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STEPS IN FORMATION OF COMPANY
In the formation of a public limited company having share capital, mainly four stages are involved, 1. Promotion 2. Incorporation 3. Capital subscription 4. Commencement of business In the case of formation of private company, only the first two stages are involved. 1. Promotion of company
he person or persons who underta!e responsibility to bring the company into e"istence are called promoters. he steps which are ta!en to persuade a number of persons to come together for the achievement of a common ob#ective through the company from of organi$ation are called promotion. %ccording to &uthman and 'oughall, (a promoter is a person who assembles the men, money and the materials into a going concern. Steps in company promotion: 1. Discoery of a ne! i"ea: he promoter starts out with an idea to start some business either in a new field which has not been commercially e"ploited or in some e"isting lines of manufacture or business. )e ma!es ma!es preliminary preliminary investigation to find find out whether it is worthwhile to ma!e ma!e a detailed investigation. #. Detai$e" inesti%ation: the promoter needs to ma!e a detailed investigation of his idea with the assistance of many e"perts. It will help him to !now whether the estimated income is ade*uate to cover the estimated costs and compensate the owner for the ris!s and services. &. Assem'$in%: after a detailed investigation, if the promoter is satisfied with the profitability of the proposed concern, he starts assembling. %ssembling %ssembling means arranging for patents, a suitable site for the company, machinery and e*uipment and ma!ing contracts for filling the positions. (. Financin% t)e proposition: %fter assembling assembling the proposition, the promoter prepares a prospectus to present present to public and to underwriters underwriters to persuade persuade them to finance the proposition.
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F*nctions of promoters A. promotion of t)e company: he most important function of the promoters is the promotion of the company. hey underta!e various processes of promotion. +. Incorporation of t)e company: Promoters also underta!e the function of getting the company registered. hey prepare necessary documents such as +..+ and %..% etc. and submit them to the registrar and get the company incorporated. c. Raisin% capita$: In the case of public company limited company having share capital promoters raise the re*uired capital and obtain business commencement certificate. D. N*rsin% t)e company: promoter also associated with the company and nurses the company -they wor! for the growth of the company. TYPES OF PROMOTERS A. Professiona$ Promoters: %re those persons who form the company as their profession when the company is incorporated, they either get the commission or a fi"ed amount for the formation of company. +. Occasiona$ Promoters: %re those persons who underta!e to form a company occasionally and ta!e forming of a company as their part time #ob. C. Entreprene*r promoters: hey are both promoters and entrepreneurs. hey conceive idea of a new business unit, do the groundwor! to establish it and subse*uently become part of the management. D. Finance promoter: /ome financial institutions, li!e investment ban!s or industrial ban!s, may ta!e up the promotion of a company with a view to find opportunities for investment. INCORPORATION
Promoters have to ta!e certain steps for getting the certificate of incorporation. 0or registration an application has to be filed with the register of the companies along with the following documents •
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he memorandum of association to which at least seven persons have subscribed, their names and each one of them has ta!en at least one share. in case of private companies at least 2 share he articles of association properly stamped and signed by the signatories. he address of the registered office of the company. this is to be delivered in any case within 3 days of incorporation
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% list of directors with their names, address and occupations. he return containing the
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particulars of the director should be filed within 3 days of their appointment. Consent in writing of the directors to act as directors. %n underta!ing by directors to ta!e and pay for *ualification shares, if any, this document is
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not re*uired in the formation of a private company. he statutory declaration by an advocate or attorney or a chartered accountant practicing in India.
%t the time of filing this documents with the register companies, they have to pay stamp duty, registration fees and filing fees. 5egister will e"amine these document after company will get 6birth certificate7. CAPITA, S-+SCRIPTION
In the capital subscription stage, the company has to ma!e arrangements for obtaining the necessary capital for the company. 0or this purpose, immediately after getting the certificate of incorporation, the company convenes a board meeting to deal with the following business 1. %ppointment or confirmation of the appointment of the secretary if one has already been appointed by the promoters at the promotion state. 2. %doption of preliminary contracts. 3. %ppointment of ban!ers, legal advisors, bro!ers, auditors, etc. 4. %doption of draft prospectus or 6statement in lieu of prospectuses. 8. 9isting shares on the stoc! e"change. :. %doption of underwriting contracts. COMMENCEMENT OF +-SINESS
he registrar after receiving the declaration of compliance from the secretary or one of the directors along with the re*uired filing fees. If registrar satisfied the declaration, he will issue (certificate of commencement of business;. 1. he company should get this certificate within one year of its incorporation. 2. if it is fails to secure it within this limit, the court order it to be wound up.
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MEMORAND-M OF ASSOCIATION
he memorandum of association is the most important document of the company. his is a document which sets out the constitution of a company and as such, its charter. It defines the company7s relations with the outside world, and the scope of its activities. Its purpose is to enable the shareholders, creditors as well as those who deal with the company to !now the company7s permitted range of enterprises. +eaning he purpose of the memorandum is to enable to the shareholder, creditors and those who deal with the company to !now that is its permitted range of enterprises. IMPORTANCE OF MEMORAND-M OF ASSOCIATION:
1. It is necessary document for the incorporation of the company. 2. It determines the #urisdiction of the company. 3. It states that ob#ectives and powers of the company for the information to the public. 4. It states the authori$ed capital of the company and its division into shares of fi"ed amount. 8. It troughs light on the liability of the members of the company. :. It governs the articles of association. <. It gives information about company name, address, head office and branch office. CONTENTS OF MEMORAND-M OF ASSOCIATION 1. Name c$a*se.
he clause contains name of the company. %.. undesirable name to be avoided. he name selected should not be similar or identical with that of any e"isting company =. he name of the company should end with ltd or >? ltd. C. Prohibition of use of certain names. hey should not use +ahatma &andhi and pm photos '. /pecial concession for which company is involved to promote art science, religion, culture and education they may use or may not use ltd or un ltd.
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@.nce Company is registered with the nameA the name of the company must be displayed outside of every office.9etter heads, notice, invoices, receipts, advertisements etc
#. Sit*ation c$a*se.
%. his clause states the state in which the registered office of the company7s to be situated. =. he name of the state and city located in registered office of the company. C. It determines even the nationality of the company, i.e., whether the company is and Indian company or foreign company. '. It avoids any unnecessary legal formalities and e"penses. @. It tells about authority powers limit and #urisdiction. &. O'ect c$a*se.
he ob#ect clause is the most important , it should be specify in unambiguous language the ob#ects for which the company is formed. %ccording to companies act 1B8: , the ob#ect clause contain %. main ob#ects of the company and ob#ects incidental or ancillary, to the attainment of these main ob#ects. (. ,ia'i$ity c$a*se.
his clause states that the liability of members is limited to the face value of shares held by them. If member already paid some amount on the shares he can be called upon to pay only the unpaid amount of the shares. /. Capita$ c$a*se.
in this clause gives information about total capital, types of shares and face value of shares. %ccording to company7s act 1B8: if the company limited by shares they may issue preference shares and e*uity shares. 0. Association or s*'scription c$a*se.
his clause contains a declaration by the subscribers.
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%. share holders they have to state their names, state, full address and numbers of shares ta!en by them. =. the declaration should be signed by at least < members In case of public company and by 2 members in case of private company C. 0urther the signatures of the subscribers must be witnessed by at least one who gives his signature, name, full address and occupation. ARTICA,S OF ASSOCIATION
he articles of association are the document it contains the rules and regulations for the internal management of the company or the day to day administration of the company. +eaning he articles are the internal regulations of the company on the basis of which are internal affairs are managed. hey lay down the powers of the directors, share holders and officers. %rticles must be printed divided into paragraphs, numbered consecutively and signed by each subscriber to the memorandum and filed with the registrar. Contents: he following are the contents of the %%.
1. /hare capital and variation of rights. 2. @"ercise of lien by the company 3. Calls on shares. 4. ransfer, transmission, forfeiture and surrender of shares. 8. Issues of share warrants. :. %lteration and reduction of capital. <. oting powers of members. D. =orrowing powers. B. Proceedings at the board and at the general body meeting. 1. %ppointment, powers, duties *ualifications, remuneration etc. 11. %ppointment of manger, managing director and secretary.
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12. 'ividends and reserves. 13. +aintenance of boo!s of accounts and their audit. 14. Company seal. 18. Einding up. he preparation of articles by a company limited by shares is not compulsory, in case the articles are not preparedA the company must adopt able 6%7 of the companies act. Items fo*n" in Ta'$eA
1. Interpretation of certain terms. 2. /hare capital. 3. 9ien on shares. 4. Calls on shares. 8. ransfer of shares. :. ransmission of shares. <. 0orfeiture of shares. D. Conversion of shares into stoc!. B. /hare warrants. 1. %lteration and reduction of capital. 11. &eneral meeting and proceedings at general meeting. 12. otes of members. 13. =oard of directors. 14. Proceedings at board meetings. 18. +anager, managing directors and secretary. 1:. Company seal. 1<. 'ividends and reserves
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1D. %ccounts. 1B. Capitali$ation of profit. 2. Indemnity to officer or agents of the company. Companies which must have their own articles section 2: 1. >n ltd companies. 2. 9imited by guarantee. 3. Private companies ltd by shares. PROSPECT-S
%fter the receipt of the certificate of incorporation if promoter of a public company wishes to invite the public to subscribe for its shares or debentures, he must prepare and issue a document !nows as prospectus. he companies act 1B8: defines prospectus as ( % prospectus, notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate;. Contents of prospect*s Part 1 of sc)e"*$e # A. 2enera$ information:
a. ?ame and address of registered office of the company. b. 'ate of opening of the issue. c. ?ame and address of auditors and lead managers. +. Capita$ str*ct*re of t)e company:
a. %uthori$ed, issued, subscribed and paid up capital. C. Terms of t)e present iss*e:
a. 5ight of the instrument holders. b. )ow to apply availability of forms, prospectus and mode of payment.
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c. %ny special ta" benefits for company and its shareholders. D. Partic*$ars of t)e iss*e:
a. ob#ects. b. Pro#ect cost. E. Company3 mana%ement an" proect:
a. )istory and main ob#ects and present business of the company. b. /ubsidiary of the company if any for financial data to auditor7s report in part 2 c. Promoters and their bac!ground. d. Infrastructure facilities for raw material and utilities li!e water, electricity, etc. e. he products • • •
?ature of the products %pproach to mar!eting and proposed mar!eting set up. @"port possibilities and e"port obligations if any.
PART # AND S4ED-,E # A. 2enera$ information:
a. Consent of directors, auditors, solicitors, advocates, managers to issue, registrar to issue, ban!ers to the company, and e"perts. b. @"pert opinion if any. c. Procedure and time schedule for allotment and issue of certificates. +. Financia$ information:
a. Profit and losses and asset and liabilities of the company previous 3 years. b. he rate of dividends if any, paid by the company in respect of each clauses of shares. C. Stat*tory an" ot)er information:
a. +inimum subscription. b. >nderwriting commission and bro!erage.
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c. @"penses of the issue giving separately fees payable, advisers, registrars to the issue, managers to the issue, trustees for the debentures holders. d. previous public or right issue, if any during the last 8 years date of allotment, date of refund, date of listing on the stoc! e"change, closing date. e. Commission bad bro!erage on previous year. f. 'etail of purchase of property. Fi$$in% of prospect*s !it) t)e re%istrar: no prospectus shall be issued until a copy of the same has been delivered to the registrar for registration. 0urther, it must be issued within B days from the date on which a copy of the prospectus delivered for registration. he prospectus must be dated and signed by every person who is named there in as a director or by the agent.
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