Comprehensive Study Notes on Company Formation and Incorporation

Introduction to Company Formation

  • The promotion and establishment of every business enterprise requires adherence to a structured, legal, and procedural process.
  • Before a company can formally exist as a recognized legal entity, numerous statutory requirements and administrative formalities must be completed.
  • Company formation begins with the conception of a business opportunity and the initiative taken by individuals or entities to transform that concept into a practical operational structure.

Stages for Formation of a Company

The formation and legal incorporation of a company consists of four distinct and sequential stages:

  • Promotion
  • Incorporation / Registration
  • Capital Subscription (Raising of Capital)
  • Commencement of Business

Stage 1: Promotion of a Company

  • Concept and Definition: Promotion is the foundational stage where all necessary preliminary steps are taken to bring a business idea into practice. It comprises identifying business opportunities, evaluating technical and financial feasibility, assembling required operational inputs, planning organizational details, and securing initial financing for the proposed venture.
  • Definition of a Promoter:
    • Under Section 2(69)2(69) of the Companies Act, 20132013, a promoter is formally defined as a person:
    • Who has been named as such in a prospectus or is identified by the company in the annual return.
    • Who exercises direct or indirect control over the affairs of the company, whether as a shareholder, director, or otherwise.
    • In accordance with whose advice, directions, or instructions the Board of Directors of the company is accustomed to act.
    • In general commercial terms, a promoter initiates the setting up of a company and controls its working during the formation phase. A promoter may be an individual, a partnership firm, or a body corporate.
  • Functions of a Promoter (Steps in Promotion):
    • Conceiving the Idea: Conceptualizes the business idea for establishing an enterprise.
    • Preliminary Investigation: Conducts detailed studies regarding market prospects, operational costs, financial viability, and technical feasibility.
    • Assembling Associates: Brings together co-promoters or associates willing to share business responsibilities and obligations.
    • Preparing Documentation: Prepares statutory documents required for legal registration.
    • Securing Initial Capital: Arranges initial seed capital and financial resources to render the company operational.
  • Kinds of Promoters:
    • Professional Promoters: Individuals or corporate entities specializing professionally in company promotion. They handle the complete formation process and transfer control to shareholders once the enterprise is functional.
    • Professional promoters are relatively scarce in India, but play major roles in other international financial markets:
      • England: Issue Houses
      • U.S.A.: Investment Banks
      • Germany: Joint Stock Banks
    • Occasional Promoters: Individuals who take an interest in floating a specific company on an ad-hoc basis but do not engage in promotion as a regular occupation. Once the company is incorporated, they return to their primary professions (e.g., engineers, lawyers, or management consultants).

Stage 2: Incorporation / Registration of a Company

Incorporation gives a company legal status. Promoters must complete the following six sequential steps to incorporate an enterprise:

  • 1. Approval of Name:

    • Promoters must submit proposed company names to the Registrar of Companies (ROC) of the state where the registered office will be situated.
    • The Registrar typically evaluates and approves the name within 7 days7\text{ days} of receiving the application.
    • The approved name remains valid for 3 months3\text{ months} from the date of intimation by the Registrar, within which the company must be registered. If this window lapses, promoters must reapply for revalidation.

  • 2. Preparation of Memorandum of Association (MoA):

    • The Memorandum of Association serves as the fundamental constitution of the company, defining its primary objectives, scope of powers, and external relationships.
    • Signatory Requirements:
    • For a Public Limited Company: Signed by at least 7 persons7\text{ persons}.
    • For a Private Limited Company: Signed by at least 2 persons2\text{ persons}.
    • The document must be printed, formatted, and properly stamped as per relevant stamp duty statutes.

  • 3. Preparation of Articles of Association (AoA):

    • Contains the rules, internal bylaws, and regulations governing the internal management and administration of the company.
    • A public limited company is not obligated to draft custom Articles; it may adopt the standard model clauses set out in Table A, Schedule of the Companies Act.
    • A private limited company must submit its own custom Articles of Association, signed by all signatories to the Memorandum.

  • 4. Preparation of Other Mandatory Documents:

    • Power of Attorney: Promoters may execute a power of attorney in favor of one promoter, an advocate, or a professional to carry out registration formalities.
    • Consent of Directors: A formal list of individuals who have agreed to serve as the company's first directors, accompanied by their written consents.
    • Particulars of Directors: Personal and professional particulars of individuals named as directors in the Articles.
    • Affidavit by Subscribers and First Directors: Sworn affidavits from every subscriber and first director affirming that they have not been convicted of any offense relating to the promotion, formation, or management of any company.
    • Address for Communication & Registered Office Notice:
    • An initial address for communication must be supplied during registration.
    • The company must establish its official registered office within 15 days15\text{ days} of incorporation.
    • Verification of the registered office address must be submitted to the Registrar within 30 days30\text{ days} of incorporation.
    • Statutory Declaration:
    • A legal declaration certifying that all statutory requirements under the Act and associated rules regarding registration have been met.
    • Must be signed by an advocate, chartered accountant, cost accountant, or company secretary engaged in the formation, or by a person named in the Articles as a director, manager, or secretary.

  • 5. Payment of Fees:

    • Prescribed registration fees and filing fees for each document must be paid at the Registrar's office.
    • Fee amounts vary based on the Nominal Capital (for companies with share capital) or the total number of members (for companies without share capital).

  • 6. Issuance of Incorporation Certificate:

    • Upon verifying all submitted documents and fees, the Registrar enters the company's name into the Register of Companies and issues a Certificate of Incorporation.
    • The date specified on the certificate is the official legal date of incorporation.

  • Legal Effect of Certificate of Incorporation:

    • Transforms the company into an independent legal entity possessing perpetual succession.
    • The certificate serves as conclusive proof of legal existence.
    • Any irregularity or flaw discovered in the incorporation process later does not invalidate the certificate or alter the existence of the company.

  • Specimen Details of Certificate of Incorporation:

    • Issued by the Government of India, Ministry of Corporate Affairs, Registration of Companies, New Delhi.
    • Granted pursuant to Sub-section (2)(2) of Section 77 of the Companies Act, 20132013, and Rule 88 of the Companies (Incorporation) Rules, 2014$.\n * Specifies the company's Corporate Identity Number (CIN).\n * Signed and sealed by the Registrar of Companies, New Delhi.\n\n# Stage 3: Capital Subscription or Raising of Capital\n\nPublic or private companies possessing share capital cannot commence business operations until minimum capital subscription requirements are met. Companies without share capital skip this stage.\n\n* **Steps Required to Raise Capital from the Public**:\n * **1. SEBI Approval**:\n * The Securities and Exchange Board of India (SEBI) regulates Indian capital markets.\n * Public companies must file comprehensive information in compliance with the 'Guidelines for Disclosure and Investor Protection 2000' and secure prior permission from SEBI before issuing securities.\n * **2. Filing of Prospectus**:\n * A prospectus is a formal invitation issued to the public to subscribe to shares or debentures.\n * A copy must be officially filed with the Registrar of Companies prior to publication.\n * **3. Appointment of Intermediaries**:\n * **Bankers**: Appointed to collect application money from subscribers into designated bank accounts.\n * **Brokers**: Appointed to solicit and encourage public subscriptions.\n * **Underwriters**: Appointed to guarantee subscription. If the public fails to subscribe to the total issue, underwriters purchase the unsold shares for an agreed commission.\n * **4. Minimum Subscription Requirement**:\n * Designed to prevent companies from launching business activities with insufficient funds.\n * As per SEBI regulations, a company must receive subscriptions equal to at least 90\%ofthetotalissuedamountwithinof the total issued amount within120\text{ days} from the prospectus issue date.\n * If the minimum subscription of 90\%isnotachievedwithinis not achieved within120\text{ days},thefullapplicationmoneymustberefundedtoapplicantswithinthenext, the full application money must be refunded to applicants within the next10\text{ days}.\n * **5. Application to Stock Exchange**:\n * A company must apply to at least one recognized stock exchange for permission to deal in its shares.\n * Exchange authorities evaluate the financial stability and structural details of the company before granting listing approval.\n * If permission is refused or not obtained within 10\text{ weeks}fromtheclosingdateofthesubscriptionlist,shareallotmentbecomesvoid,andallreceivedfundsmustberefundedwithinfrom the closing date of the subscription list, share allotment becomes void, and all received funds must be refunded within8\text{ days}.\n * **6. Allotment of Shares**:\n * Once stock exchange listing approval is granted, shares are formally allotted to applicants.\n * A list detailing the names, addresses, and allotted share counts of all shareholders is compiled.\n * A formal Return of Allotment must be filed with the Registrar of Companies.\n\n# Stage 4: Commencement of Business\n\n* **Companies Without Share Capital**: May commence business activities immediately upon obtaining the Certificate of Incorporation.\n* **Companies With Share Capital**: Both public and private companies with share capital are barred from commencing business operations or exercising borrowing powers until they obtain a Certificate of Commencement of Business under the Companies Act, 2013$.

  • Director's Declaration Requirement:

    • A director must file a formal statutory declaration with the Registrar confirming that:
    • Every subscriber to the Memorandum of Association has paid the full agreed value for their subscribed shares.
    • The paid-up share capital of the company on the declaration date is not less than:
      • INR 5,00,000\text{INR } 5,00,000 (5 lakh rupees5\text{ lakh rupees}) in the case of a Public Company.
      • INR 1,00,000\text{INR } 1,00,000 (1 lakh rupee1\text{ lakh rupee}) in the case of a Private Company.