1. The document discusses the various stages involved in the formation of a company, including promotion, incorporation, subscription of capital, and commencement of business. 2. Key documents formed during the process include the Memorandum of Association, which defines the company's objectives and activities, and Articles of Association, which contains rules for company management. 3. A prospectus or statement in lieu of prospectus is also required to provide information to potential investors. Misstatements in these documents can lead to civil or criminal liability for directors and promoters.

1. Unit-2
Formation of
Company
By S Lohith Kumar

4. Conclusiveness of Certificate of Incorporation
• If a company is incorporated by furnishing any false or incorrect
information or representation or suppressing any material facts the
tribunal can:
• Pass orders for regulating the management of the company in its
memorandum and articles in public interest.
• Direct that liability of the members shall be unlimited.
• Direct removal of the name of the company from the register.
• Pass an order for the winding of the company

5. Commencement of
Commencement
• As per companies act of 1956 a public company
cannot commence unless it has complied with
formalities
• When a Company issued prospectus
• Minimum number of shares paid in cash haven been allotted.
• Every director has paid on his shares an amount equal to what
is payable as offered to public
• A Statutory declaration by the secretary or one of the directors
with ROC
• When company has not issued prospectus
• It has filed with ROC a statement in lieu of prospectus at 3
days before allotment

6. Steps to form a company

7. Promotion
It is the preliminary stage where necessary steps
are taken for registration of a company.
It is the process of organizing and planning the
finances of a business enterprise under the
corporate form

8. Promoter
• Promoter means a person
• Who has been named as such in the
prospectus by company in annual
returns.
• Who has control over the affairs of
the company as shareholder or
director
• As per whose instruction the Board of
Directors are accustomed to act.
Promoter is the person who brings a
company into existence.

9. Functions of a Promoter
Discovery of Idea Detailed Investigation Assembling of Resources
Preparing Preliminary
Documents
• Memorandum of Association
• Articles of Association
• Prospectus
Entering into Preliminary
Contracts
Naming a Company
Appointment of Bankers,
Brokers, Solicitors and
Underwriters.
To meet all the
preliminary expenses for
floating of a company

10. Legal Position of
a Promoter
• The promoters of a company
stand undoubtedly in a fiduciary
position. They have in their
hands the creation and molding
of the company. They have the
power of defining how and when
and in what shape and under
what supervision, it shall come
into existence and begin to act as
a trading corporation.

11. Legal
Position of
Promoter
He is not an agent or a Trustee
– May not make profits directly
or indirectly at the expense of
company
He should disclosure to an
independent Board of directors
or shareholders as a body of
the profits permissible.

12. Rights and Liabilities of Promoter
• Right to receive preliminary Expenses
• Right to receive remuneration for their services
• Right to receive the proportionate money from co-promoters.
. Rights of a Promoter
• To disclose the liability and pay the secret profits if promoters have earned.
• Liability up to the completion of contracts
• Liability on statutory mistakes or fraud in the prospectus
• His property becomes liable for payments even after his death.
Liabilities of the Promoter

13. Types of Promoters
Professional Promoters
Financial promoters
Technical promoters
Entrepreneurial Promoters- Tata, Birla, Ambani's etc
Specialized Institutions
Government- HMT, ONGC, SAIL, BHEL,

14. Steps
involved in
Promotion of
a Company
(Walkman)
Discovery of a Business idea
Investigation and Verification
Assembling
Financing the proposition

15. Incorporation
Stage
It is the process by which a new or
existing business registers as limited
company.
A company is a legal entity which a
separate identity form those who own
or run it.
Vast majority of companies are limited
liability companies where the liability
of the members is limited by shares or
guarantee.

16. Contents of
Incorporation Stage
• Approval of Name
• Filing of Documents
• Memorandum of Association
• Approval of name
• Filing of documents
• Payment of filing and registration fees
• Articles of Association
• List of Directors and addresses
• Written consent
• Registered Office address
• Payment of filing and Registration
Fees

17. Advantages of
Incorporation
Independent corporate existence
Limited Liability
Perpetual Succession
Common Seal
Transferable shares
Separate property
Capacity for suits
Professional management

18. Disadvantages of Incorporation
• Lifting of corporate veil
• Determination of character
• For benefit of revenue
• Fraud or improper conduct
• Agency or Trust or Government Company
• Under Statutory provisions
• Formality and Expenses
• Company not a Citizen.

19. Certificate of Incorporation
CERTIFICATE OF INCORPORATION IS A
LEGAL DOCUMENT REQUIRED AT THE
TIME OF COMPANY FORMATION.
IT IS ISSUED BY STATE GOVERNMENT

20. Steps in
formation of
a Private Ltd
Company
Filing application for DIN and DSC (Director
Identification Number)(Director Signature Certificate)
Selecting and Applying for name
Drafting of MOA and AOA
Filing of E-Forms with Registrar of Companies
Registrar of companies' fees and stamp duty has to be
paid for it.
All verification of documents by ROC
Issue of Certificate of Incorporation to Directors of
Company

21. Contents of
Certificate of
Incorporation
The name of the corporation with its abbreviation
A Statement of business purpose
The corporation’s registered office’s address and
the name of registered agent for the address
Number of shares of stock which are authorized to
be issued and description of type of shares.
The name and address of the corporation
incorporated.

22. Subscription
Stage- Rising
of Capital
Preparation of draft prospectus and inspecting it with
SEBI.
Filing a copy of the prospectus with Registrar of
Companies
Issue of Prospecus to the public by notifying in a
newspaper and inviting the public to apply
On receiving minimum subscription shares are to be
allotted to the applicants as per SEBI guidelines and file a
return of allotment with ROC
Listing of shares in recognized stock exchange. Consent of
stock exchange to be received before issue of prospectus
to public.

23. Commencement
Stage

24. Condition for
Commencement of Business
• The director of the company has filed the declaration with Registrar that
every subscriber to MoA has paid the amount for the shares held by
them. This declaration has to filed within 180 days of Incorporation of
Company.
• Documents required for this form is
• Corporate Identification Number of the Company
• Name of the company
• Address of Registered Office
• Email address of Company
• Attachments
• Subscription Proof of payment for value of shares
• Certificate of Registration issued by RBI or other Regulators

25. Cont….
• Verification of Registered Office: The company has filed with registrar
a verification of its registered office as provided in
• Verification Shall Be file In E-From Inc Within 30 days From the Date
of Incorporation.
• Proof of Registered Office- Rent Agreement or Conveyance Agreement
• Copy of Utility Bills- Electricity Bill/ Water Bill/ Telephone Bill
• A Proof that the Company is permitted to use the address as the registered
office of the company.
• List of all the companies having the same registered office address if any.

26. Memorandum of
Association
• Memorandum of Association is a document that
regulates a company’s external activities and must
be drawn up on the formation of a registered or
incorporated company. The memorandum of
association gives the company’s name, names of its
members and number of shares held by them and
location of its registered office.

27. Purpose of
Memorandum
of Association
The main purpose of memorandum is to explain the scope of activities of the company.
The outsiders will understand the limits of working of the company and their dealings
with it should remain within the prescribed scope.
The shareholders who are investing their money in the company have the right to know
the purpose for which they are investing money and company’s field of operation
To inform about the corporate objective.
Basic charter on which the company is based on
It is the constitution of the company defining the limitation and shphere of activities.
Defines the company’s relations with outside individuals and its activities.

28. Clauses of Memorandum of Association
• Name Clause-Approval of Proposed name
• Situation Clause- Registered office of the company
• Objects Clause-Objects and rights of the company.
• Liability Clause
• Capital Clause- Authorized capital
• Subscription Clause- 7 Members in case of Public limited companies
and two members in case of Private limited companies.

29. Reason for Alteration of Capital Clause
• To carry on its business more economically or more efficiently.
• To attain its main purpose by new or improved means
• To enlarge or change the local area of its operation
• To carry on some business which under existing circumstances may be
advantageous to the objects as in the MOA
• To restrict or abandon any of the objects in MoA
• To Sell or dispose of whole or any part of the undertaking or any
under taking of the company.

30. Procedure of Alteration
• Special Resolution: A special resolution shall be passed at the General
Meeting of the company with respect to alteration of the objects of
the company
• Copy of the resolution to be filed with the registrar within one month
from the date of resolution along with printed copy of MoA

31. Alteration of Memorandum
• Alteration of Name : A special Resolution is required. INC -24 is to be filed with prescribed fees.
• Alteration to the Registered Office Clause: application for the same is to filed in Form INC 23 with
Central Government with Prescribed fees.
• Alteration to the object Clause: Special Resolution and confirmation by Authority. Publication in
newspaper.
• Alteration to the liability Clause: Written consent of all the members of the company. Special
Resolution sent to Registrar of companies.
• Alteration of Capital Clause:
• Increase in authorised Share Capital
• Conversion of Shares
• Consolidate and division of shares
• Cancel the shares which have not been subscribed
• Diminish the share capital of shares cancelled.
• Altered memorandum of Association should be submitted to Registrar within 30 days of passing
resolution.

32. The process of alteration of the MoA is as
follows:
• Hold board meeting: The company must hold a board meeting to
approve the alterations to the MOA.
• Hold a general meeting: A general meeting should be conducted to
obtain the approval of the shareholders for the alterations to the
MOA.
• Filing of a special resolution: A special resolution to alter the MoA
should be filed with the ROC within 30 days of the passing of the
resolution.
• Approval of ROC: The ROC will scrutinize the special resolution and
approve the MoA alteration.

33. Articles of Association (AoA)
• Articles of Association of a company contains various rules and
regulation for the day to day management of the company. These
rules are also called bye-laws. It covers various rights and powers of
its members, duties of management and the manner in which they
can be changes.
• It includes the process for appointing directors and how financial
records will be handled.

34. Contents of Articles of Association
• Share capital, rights of shareholders, variation of these rights, payments of underwriting
commission.
• Lien on shares
• Calls on shares
• Transfer of shares
• Transmission of shares
• Forfeiture of shares
• Conversion of shares into stock
• General meetings and proceedings thereof
• Directors, their appointment, remuneration, qualification, powers
• Dividend and Reserves
• Accounts, audit and borrowing powers
• Capitalization of profits

35. Rules and Regulation
• Preliminary contract
• Use and custody of common seal
• Allotment, calls and lien on shares
• Transfer and transmission of shares
• Forfeiture and re-issue of shares
• Alteration of share capital
• Issue of share certificate and share warrants
• Conversion of shares into stocks
• Procedure of holding and conducting meetings
• Voting rights and proxies of members
• Qualification, appointment, remuneration and powers of Directors
• Borrowing powers and methods of raising loans
• Accounts and audit
• Winding up of company

37. Prospectus
Prospectus is legal document which is required by and filed with SEBI
that provides details about an investment offering for sale to the
public
It should contain the facts that an investor needs to make an
investment decision

39. Objectives of Prospectus
• It informs the company about the formation of a new company
• It serves as written evidence about the terms and conditions of issue
of shares or debentures of a company
• It induces the investors to invest in the shares and debentures of the
company
• It describes the nature, extent and future prospectus of the company
• It maintains all authentic records on the issue and make the directors
liable for the misstatement in the prospectus.

40. Contents of Prospectus
1. Name of the company,
2. The registered address of the company,
3. Objectives and purpose of the company,
4. Purpose of the issue of prospectus,
5. Nature and capital structure of the business,
6. Name, location, and the number of shares that signatories have subscribed,
7. Qualification shares of the directors,
8. Details on redeemable preference shares and debentures,
9. Remuneration of directors and promoters,
10. Minimum subscription for allotment,
11.Date of opening and closing of the issue,
12.Information on underwriting commission and brokerage,
13.Name and address of the company’s auditor, secretary, banker, and trustee,
14.Particulars of material documents,
15.Forecasted rate of dividend and voting rights.

41. Red Herring Prospectus
• A red herring prospectus is defined under Section 32 of the CA,
2013.
• A red herring prospectus does not provide detailed information
about the quantum, or quantity, and price of the securities
offered.
• It is used for the book-building process. The process through
which an issuer seeks to identify the price at which an initial
public offering (IPO) will be offered is known as book building.
• An issuer often creates a book for institutional investors to make
offers for the quantity of shares and the estimated amount of
money they will pay.
• The issuer examines the data and estimates the final price for
the security using an average value.

42. Shelf Prospectus
• The shelf prospectus is outlined under Section 31 of the
CA, 2013.
• A shelf prospectus offers securities for subscription in
one or more issues over a specific period of time
without the need for a fresh prospectus to be issued.
• This is done especially in projects where the issue size
is substantial, and large sums of money are required to
be raised in order to save on the expense of filing a
new prospectus every time.

43. Companies which are entitled to Issue
1.Public financial institutions defined under Section 2(72) of
the CA, 2013, and scheduled banks defined under Section
2(e) of the Reserve Bank of India Act, 1934; or
2.Issuers authorised by the notification of the Central Board
of Direct Taxes to make a public issue of tax-free secured
bonds, with respect to such tax-free bond issuances; or
3.Infrastructure debt funds and non-banking financial
companies regulated by the Reserve Bank of India; or
4.Non-Banking Financial Companies (NBFCs) registered with
the Reserve Bank of India and Housing Finance Companies
(HFCs) registered with the National Housing Bank that meet
the following criteria:

44. Abridged
• Section 2(1) of the CA, 2013 outlines an abridged
prospectus. It means a memorandum containing the salient
features of a prospectus as per the regulations specified by
the Securities and Exchange Board. Section 33 mandates
the issuance of application forms for securities along with an
abridged prospectus.
• Section 33 shall not be applicable to the application form
issued for:
1.A valid invitation to a person to engage in an underwriting
agreement with regard to such securities; or
2.Securities that were not offered to the public.

45. Deemed
• Section 25 of the CA, 2013 discusses deemed prospectuses.
• A deemed prospectus is a document that is assumed to
represent a company’s prospectus.
• A deemed prospectus is a document that contains an offer
for sale made by the intermediary or issuing house on
behalf of a company that allots or agrees to allot its shares
or securities through an intermediary, such as a merchant
bank, another business, or an issuing house.
• A company usually opts for a deemed prospectus to avoid
complying with regulations issued by the SEBI.

46. Statement in Lieu of Prospectus
• If a company does not want to issue a prospectus to the public for
subscription of the shares, this statement is required to be issued to
the public for necessary information
• Share Capital
• Share Warrant
• Common Seal
• Dividend
• Minimum subscription
• Transmission of shares
• Underwriting.

49. Misstatement In Prospectus
The liability may be in the form of civil or criminal, and the
following people face them:
1.A director at the time of issue.
2.Any person named as a director or who agreed to become so
and whose name is mentioned in the document will face it.
3.Any promoter of the company.
4.Every other person who is authorized to issue the document
also has to face it.

50. Criminal Liablity
• A person who authorizes the issue of a
prospectus which has untrue or misleading
statements is liable for punishment under Sec.
34. Such a punishment is for fraud as set out in Sec.
447. “Fraud” under Sec. 447 includes an act, omission,
concealment of any fact with an intent to deceive, gain
undue advantage, or to injure the interests of the
company or its shareholders or its creditors or any
other person.

51. • If the fraud involves an amount of ten lakh rupees or more, or
one per cent. of the turnover of the company (whichever is lower)
the person who is found guilty of fraud shall be punishable with
imprisonment for a minimum term of six months which may extend to
ten years. Such a person shall also be liable to a fine of an amount not
less than the amount involved in the fraud and the fine may extend to
three times of such amount.
• If the fraud involves an amount less than ten lakh rupees or
one per cent. of the turnover of the company (whichever is lower)
and does not involve public interest, the imprisonment may extend to
five years or with fine which may extend to fifty lakh rupees or with
both.
• If the fraud in question involves public interest, the term of
imprisonment shall not be less than three years.
• Civil liability