Steps in Formation of a Company

formation of a company

Nowadays, a large number of people, ranging from foreign nationals to Indian Residents, want to invest and start their business in India. There are mainly 2 reasons behind that – firstly, the Indian economy is growing at a commendable pace and secondly, India has a diverse population, which makes it attractive for a large pool of investors. In addition to this, India offers different routes of investment to its people. The most suitable form of starting a business in India is to form a “company”. There are Various Types of Companies under the Companies Act. In this article, we will explore the various steps followed along with necessary documents for the formation of a company.

Meaning of a Company

At the outset, it is very essential to understand the meaning of a company. The company is defined under Section 2(20) of the Companies Act, 2013. As per the section, a company is an association of a person who has a separate legal entity and has a perpetual succession. The capital of the company is divided into small denominations known as “shares”.

The term “separate legal entity” means that the company has a different existence from its shareholders. The company can hold assets in its name and can be sued or be sued. Similarly, “perpetual succession” means that the members may come or go, but the company will remain forever.

Steps in formation of Company

The formation of a company is a complex process that involves the completion of legal formalities and procedures. In order to understand the complete process, the formalities are divided into three distinct

Stages of formation of company namely:

  1.  Promotion;
  2. Incorporation
  3. Subscription of capital

Promotion of a Company

It is the first stage in the formation of a company. It involves creating a new business idea and taking initiatives to form a company to bring that idea into reality. An individual, group of individuals or even a company may have discovered an opportunity. Such persons or groups of persons are known as the promoter of the Company.

The steps involved in the promotion stage are as follows-

Identification of business opportunity:

The primary responsibility of a promoter is to identify a business opportunity. The opportunity may arise relating to producing a new product or making existing service available through an alternative channel. After finding the opportunity, it is analysed to see its technical and economic feasibility. Only after these investigations provide a favourable picture, the promoters may decide to actually incept a company.

Name approval:

After deciding the prospective profitability of the company, it is time to select the name of the company. For this purpose, an application is made to the registrar of companies of the state in which the registered office of the company is going to be situated. The name of the company shouldn’t resemble the name of any existing company. Further, usage of words like king, queen, national emblem, etc are also prohibited for this purpose.

Fixing up Signatories to the Memorandum of Association (MOA)

The promoters of the company decide the signatories of the Memorandum of Association of the proposed company. Usually, it is observed that the people signing the MoA of a company are also the first Directors of the Company. However, they need to give written consent to act as Directors and take all the responsibilities attached thereto.

Appointment of professionals:

During the process of incorporation, certain professionals such as mercantile bankers, auditors etc., are appointed by the promoter to assist the proposed company in filing necessary documents with the Registrar of Companies. The details of all the shareholders along with the amount of the shares subscribed by them also need to be submitted.

Incorporation

It refers to that process by which the company came into existence. It involves the submission of various documents with the Registrar of Companies (ROC) for the formation of a company.

Documents Required for incorporation

  • Memorandum of Association 

The Memorandum of Association is the most important document which is often understood as the constitution of the company. The company is bound by the terms mentioned in the MOA. It contains the following clause

  1. Name clause
  2. Registration clause
  3. Object clause
  4. Liability clause
  5. Capital clause

Memorandum of Association-definition and format of MoA

  • Article of Association

The Articles of association are the special document that governs the internal relations of a company.  It contains all the details pertaining to the managerial rules and regulations followed by the company. The articles of a company shall be in respective forms as specified in Table F, G, H, I and J in the schedule as may be applicable to such company.

  • Consent of Proposed Directors:

Apart from the MOA and the AOA of the company, the written consent of each director is required to be submitted with the registrar of companies. They should specify that they have the requisite qualifications for this post and agree to take responsibility for the same. This statement is filed as per the DIR 12 form.

  • Agreement:

The agreement determines the key managerial persons of the company including the managerial director, whole-time director, company secretary, etc.

  • Statutory Declaration

At this stage, the last document is a  declaration stating that the company has complied with all the legal provisions and all the necessary documents have been submitted to the Registrar. In case, such information proves to be false, criminal action may initiate against the directors as well as the promoters.

If the Registrar is satisfied with regards to the completion of formalities, he issues a Certificate of Incorporation to the company, which is also known as the birth of the company. From November 1, 2000, the Registrar of Companies gives a CIN (Corporate Identity Number) to the Company.

Effect of the Certificate of Incorporation

It is believed that a company is legally born on the date which is printed on the Certificate of Incorporation. After receiving the certificate, It becomes a legal entity with a perpetual succession on such date. The company is entitled to enter into valid contracts through its name. This Certificate is conclusive evidence of the regularity of the incorporation of a company.  It is solid proof of the existence of a company. The company can sue another party or it can be sued after incorporation.

Capital Subscription Stage

A company can’t run without capital. Just like food is needed for a human body to survive, similarly, adequate capital is needed for the survival of a business and the formation of a company. After incorporation, one of the important steps is to arrange finance for the company.  There are various sources of finances such as private equity, venture capital, bank loan, etc. However, the most prominent and widely used source is to get capital from the public.

This involves the following steps-

SEBI Approval

SEBI (Securities and Exchange Board of India) is the apex body governing all the securities-related transactions in India. A public company that wants to raise money from the public must make adequate disclosure to the SEBI. It must

not conceal any material information from the potential investors to safeguard their interests. Therefore, prior approval from SEBI is required before raising funds from the public.

Filing of Prospectus

The company is also required to file a copy of the prospectus or statement in lieu of the prospectus with the ROC.  A prospectus is a document that invites deposits from the public or inviting offers from the public for the subscription or purchase of the shares of the company. In simple words, it is an invitation given to the public at large. It is essential that all the information provided in the prospectus must be true and all the material facts must be disclosed.

Appointment of Bankers, brokers, etc.

For raising funds, bankers, brokers, etc played a very vital role. The application money is received by the bankers of the company. The brokers sell the shares through the distribution of forms and encourage the public to apply for the shares. If the company is not fully assured of a good response from the public, it may appoint an underwriter for this purpose. Underwriters undertake to subscribe to the shares of the company if these are not subscribed by the public. They charge a commission for this service.

Minimum Subscription:

As per SEBI rules, it is essential that a minimum of 90% of people subscribe to the shares of the company. It aims to ensure that the company must receive applications for a certain minimum number of shares before going ahead with the

allotment of shares. As per the Companies Act, 2013, it is called the ‘minimum subscription’.Thus, if applications received for the shares are for an amount less than 90 per cent of the total amount, the company can’t issue its share to the public.

Application to Stock Exchange:

As per the Companies Act, it is essential for a public company to make an application to at least one stock exchange to seek their permission for dealing in its shares or debentures. If such permission is not granted within ten weeks from the last date of subscription, the entire allotment becomes void and the company has to return money to all the shareholders within 8 days.

Allotment of Shares:

Before the shares are allotted, the money received from the shareholders shall be kept in a separate escrow account and must not be used by the company. It is important to note that if the number of shares allotted is less than the number applied by the shareholder or in a condition wherein no shares are allotted to the applicant, the excess application money shall be returned to applicants or it can be adjusted towards allotment money due from them.

Conclusion

The formation of a company involves procedural as well as legal requirements. Various documents, ranging from Memorandum of Association to Articles of association are submitted to the Registrar of Companies. The registrar after satisfying itself with all the legal formalities issues a certificate of incorporation, which is proof of the existence of the company.

 

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