration: it is the amount of
money paid to directors since directors are not
employees of company so that is why don‟t receive
salaries but instead receive a specific percentage
amount from the income of a company, for example
5% of income)
9- Declaration of dividends. (It should be clearly
defined in Article of Association that how dividends
should be distributed among share holders.)

 10-Convening and conduct of meetings with reference
to notice, quorum, poll, proxy, resolutions.
(CONVENING: it clarifies how participants should be
informed for meetings etc. it is reference to notice for
meeting. QUORUM: it mentions the minimum number
of participants in meetings as some important
decisions taken during meetings so most of members
of a company should be present in a meeting. POLL:
Rules and regulation of voting, vote casting, polling
station etc. PROXY: If a participant can’t attend a
meeting, he/she writes a formal letter introducing
someone else to attend meeting on his/her behave, it’s
called proxy. RESOLUTION: Any decision which is
taken in a meeting.)

11-Forfeiture of shares.
12-Matters relating to account and audit, (Clarifies
how audit should take place or control accounts)
13-Rules for winding up of the company.

ALTERATION OF ARTICLES OF ASSOCIATION
 PERMISSION OF COURT IS NOT NECESSARY
 SPECIAL RESOLUTION AND APPROVAL OF
GOVERNMENT IS REQUIRED
 BUT IN SOME CASES THEY SHOULD FOLLOW
COMPANIES ACT AS WELL AS MEMORANDUM

COMPARISON BETWEEN MEMORANDUM
AND ARTICLES OF ASSOCIATION
Memorandum of Association Article of Association
 It contains conditions upon
which the company is  These are internal
granted registration. regulations of the company
 It contains objects and  It provides the regulation
powers of the company by which those objects and
 It can not be easily altered. powers are to be carried
into effect.
The company has to follow  It can be easily altered as
strict procedure for the compared to memorandum
alteration. of association.
 It regulates the relationship  It regulates the internal
of the company with the management of the
outsiders, as the objects company, as the rules and
and powers of the regulations contained in it
company are made known describe the internal
to the outsiders procedure to be followed
by the company

PROSPECTUS

Definition: “A prospectus means any document
described or issued as prospectus and includes any
notice or circular, advertisement or other document
inviting deposits from the public or inviting offers
from the public for the subscription or purchase of
any shares in, or debentures of a body corporate”.

CONTENTS OF PROSPECTUS
1. Name and registered address of the company.
2. The main objects of the company.
3. Information regarding listing of shares on a
recognized stock exchange.
4. Particulars pertaining to different classes of
shares and extent of interest of holders.
5. The number of shares (if any) fixed by the
articles as the qualification of a director and the
remuneration of directors.
6. The date of opening and closing of the issue.
7. The names and addresses of auditors and lead
managers.

8. Amount payable on application and allotment of
shares.
10. Details regarding debenture.
11. Amount of premium or discounts on shares.
12. Details regarding property purchased or acquired
against issue of shares.
13. Preliminary expenses.
14. The promoters and their background.
15. Benefit paid to any promoters or officer and
consideration thereof.
16. Details regarding contract or appointment of
Chief Executive, Managing Agent, Secretary and
every other material contract.

17. Name and address of legal advisors.
18. Full particulars of nature and extent of the
interest of every director or promoter.
19. Voting rights and rights in respect of capital and
dividend.
20. The authorized, issued, subscribed and paid up
capital of the company.
21. The size of present issue. Out of this, the shares
reserved for preferential allotment to promoters
and other should also be stated.
22. Restrictions imposed upon the members of the
company.
23. Quorum of general meeting.
24. The location of the plant.
25. Information about projects, plant and its
machinery raw material.

LIST OF DIRECTORS :-
 THE LIST OF DIRECTORS WHO HAVE AGREED
TO ACT AS A DIRECTORS SHOULD FILED WITH
REGISTRAR
 THEY SHOULD SUBMIT THEIR
- NAMES
- AGE
- OCCUPATION
- FULL ADDRESSES
 IN CASE WHEN THE LIST IS NOT READY
MEMORANDUM WILL BE DEEMED TO BE THE
DIRECTORS

CONSENT LETTER OF DIRECTORS :-
 EVERY PERSON WHO IS READY TO ACT AS
DIRECTOR MUST GIVE A WRITTEN
UNDERTAKING STATING THAT HE IS WILLINGLY
AGREED TO ACT AS A DIRECTORS OF THE
COMPANY
 ALONG WITH THE LETTER THE MUST
SUBSCRIBE THE QUALIFICATION OF SHARES
AS MENTIONED IN ARTICLES OF ASSOCIATION
AND HAVE PAID YHE AMOUNT ACCORDINGLY

NAME APPROVAL CERTIFICATE :-
 A COPY OF LETTER FROM THE REGISTRAR
ANNOUNCING THAT THE NAME OF COMPANY
WAS APPROVED WITHOUT ANY OBJECTION

STATEMENT OF AUTHORISED CAPITAL
:-
 THE COMPANY SHOULD PREPARE AND
SUBMIT A STATEMENT OF PROPOSED CAPITAL
WHICH IS AUTHORISED TO COLLECT FROM
THE PUBLIC
 IT CONTAIN THE NUMBER OF SHARES AND
DEBENTURESAND THE AMOUNT OF EACH
CATEGORY

STATUTORY DECLARATION :-
 A COPY OF STATUTORY DECLARATION
SHOULD BE ENCLOSED STATING TO THAT ALL
THE FORMALITIES HAVE DULY COMPILED
WITH AS PER THE PROVISIONS OF
COMPANIES ACT.
 IT SHOULD BE SIGNED BY AN ADVOCATE OF
HIGH COURT OR THE SUPREME COURT OR A
CHARTED ACCOUNTANT OR A DIRECTOR OR A
SECRETARY OR MANAGER .

RECEIPT OF REGISTRATION FEE :-
 IT IS NECESSARY TO ATTACH THE RECIPT OF
THE REGISTRATION WHICH IS PAID TO
REGISTRAR OFFICE OF WHICH IT IS
CALCULATED BASIS ON THE AUTHORISED
CAPITAL OF THE COMPANY

ISSUE OF CERTIFICATE OF
INCORPORATION

ISSUE OF CERTIFICATE
 AFTER THE RECEIPT OF THE ALL THE
DOCUMENTS , THE REGISTRAR WILL
SCRUTANISE THE DOCUMENTS .
 AFTER EVERYTHING IS SATISFIED , THE
REGISTRAR WIL ISSUE THE CERTIFICATE OF
INCORPORATION
 WITH THIS CERTIFICATE, THE COMPANY GETS
ITS RECOGNITION AS A BODY OF CORPORATE.

A PRIVATE COMPANY CAN START
ITS OPERATIONS IMMEDIATELY
AFTER OBTAINING THE
CERTIFICATE OF INCORPORATION

4.COMENCEMENT OF BUSINESS
 A certificate of incorporation is one which certifies
that the company is incorporated. It is issued by the
registrar of companies. It contains :-
1. Name of company.
2. Date of its issue.
3. Signature of registrar with seal.

Formation of a company

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