Meaning of Company Formation:
Since a Company is a legal entity therefore its formation requires various legal formalities and processes, which needs to complete. To fully understand, how the company is formed we will divide into 4 processes.
For a public company and private company, the stages for formation of a company differ. A Private Company can starts with its operations as soon as it obtains the certificate of incorporation as in case of public company the shares are not issued to public for raising the money. But in the case of public company, it has to undertake all four stages before it can begin with its operations.
Formation of a Company – Promotion:
Promotion is the first step in the formation of a company. It involves conceiving a business opportunity and taking concrete steps so that it can lead to birth of the company. A person or group of persons who has business ideas and undertake the required steps are called promoters. Apart from having a business idea, a promoter is also responsible for filling in of required documents and undertaking other formalities as required by the statute.
Functions of a Promoter:
- Identification of business opportunity
- Feasibility studies: A promoter undertakes 3 kinds of feasibility tests to see if it is profitable to undertake the present business idea.
1. Technical feasibility
2. Financial feasibility
3. Economic feasibility - Getting the Name Approved
- Fixing up Signatories to Memorandum of Association
- Appointment of Professionals
- Preparing Necessary Documents
1. Memorandum of Association
2. Articles of Association
3. Consent of Proposed Directors
4. Agreement
5. Statutory Declaration
6. Payment of Fee
Incorporation of Company:
After the completion of above formalities, promoters file an application to the Registrar of Companies of a state within which they plan to establish registered office of the company. It is accompanied by aforesaid documents.
When the Registrar is satisfied with the applications and documents, a Certificate of Incorporation is issued to the company, which in layman’s term means that a company is born.
Effect of the Certificate of Incorporation:
The certificate of incorporation is the proof of the existence of a company. Even if a company gets registered with illegal object, the birth of the company cannot be questioned. With the issue of this certificate the company has become a legal business entity.
A Private Company can commence with its business upon the Issue of Certificate of Incorporation.
Formation of a Company – Subscription of Capital:
A public Company can issue shares and debentures to the general business to raise money. But a company needs to follow the following steps to do the same:
- SEBI Approval: A company must make adequate disclosure of all the relevant information to the public.
- Filling of Prospectus: A copy of the prospectus or statement in lieu of Prospectus is filed with the Registrar of Companies. It is an invitation to the public to buy securities of a Company.
- Appointment of bankers, brokers and underwriters: Since raising of funds is a mammoth task, therefore bankers are appointed to undertake take the same.
- Minimum Subscription: the company must receive a minimum subscription of 90% of issue size before it can go ahead with the allotment of shares.
- Application to Stock Exchange: An application is made to at least 1 stock exchange for permission to deal in its shares or debentures.
- Allotment of Shares: Allotment letters are issued to the successful allottees.
Commencement of Business:
A public company raising money from the public has to apply to Registrar for the certificate of Commencement of Business. Along with that it needs to submit the following documents:
- A declaration about meeting minimum subscription requirement.
- A declaration about details in respect of allotment to directors.
- A declaration about no money being payable to applicants
- A Statutory declaration
Chapter 1 – Accounting for Share Capital