Formation of a Company


The formation of a corporation may be a lengthy process. For convenience the entire process of company formation could also be divided into the subsequent four stages: 

1. Promotion Stage 
2. Incorporation or Registration Stage 
3. Capital Subscription Stage 
4. Commencement of Business Stage.

* 1. Promotion Stage:

Promotion is that the first stage within the formation of a corporation . The term ‘Promotion’ refers to the mixture of activities designed to bring into being an enterprise to work a business. It presupposes the technical processing of a billboard proposition with regard to its potential profitability. The meaning of promotion and therefore the steps to be taken in promoting a business are discussed in short here.

Promotion of a corporation refers to the sum of the activities of all those that participate within the building of the enterprise upto the organisation of the corporate and completion of the decide to exploit the thought . It begins with the intense consideration given to the ideas on which the business is to be based.

According to Guthmann and Dougall, “Promotion starts with the conception of the thought from which the business is to evolve and continues right down to the purpose at which the business is full, able to begin operations during a going concern.”

*2. Incorporation or Registration Stage:

Incorporation or registration is that the second stage within the formation of a corporation . it's the registration that brings a corporation into existence. a corporation is correctly constituted only it's duly registered under the Act and a Certificate of Incorporation has been obtained from the Registrar of Companies.

Procedure to urge a corporation Registered:

In order to urge a corporation registered or incorporated, the subsequent procedure is to be adopted:

(A) Preliminary Activities:

Before a corporation is incorporated, the promoter has got to take decision regarding the following:

1. to make a decision the name of the corporate 

2. Licence under IDR Act (Industries Development and Regulation Act) 1951,

(B) Filing of Document with the Registrar:

1. Memorandum of Association

2. Articles of Association

3. List of directors

4. Written consent of directors

5. Statutory declaration

Certificate of Incorporation:

On the registration of memorandum and other documents, the Registrar will issue a certificate referred to as the Certificate of Incorporation certifying under his hand that the corporate is incorporated and, within the case of a Ltd. that the corporate is restricted .

The specimen of certificate of incorporation is given below:

Certificate of Incorporation

Effects of Incorporation:

The certificate of incorporation is conclusive evidence of the very fact that:

(i) the corporate is correctly incorporated and duly registered;

(ii) The terms of the Memorandum and Articles are within the law;

(iii) All requirements of the Act in respect of registration are complied with;

(iv) a personal company can start its business after getting the certificate of incorporation; and

(v) With the difficulty of certificate, the corporate takes birth with a separate legal entity.

*3. Capital Subscription Stage:

A private Limited company or public Limited company not having share capital commence business immediately incorporation. intrinsically ‘capital subscription stage’ and ‘commencement of business stage’ are relevant only within the case of a public company having a share capital. Such a corporation has got to undergo these additional two stages before it can commence business.

Under the capital subscription stage comes the task of obtaining the required capital for the corporate .

For this purpose, soon after the incorporation, a gathering of the Board of Directors is convened to affect the subsequent business:

1. Appointment of the Secretary.

2. Appointment of bankers, auditors, solicitors and brokers etc.

3. Adoption of draft ‘prospectus’ or ‘statement in lieu of prospectus’.

4. Adoption of underwriting contract, if any.

Besides the above mentioned business, the Board also decides on whether:

(i) A public Limited Company offer for capital subscription is to be made, and

(ii) Listing of shares at a stock market is to be secured.

The company will now proceed to get the permission of the Controller of Capital Issue, New Delhi, under the Capital Issue Control Act, 1947 if a public offer purchasable of shares and debentures exceeding Rs. one crore is to be made during a period of 12 months, unless the difficulty fulfils the conditions of exemption as laid down within the Capital Issue (Exemption) Order, 1969.

The Capital Issue Control Act, 1947 however, doesn't apply to a personal company, a depository financial institution , an insurance firm , and a government company provided it doesn't make a problem of securities to the overall public.

After the above formalities are completed, the administrators of the corporate file a replica of the ‘prospectus’ with the Registrar and invite public to subscribe the shares of the corporate by putting the ‘prospectus’ in circulation.

Application for shares are received from the general public through the company’s bankers and if the subscribed capital is a minimum of adequate to the minimum subscription amount as disclosed within the prospectus, and other conditions of a legitimate allotment are fulfilled, the administrators of the corporate pass a proper resolution of allotment.

If the subscribed capital is a smaller amount than the minimum subscription or the corporate couldn't obtain the minimum subscription within 120 days of the difficulty of prospectus, all money are going to be refunded and no allotment are often made.

It may be noted that a public company having a share capital, but not issuing a ‘prospectus’ has got to file with the Registrar ‘a Statement in lieu of Prospectus’ a minimum of three days before the administrators proceed to pass the primary allotment resolution.

*4. Commencement of Business Stage:
After getting the certificate of incorporation, a personal company can start its business. A public company can start its business only after getting a’ certificate of commencement of business’.

After getting the certificate of incorporation:

(i) A public company issues a prospectus of inviting the general public to subscribe its share capital,

(ii) A minimum subscription is fixed, and

(iii) the corporate is required to sell a minimum number of shares mentioned within the prospectus.

After making the sale of the specified number of shares a certificate is shipped to the Registrar stating this fact, along-with a letter from the banks, that it's received application money for such shares.

The Registrar scrutinizes the documents. If he's satisfied, then issues a certificate referred to as Certificate of Commencement of Business. this is often the conclusive evidence of the commencement of the business.

The specimen of certificate of commencement of business is given below:

Certificate of Commencement of Business

Restrictions on the Commencement of Business:
Section 149 of the businesses Act, 1956 has imposed some restrictions on the commencement of business by public companies, which are as follows:

1. Companies which issue a prospectus:

A company having share capital issues prospectus to the overall public for subscription of their shares or debentures.

But this company cannot commence business or exercise borrowing powers unless the subsequent formalities are complied with [Sec. 149 (1)]:

(i) the administrators have haunted and purchased the qualification shares in cash an amount adequate to the quantity payable by other subscribers on application and allotment.

(ii) No money is susceptible to become refundable to applicants, due to company’s failure to use for, or to urge permission for the share or debentures to be dealt in on any recognised stock market .

(iii) A statutory declaration duly verified by anybody of the corporate should be filed with the Registrar stating that each one conditions given above in (i), (ii) and (iii) are complied with.

2. Companies which don't issue a prospectus:

A company which has not issued a prospectus must file the subsequent documents with the Registrar or in other words, cannot commence the business unless the subsequent formalities are complied with [Sec. 149 (2)].

(i) a press release in lieu of prospectus has been filed with the Registrar.

(ii) the administrators have haunted and purchased the qualification shares in cash an amount adequate to the quantity payable by other subscribers on application and allotment.

(iii) A statutory declaration duly verified by anybody of the administrators or secretary of the corporate that the administrators have haunted and purchased the qualification shares in cash an amount adequate to the quantity payable by other subscribers on application and allotment.

If the above requirements are complied with, the Registrar issues a certificate that the corporate is entitled to commence business. This certificate of commencement of business, just like the certificate of incorporation, may be a conclusive evidence that the corporate is so entitled [Sec. 149 (3)].

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