Chapter Three

Chapter Three: THE FORMATION OF COMPANY
 ESSENTIAL STEPS OF FORMATION A COMPANY

Before a company can be formed the following steps must be taken:
1. The Memo and the Articles must be prepared.
2. If it is proposed to have a paid up capital or more than taka 3 crores.
3. A licensed must be obtained under the Companies Act.
4. The company must be registered in accordance with the provision of the Companies Act.
5. The Prospectus or the Statement in lieu of Prospectus must be issued and registered with
the Registrar.
6. The minimum subscription must be raised and thereafter the allotment of shares must be
made.
7. The Certificate of the Commencement of business must be obtained from the Registrar.
 WHO IS PROMOTER?
A promoter is the person who initially plan the formation of a company and bring it into
existence.
According to Palmer:
 THE DUTIES AND LIABILITIES OF PROMOTERS

The duties and liabilities of promoter are discussed in the following:
1. A promoter cannot be described as an agent of the Company.
2. A company cannot ratify a contract made by a promoter before the incorporation of the
company because the ratifier was then not in existence.
3. A promoter cannot be a trustee of the company.
4. A promoter cannot make secret profits, If any secret profits or undisclosed financial benefits
is made by the promoter, the company can recover it from him.
5. The promoter is not prohibited from making profits. He can do so, provided his discloses all
the facts to the Board of Directors of the proposed company.
6. A promoter must see that the documents contains the particulars which according to the
Companies Act and must see that the documents do not contain any untrue statement.
7. For Failure to perform these duties, the promoter is liable to pay compensation and may be
prosecuted in the criminal court according to the provisions of the Companies Act.
 DEFINITION OF PROSPECTUS
A prospectus is a formal legal document, which is required by and filed with the Securities and
Exchange Commission that provides details about an investment offering for sale to the public.
(Prospectus – Investopedia - http://www.investopedia.com/terms/p/prospectus.asp)
 CHARACTERSITICS OF PROSPECTUS
The essential characteristics of the prospectus are the following:
1. It is a document described or issued as a prospectus.
2. It includes any notice, circular, advertisement inviting deposits from the public or other
document.
3. It is an invitation to the members of the public.
4. The public is invited to subscribe the shares or debenture of the company.
5. Prospectus is the document through which the company secures the capital needed for
carrying on its business.
 THE LEGAL REQUIREMENTS OF PROSPECTUS

The legal requirement of prospectus are mentioned below:
1. Time: A prospectus is to be issued after the incorporation of the company.
2. Particulars: The prospectus must contain all the particulars listed in the Companies Act.
3. Date: The prospectus must be dated and this date will considered to be date of the
publication.
4. Signature: The prospectus must be signed by every person mentioned therein as director or
proposed director or his agent.
5. Copy of Prospectus: Every application form for shares, issued by the company, must be
accompanied by a copy of the prospectus.
6. Statement by Expert: A statement relating to the company by an expert can be included in
the prospectus only if the expert concerned is not engaged or interested in the formation,
promotion or the management of the company.
7. Deposits: The Central Government may in consultation with the Reserve Bank prescribe the
limits, the manner and the conditions subject to which deposit may be invited or accepted
by a company either from the public or the member.
8. Registration: Before a prospectus is issued, it must be registered with the Registrar of
Companies.
9. Terms of Contracts: The terms of contracts mentioned in the prospectus cannot be varied
after registration of the prospectus except with the approval of the members in a general
meeting.
10. Prospectus by a Foreign Company: A prospectus issued by a foreign company with a view to
selling share must include certain additional particulars.

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Chapter Three

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Chapter Three: THE FORMATION OF COMPANY

 ESSENTIAL STEPS OF FORMATION A COMPANY

 THE DUTIES AND LIABILITIES OF PROMOTERS

 THE LEGAL REQUIREMENTS OF PROSPECTUS

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