Formation of a Company

Definition

The Promotion stage is the "brainstorming and planning" phase. It is the process of transforming a business idea into a formal proposal, checking its viability, and preparing for registration.

The Promoter: The Architect of the Company

A Promoter is a person (or group) who undertakes the necessary steps to form a company. They conceive the idea, investigate its feasibility, and take the initial steps to register it.

Key Functions of a Promoter

• Identification of Business Opportunity: Finding a profitable idea or gap in the market.
• Feasibility Studies: Checking if the idea is technically, financially, and commercially possible.
• Name Approval: Choosing a unique name and getting it cleared by the Registrar.
• Fixing up Signatories: Deciding who will sign the initial documents (the first directors).
• Appointment of Professionals: Hiring lawyers, bankers, and auditors for paperwork.

Examples

• Example A: An engineer notices there is no easy way to book local plumbers. He does the research and finds investors. He is the Promoter.
• Example B: A group of friends checks if a specific location can support a new cafe. This research is a Feasibility Study.

Definition

Incorporation is the process of registering the company with the government (the Registrar of Companies or ROC). Once this is complete, the company becomes a "Legal Person" in the eyes of the law.

Essential Documents Required

1. Memorandum of Association (MoA): The company's "Constitution." It defines powers, objects, and relationship with the outside world.
2. Articles of Association (AoA): The "Internal Rules." A rulebook for how directors and managers run day-to-day operations.
3. Consent of Proposed Directors: Written agreement to act as directors.
4. Statutory Declaration: A formal statement confirming all legal requirements are met.

Certificate of Incorporation

Issued by the Registrar, this is the "Birth Certificate" of the company. From this date, the company officially exists as a separate legal entity.

Comparison Table: MoA vs. AoA

Definition

After incorporation, a company needs funds to operate. This stage involves raising money from the public by issuing shares.

The Process and SEBI Guidelines

For Public Companies, the Securities and Exchange Board of India (SEBI) sets strict rules to protect investors:

• Issuing a Prospectus: A document inviting the public to buy shares, containing honest financial truths.
• Minimum Subscription: A company must receive a minimum amount (usually 90% of the issue) to proceed. If they fail, they must refund all money!
• Allotment of Shares: The process of officially giving shares to the applicants.

Modern Tool Application

Today, companies use IPO (Initial Public Offering) platforms and ASBA (Application Supported by Blocked Amount), where money stays in your bank until shares are allotted, ensuring higher safety.

Numerical Illustration: Minimum Subscription

Problem: "BrightTech Ltd." wants to raise ₹10,00,000. SEBI requires a 90% minimum subscription. 1. Calculate the minimum required amount. 2. What if they only collect ₹8,50,000?

Step 1: Calculate 90% of Total Issue
Minimum Subscription = 10,00,000 * (90/100) = ₹9,00,000

Step 2: Analysis
Collected: ₹8,50,000 (Less than ₹9,00,000)
Result: The company MUST refund the entire amount to applicants.
        

For a Public Company, after raising capital and complying with SEBI, they must file a final declaration to get the Certificate of Commencement of Business. Only then can they start official operations and enter legal contracts.

Note: Private Companies have a shorter process as they do not approach the general public for funds immediately.

1. The person who conceives the idea of a company is called:
   (c) Promoter
2. Which document is known as the 'Constitution' of the company?
   (b) MoA
3. The 'Birth Certificate' of a company is the:
   (b) Certificate of Incorporation
4. Internal rules and regulations of a company are found in:
   (b) AoA
5. Which body regulates the capital subscription process in India?
   (b) SEBI
6. A company cannot proceed with allotment if it fails to receive:
   (c) 90% subscription
7. The stage where the feasibility of an idea is checked is:
   (b) Promotion
8. Which of these is NOT a function of a promoter?
   (c) Managing day-to-day sales after incorporation
9. The document used to invite the public to buy shares is:
   (c) Prospectus
10. Incorporation is done with the:
    (b) Registrar of Companies (ROC)

1. Q: Define a Promoter. What are their primary responsibilities?
   Ans: A promoter is an individual or group that takes the initiative to form a company. Their responsibilities include identifying business opportunities, conducting feasibility studies (technical, financial, commercial), selecting a company name, and preparing necessary legal documents for incorporation.
2. Q: Differentiate between MoA and AoA.
   Ans: MoA is the company's constitution defining its external boundaries and objects, whereas AoA contains the internal rules for management. MoA is supreme over AoA.
3. Q: What is the significance of the Certificate of Incorporation?
   Ans: It is the legal proof of the company's existence. From its date, the company becomes a separate legal entity, capable of owning assets and entering contracts.
4. Q: Explain the concept of 'Minimum Subscription'.
   Ans: It is the minimum amount of capital a company must raise through its public issue (usually 90%) to be allowed to proceed with the allotment of shares. If not met, the money must be refunded.
5. Q: What are the stages in the formation of a company?
   Ans: 1. Promotion Stage, 2. Incorporation Stage, 3. Capital Subscription Stage, 4. Commencement of Business Stage.
6. Q: Why is a Feasibility Study important during promotion?
   Ans: It helps the promoter determine if the business idea is actually viable in terms of technology, money, and market demand, preventing massive losses later.
7. Q: What is a Prospectus?
   Ans: A prospectus is a formal legal document issued by a public company to invite the general public to subscribe to its shares or debentures.
8. Q: What role does SEBI play in the formation of a public company?
   Ans: SEBI protects investors by regulating the capital subscription process, ensuring companies provide honest information in their prospectus and follow fair allotment rules.
9. Q: Can a company perform activities not mentioned in its MoA?
   Ans: No. Any activity outside the scope of the MoA is considered 'Ultra Vires' (beyond powers) and is legally void.
10. Q: What is the final step before a public company starts its actual operations?
    Ans: Obtaining the Certificate of Commencement of Business after fulfilling all capital subscription requirements.

• Stages of Formation: Use P.I.C.C. (Promotion, Incorporation, Capital Subscription, Commencement).
• MoA Clauses: Use N-O-A-L-S (Name, Object, Association, Liability, Subscription).
• MoA vs AoA: MoA = Constitution/External; AoA = Rules/Internal.
• Min. Subscription: Must be 90% for Public Companies.

Mnemonic Tip: Remember "PICCs" (like pictures) to visualize the 4 stages of a company growing!