Formation of a Company

NCERT Solutions • Class 11 Business Studies • Chapter 7
Short Answer Questions
1. Name the stages in the formation of a company.
The formation of a company typically involves the following four stages:
  • Promotion: Discovery of business idea and investigation.
  • Incorporation: Registration of the company as a legal body.
  • Capital Subscription: Raising capital from the public (for public companies).
  • Commencement of Business: Obtaining the certificate to start operations.
2. List the documents required for the incorporation of a company.
The main documents filed with the Registrar of Companies are:
  • Memorandum of Association (MoA): The charter of the company.
  • Articles of Association (AoA): Rules for internal management.
  • Consent of Proposed Directors: Written consent to act as directors.
  • Agreement: With proposed managing director or whole-time director.
  • Statutory Declaration: A declaration stating that all legal requirements for registration have been complied with.
3. What is a prospectus? Is it necessary for every company to file a prospectus?
Prospectus: It is any document described or issued as a prospectus, including any notice, circular, advertisement, or other document inviting deposits from the public or inviting offers from the public for the subscription of shares or debentures.

Necessity: No, it is not necessary for every company.
  • Public Companies: Must issue a prospectus if they wish to raise funds from the public. If they raise funds privately, they must file a “Statement in Lieu of Prospectus”.
  • Private Companies: Cannot invite the public to subscribe to their shares, so they do not issue a prospectus.
4. Briefly explain the term ‘Return of Allotment’.
Return of Allotment is a statement submitted to the Registrar of Companies (RoC) after the allotment of shares is completed. It contains details such as:
  • The names and addresses of shareholders.
  • The number of shares allotted to each.
  • The amount paid or payable on such shares.
It serves as a formal record of the distribution of the company’s capital.
5. At which stage in the formation of a company does it interact with SEBI?
A company interacts with the Securities and Exchange Board of India (SEBI) during the Capital Subscription Stage. This happens before raising funds from the public to ensure that the company’s disclosures and investor protection measures comply with SEBI guidelines.
Long Answer Questions
1. What is meant by the term ‘Promotion’? Discuss the legal position of promoters with respect to a company promoted by them.
Promotion: It is the first stage in the formation of a company. It involves conceiving a business opportunity and taking the initiative to form a company so that practical shape can be given to exploiting the available business opportunity.

Legal Position of Promoters:
  • Not Agents: They are not agents of the company because the company has not yet been incorporated (born).
  • Not Trustees: They are not trustees, but they stand in a fiduciary relation (relationship of trust and confidence) with the company.
  • Disclosure: They must not make any secret profit. If they do, they must disclose it to the company.
  • Liability: They are personally liable for all preliminary contracts entered into before incorporation unless the company adopts them after incorporation.
2. Explain the steps taken by promoters in the promotion of a company.
The steps involved in promotion are:
  1. Identification of Business Opportunity: The promoter identifies a potential business opportunity (producing a new product or service).
  2. Feasibility Studies: Detailed analysis to check if the idea is viable:
    • Technical Feasibility: Is the technology/raw material available?
    • Financial Feasibility: Are funds available?
    • Economic Feasibility: will it be profitable?
  3. Name Approval: Selecting a name and getting it approved by the Registrar of Companies to ensure it doesn’t duplicate an existing company.
  4. Fixing Signatories to the Memorandum: Deciding who will sign the MoA and become the first directors.
  5. Appointment of Professionals: Hiring mercantile bankers, auditors, and solicitors to assist with legal and financial papers.
  6. Preparation of Necessary Documents: Drafting the MoA, AoA, and Consent of Directors for registration.
3. What is a ‘Memorandum of Association’? Briefly explain its clauses.
Memorandum of Association (MoA) is the principal document or “Charter” of the company. It defines the powers and objectives of the company and its relationship with the outside world.

Clauses of MoA:
  • Name Clause: Contains the approved name of the company (ending in ‘Limited’ or ‘Private Limited’).
  • Registered Office Clause: Mentions the State in which the registered office is situated (determines jurisdiction).
  • Objects Clause: The most important clause; defines the purpose for which the company is formed. It cannot do anything beyond this scope.
  • Liability Clause: States that the liability of members is limited to the unpaid amount on their shares.
  • Capital Clause: Specifies the maximum capital (Authorized Capital) the company can raise.
  • Association/Subscription Clause: A declaration by signatories that they desire to form a company and agree to take shares.
4. Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’
Basis Memorandum of Association (MoA) Articles of Association (AoA)
Nature It is the Charter or Constitution of the company. They are the Bye-laws of the company.
Scope Defines the objects and powers of the company. Defines the rules for internal management.
Status Fundamental document; supersedes the Articles. Subsidiary document; subordinate to the MoA.
Relationship Defines relationship between company and outsiders. Defines relationship between company and members.
Alteration Difficult to alter (often requires Govt. approval). Easier to alter (Special Resolution is sufficient).
5. What is the meaning of ‘Certificate of Incorporation’?
The Certificate of Incorporation is a document issued by the Registrar of Companies after all registration formalities are completed.

Significance:
  • It acts as the birth certificate of the company.
  • It is conclusive evidence that the company has come into existence and all legal requirements regarding registration have been complied with.
  • Even if there were irregularities in the registration process, the company’s existence cannot be questioned once this certificate is issued.
6. Discuss the stages of formation of a company?
There are four distinct stages:
  1. Promotion Stage: The idea generation phase where promoters identify an opportunity, conduct feasibility studies, and prepare necessary documents.
  2. Incorporation Stage: The registration phase. Documents (MoA, AoA) are filed with the Registrar, fees are paid, and the Certificate of Incorporation is issued. The company becomes a legal entity here.
  3. Capital Subscription Stage: (For Public Companies only). The company obtains SEBI approval, issues a prospectus, appoints bankers/brokers, and collects minimum subscription from the public.
  4. Commencement of Business Stage: After raising capital, the company files a declaration with the Registrar. Upon verification, the Registrar issues the “Certificate of Commencement of Business,” allowing the public company to start operations. (Private companies can start after Incorporation).
Project / Assignment
Visit the Registrar of Companies (RoC) to study the actual formation procedure.
(Guidance for Students):
Procedure Comparison: You will find that the actual process is now largely digital (via the MCA-21 portal).
Common Obstacles:
  • Name Rejection: Difficulty in finding a unique name not resembling existing brands.
  • Document Errors: Technical rejections due to incorrect filing of forms (SPICe+ forms).
  • DIN/DSC Issues: Delays in obtaining Director Identification Numbers or Digital Signature Certificates.

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