Unit – 7: FORMATION OF A COMPANY

Formation of a company is a very time consuming, lengthy

and complex process. It involves a lot of formalities and legal
procedures. It consists of 4 stages. They are:
1. Promotion
2. Incorporation
3. Subscription of capital and
4. Commencement of business
PROMOTION OF A COMPANY:

The first stage in the formation of a company is known as

Promotion. It involves discovering a business opportunity and
taking appropriate steps to form a company. Any person or a
group of persons who creates or discovers a business
opportunity and proceeds to form a company is known as
promoter.

Functions of a promoter:
1. Identification of business opportunity:
The primary function of a promoter is to identify a business
opportunity. This opportunity may be in the form of
producing a new product or service or providing a product
through different channel or any other investment having
potential opportunity.
2. Feasibility services:

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 In order to test the profitability or feasibility of a business,
which a promoter intends to start, the promoter undertakes
various feasibility studies like technical, economic and
financial feasibility with the help of specialists like
chartered accountants, engineering etc.
a) Technical feasibility:
Sometimes a business idea is good but it is not possible
to execute it because the raw material or the technology
required for its execution is not easily available.
b) Financial feasibility:
This study involves determining the funds requirements
for an identified business opportunity. The project is
given up if the funds required by it are very large and / or
cannot be easily arranged for within the available means.
c) Economic feasibility:
Sometimes the project is given up when it is considered
to be less profitable although it is technically viable and
financially feasible.
3. Name approval:
After taking a decision to launch a company, the promoter
selects a name for the company. An application is
submitted for the approval of the name to the registrar of
companies of the state in which the registered office of the
company is to be situated. The proposed name is approved
if it is not misleading, is not identical or closely resembling
the name of an existing company.
4. Fixing up signatories to the Memorandum of
Association:

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 This step involves deciding about the members of the first
directors of the company who will be signing on the
Memorandum of Association.
5. Appointment of professionals:
Promoters appoint certain professionals like bankers,
auditor etc. to help them in preparing the necessary
documents.
6. Preparation of necessary documents:
The various legal documents like MOA, AOA, etc. are
prepared and submitted by the promoter to the Registrar of
the companies for getting the company registered.

INCORPORATION:
This is the second stage in the formation of the company.
Promoters file an application with the Registrar of the
companies of state wherein the company‟s registered office is to
be established. Following documents are to be attached;
i) Memorandum of Association duly stamped and signed
by the members.
ii) The Article of Association duly stamped and signed by
same people who are signatories for MOA.
iii) Written consent of proposed director.
iv) The agreement if any entered into by the company and
the individuals proposed to be the managing director.
v) A copy of the Registrar‟s letter regarding the approval of
the name of the company.
vi) A statutory declaration.
vii) Along with these documents, a notice about the exact
address of the registered office is also submitted.
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 In case the company fails to submit it at the time of
incorporation, the same is to be submitted within 30 days
after receiving the certificate of incorporation.
viii) Documentary evidence for payment of Registration fees.
When the registrar is satisfied with all the formalities for
registration, he issues a certificate of incorporation to the
company. This certificate is known as the birth certificate of
the company.

CAPITAL SUBSCRIPTION:
In order to issue shares and debentures for raising funds from
the public, a public company has to issue prospectus. A
prospectus can be defined as an invitation to the public to
subscribe to the capital of the company or to make deposits in
the company.
Following are the main steps involved in raising funds from
the public.
1. SEBI approval
2. Filing of prospectus
3. Appointment of bankers, brokers, underwriters.
4. Minimum subscription.
5. Application to stock exchange
6. Allotment of shares

COMMENCEMENT OF BUSINESS

After obtaining the minimum amount of subscription

through the issue of shares, a public company applies to the
registrar of companies for the issue of certificate for
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commencement of business. The company is required to submit
the documents When the Registrar is satisfied with the
formalities he issues „certificate for commencement of
business‟. After obtaining this certificate, the formation of a
public company is complete and the company can legally start
its business.

1) State the various stages of formation of a company?

i) Promotion of a company
ii) Incorporation
iii) Capital subscription
iv) Commencement of business.

2) What is promotion of a company?

Ans) The first stage in the formation of a company is known as Promotion. It
involves discovering a business opportunity and taking appropriate steps to
form of a company.

3) Who is Promoter?
Any person or a group of persons who creates or discovers a business
opportunity and proceeds to form a company is known as promoter.

4) State different feasibility studies?

i) Technical feasibility
ii) Economic feasibility
iii) Financial feasibility

5) When is a business idea said to be technically feasibility?

When the raw material or the technology required for its execution is easily
available.

6) When is business idea said to be financially feasibility?

When the funds required for it can be easily arranged for within the available
means.

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7) DLF Ltd. intends to start the business of construction of Malls. It requires
large funds which it cannot arrange for. Is the idea feasible?
No, it lacks financial feasibility.

8) When is a business idea said to be economically feasible?

When its chances of earning profits are high.

9) Who are the first directors of the company?

The members signing MOA of the proposed company.

10) Who decides about the members signing the MOA of the proposed
company?
Promoter.

11) What is Memorandum of Association?

Ans) It is the most important document of the company and defines the
objectives of the company. Any activity which is not mentioned in the MOA
cannot be legally undertaken by the company.

12) What is AOA?

Ans) AOA describes the rules and regulation regarding internal management
of the company.

13) Who issues incorporation certificate, commencement of business

certificate?
Ans) Registrar.

14) 1) Adlakha Pvt. Ltd., the famous group of promoters submitted an

application to the registrar of companies for the approval of the name for
mobile manufacturing company. They selected “Nokia Ltd.” As the name of
the company so as to increase the sales because Nokia was a well-known
brand.
i) Who selects the name for the company?
Promoters.
ii) Would the proposed name be accepted by registrar of companies?
Give reasons?

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 No, the selected name of the company is the name of an already
existing well known company. The proposed name should not be
identical with or too closely resembling the name of an existing
company.
15) A group of 10 persons appointed Shrivastava Ltd. as the promoters to form
their company. Shrivastava Ltd. purchased land on behalf of the company. But it
did not disclose the material fact that the land was agricultural land. Later on, the
company was not allowed to carry on its business operations by the government.

i) What is the mistake of Promoters?

Non-disclosure of material information to the company.

ii) What can the company do now?

Ans) The Company claim damages for the losses from promoters.

iii) Why did government disallow the company?

Ans) because agricultural land is not meant to be used for business activity.

IV) Identify and explain the values which according to you have been violated by
the promoter company in hiding material facts.
Ans) A) Respect for Law: Promoter has not shown respect for law by purchasing
agriculture land for commercial purposes.

B) Honesty and Integrity: Promoters have not shown honesty and integrity by
hiding the crucial information from the owners of the new company.
16) Jai and Veer wanted to form a company. Jai said that one document is really
important because it is life giving and principal document which defines the
objectives of the company. Veer said that another document which lays down rules
and regulations regarding the internal management of the company and the way it
works is also important.
Q) Identify and explain the documents that Jai and Veer talking about by quoting
lines.
A) Memorandum of Association: Jai said that one document is really important
because it is a life giving and principal document which defines the objectives of
the company.

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B) Articles of Association: Veer said that another document which lays down
rules and regulations regarding the internal management of the company and the
way it works is also important.
17) Explain the functions of Promoters.