COMPANY FORMATION

COMPANY FORMATION

In the formation of a public limited company having share capital, mainly four stages are involved namely:
1. Promotion
2. Incorporation
3. Capital Subscriptions, and
4. Commencement of business or trading certificate.

In the case of the formation of a private company, only the first two stages are involved, because, a private company can commence its business immediately after securing the certificate of incorporation from the Registrar of companies. But in the case of formation of a public company, having share capital, there is need for the promoters to secure from the Registrar, the certificate to commence business in addition to the certificate o~ incorporation.

1. Promotion of Company
The person or persons who undertake responsibility of bring the company into existence are called' Promoters. In other words, the work of promotion is done by a person called "Promoter" or group of persons called "Promoters". Promotion involves discovery of specific business opportunity and subsequent organisation of the factors of production. According to Haney, promotion may be defined as the process of organizing and planning the finances of a business enterprise under the corporate form in other words, the steps which are taken to persuade a number of persons to come together for the achievement of a common objective through the company form of organisation is called promotion. Promotion may be undertaken either for starting a new business or for expanding the existing concern or for forming a holding company for a merger.

Steps in Company Promotion:

The work of promotion of a company involves four stages namely;
a) Discovery of an idea and Preliminary investigation
b) Detailed investigation
c) Assembling and
d) Financing the promotion

a) Discovery of an Idea: The promoter starts out with an idea to start some business either in a new field which has not been commercially exploited or in some existing lines of manufacture or business. He makes a preliminary investigation to find out whether it is worthwhile to make a detailed investigation. He makes a rough estimate of probable revenues and expenditure.
b) Detailed Investigation: The promoter need to make a detailed investigation of his idea with the assistance of many experts like engineer, chemist, market analyst, financial expert, management consultant, etc,. On the basis of the reports of these experts, the promoters would be in a position to know the capital requirements, place of location, size of the unit, demand condition in the market, price of product, cost of production, probable return on capital, etc,. A detailed investigation will help the promoter to decide...whether the estimated income will be adequate to take care of the estimated cost of production and compension to the owner for risks and services.
c) Assembling: After a detailed investigation, if the promoter is satisfied with the practicability and profitability of the proposed concern, he starts assembling the proposition. ‘Assembling’ means getting the support and consent of some other persons to act as directors or founders, arranging for patents, a suitable site for the company! .machinery and equipment and making contracts for filling the positions.
d) Financing the Proposition: After assembling, the proposition, the promoter prepares a 'prospectus' to present to the public and to under writers to persuade them to, finance the 'proposition'. A prospectus contains complete details of the proposition and also the reports of various experts who have investigated the proposition. The promoter also takes steps to incorporate the company, and to secure the certificate to commence the business. For incorporating the company and also for obtaining the certificate to commence business, -the promoter has to full fill many legal formalities.

2. Incorporation

After taking all the preliminary steps for registration, an application along with the necessary documents, stamp duty, registration and filing fees, has to be made to Registrar for the issue of the 'certificate of incorporation. The Registrar will scrutinize the documents and if satisfied will enter the name of the company in the register .and will issue the company its birth certificate called the Certificate of Incorporation.

Steps and Formalities for Incorporation of a Company

Promoters have to take certain steps for getting the certificate of incorporation from the Registrar of Companies, on hearing from the Registrar about the availability of names for the proposed company; they have to prepare the following documents and file them with Registrar of Companies' of the state in which the registered office of company is to be situated.

A. The Memorandum of Association to which at least seven persons have subscribed, their names and each one of them has taken at least one share. In the case of a private company, then number of persons required to subscribe their names is only two.
B. The Articles of Association similarly signed except where Table' A' attached to the Companies Act 1956, has been adopted as the Company's Articles.
C. The Address of the registered office of the company.
This is to be delivered in any case within 30 days of incorporation.
D. A, list of directors with their names, addresses and occupations. The return containing the particulars of the directors should be filed within 30 days of their appointment.
E. Consent in writing of the directors to act as directors.
F. An Undertaking by the directors to take and pay for qualification shares, if any,
G. The statutory declaration by an advocate or an attorney or a chartered accountant practicing of India, who is engaged in the formation of an company or by a person named in the articles as a director manager, or secretary of the company.

At the time of filing these documents with the Registrar of Companies, necessary stamp duty, registration fees and filing fees 'are to be paid. The Registrar will examine these documents and if he is satisfied with the documents, he will enter the name of the company in the Registrar and will issue to the company its birth certificate called the "Certificate of Incorporation".

3. Capital Subscription

A private company and a public company not having any share capital can commence business immediately after obtaining the Certificate of Incorporation, but a public company having a share capital can commence business only after obtaining another certificate called the 'Certificate of Commence Business' from the Registrar of companies. Hence, a public company having a share capital has to undergo two additional stages, namely

1. The subscription stage and
2. Commencement of business stage.

In the capital subscription stage, the company has to make arrangements for obtaining the necessary capital of the company. For this purpose, immediately after getting the certificate of incorporation, the company convenes a board meeting to deal with the following business:

1. Appointment or confirmation of the appointment of the secretary if one has already been appointed by the promoters at the promotion stage.
2. Adoption of preliminary contracts.
3. Appointment of bankers, solicitors, legal advisors, brokers, auditors, etc.,
4. Adoption of draft prospectus or statement in lieu of prospectus.
5. Listing shares on the stock exchange.
6. Adoption of underwriting contracts.

Adoption of Preliminary Contracts

Before registering the company, the promoters enter into several contracts on behalf of the proposed company such as contract for the purchasing of properties and assets, or contract for purchasing existing business, if any. As these contracts were entered into by the promoters, when the company was not in existence, they become valid only when they are ratified by the company. Hence, these contracts are ratified in the first board meeting of the company.

Appointment of Bankers

According to the Companies Act, all money received by the company with the application for shares must be deposited in a scheduled bank. Hence, before issuing prospectus, the Board of Directors appoint bankers by passing a resolution to that effect. For opening an account with the bank, the secretary has to make an application to the bank along with a copy of the memorandum of association, certificate of incorporation, a certified copy of the board resolution authorizing the opening of a bank account and specimen signatures of the persons who operate the account.

4. Commencement of Business

A public company cannot commence business without obtaining from the Registrar a certificate called 'certificate to commence business'. To obtain this certificate the following conditions must be fulfilled:

1. .A prospectus or a 'statement ill lieu of prospectus' has to be filed with the Registrar of companies. A statement in lieu of prospectus has to be prepared by those companies, which do not find it necessary to issue a prospectus for the issue of their shares. The statement must include all the information which a prospectus must contain under the law; that is:
2. The number of shares allotted is not less than the minimum subscription mentioned in the prospectus (or a statement in lieu of prospectus).
3. The directors have taken up and paid for their qualification shares. The amount paid on a share by them is not less than the amount paid by other members.
4. The declaration that no money is liable to become refundable to applicants for shares for reason .of failure on the part of the company to apply for, or to obtain permission for, the shares or debentures dealt !n any recognized stock exchange.
5. A declaration by one of the directors or the secretary, or secretary in whole time to the effect that all the conditions regarding the commencement of business have been complied with.
6. An application must be made by the company to the register of companies requesting him to agent the Business Commencement Certificate

Minimum Subscription

The minimum subscription is the minimum amount, which in the opinion of the directors or signatories to the memorandum, is required to commence business. In the case of a public company the registrar will issue the certificate to commence business only when the amount raised by allotting shares, is not less than the amount equivalent to the minimum subscription mentioned in the prospectus.

The amount fixed, as 'minimum subscription' must be sufficient to provide for:
(a) Purchase price of any property bought or to be bought;
(b) Preliminary expenses and commission payable by the company;
(c) The repayment of sums borrowed to provide for the foregoing;
(d) Working capital; and
(e) Any other expenditure.

Certificate of Commence of the Business

The Registrar after receiving the declaration of compliance with the provisions of Section 149 from the secretary or one of the directors along with the required filing fees, will scrutinize the declaration and, if satisfied, will issue a certificate to commence business. From the date of the issue of this certificate, the company is entitled to commence business and also empowered 'to exercise its borrowing powers.
Further the company should get this certificate within one year of its incorporation. All ccntracts entered into between the date of incorporation and the date of commencement of business are provisional and would become binding on the company automatically only after it is entitled to commence business.

Duties of the Secretary before and after incorporation

Duties before incorporation

Before incorporation, the secretary has to assist the promoters in performing preparatory work and in fulfilling many legal formalities. He has to assist the promoters in convening and conducting meetings, .drawing up preliminary contracts and documents required for registration. At this stage, he may also take the help of specialists such as a solicitor and a chartered accountant. The duties to be performed by the secretary before incorporation are as follows:

1. To help the promoter in making a detailed, investigation of the proposed venture.
2. If necessary, on the advice of the promoters to secure the opinion of the experts in different fields on the proposed venture.
3. To help the promoters in drawing up the financial plan for the proposed venture.
4. To attend to all preliminary meetings of the promoters, keep a record of proceeding of their meetings and to help in the discussion
5. To secure the approval of the Registrar for the proposed name of the venture.
6. To help the promoters in the preparation of preliminary contracts
7. To help the promoters in the drafting and finalizing of documents such as memorandum, articles of association etc,.
8. To follow the guidelines issued by SEBI
9. To see that all requirements of the Acts as to incorporation and registration are complied with and that documents such as memorandum, articles, etc., with the required stamp duty, filing fees and registration charges are duly filed with the Registrar.
10. To collect the certificate of incorporation from the Registrar.
11. To send a notice of the registered address of the company to the Registrar within 30 days of the date of registration.

Duties of the Secretary after Incorporation:

1. To make himself thoroughly conversant with the contents of the memorandum and articles of association.
2. To prepare the draft of prospectus or statement in lieu of prospectus.
3. To call the first board meeting and get the draft prospectus, preliminary contract etc,. approved by the board.
4. To see that his own appointment is made and confirmed at the first board meeting
5. To get the necessary resolution passed for the appointment of bankers, legal advisers and other responsible officers of the company.
6. To arrange for the listing of securities of the company
7. To arrange for the opening of a bank account as per the directors of the board.
8. To secure the necessary forms and stationery and to arrange for the preparation of the common seal of the company.
9. To see that the prospectus or statement in lieu of prospectus is filed with the Registrar and to arrange for the issue of the prospectus to the public.
10. To arrange with the bankers to receive the application money from the intending investors
11. To arrange a board meeting as soon as the minimum subscription is reached and to get the necessary resolution passed for allotment of shares.
12. To arrange for the refund of application money to those who have not been allotted shares.
13. To issue letters of allotment/regret to applicants as per the decision of the board.
14. To see that all the legal requirements for commencement of business are complied with.
15. To see that a declaration is filed with the Registrar by one of the directors or the secretary himself, stating that the conditions required to be fulfilled for getting the certificate of commencement of business have been complied with
16. To collect the certificate of commencement from Registrar.