Introduction
The formation of a company is a complex legal process involving several steps. Broadly, it is divided into three main stages (Note: For a Private Company, only the first two stages are required).
Stage 1: Promotion
Promotion is the first stage where an idea is conceived and converted into a business enterprise. The person who performs these activities is called a Promoter.
Functions of a Promoter:- Identification of business opportunity.
- Feasibility studies (Technical, Financial, and Economic).
- Name approval from the Registrar of Companies (ROC).
- Fixing up Signatories to the Memorandum of Association.
- Appointment of professionals (Bankers, Auditors, Solicitors).
Stage 2: Incorporation
Incorporation is the registration of the company under the Companies Act. After this stage, a company becomes a legal entity.
- Memorandum of Association (MoA): The most important document; defines the company's powers and objectives.
- Articles of Association (AoA): Contains rules and regulations for internal management.
- Consent of Proposed Directors.
- Statutory Declaration.
Stage 3: Capital Subscription
This stage is applicable only to Public Companies that wish to raise funds from the general public.
- SEBI Approval: Obtaining permission from the Securities and Exchange Board of India.
- Filing of Prospectus: A prospectus is an invitation to the public to subscribe to shares.
- Appointment of Bankers & Brokers: To handle the money and sell shares.
- Minimum Subscription: A company must receive at least 90% of the issued amount before allotting shares.
MoA vs. AoA: Key Differences
| Basis | Memorandum of Association (MoA) | Articles of Association (AoA) |
|---|---|---|
| Objectives | Defines the objects for which the company is formed. | Defines rules for internal management. |
| Status | Charter/Main document of the company. | Subsidiary document to MoA. |
| Relationship | Defines relation between company and outsiders. | Defines relation between company and members. |
| Alteration | Difficult; requires special approvals. | Comparatively easy to alter. |
Important Examination Questions
Answer: It is the birth certificate of a company. Once the Registrar is satisfied with the documents, he issues this certificate, which gives the company a separate legal existence.
Answer: Contracts entered by promoters on behalf of the company before incorporation are called Preliminary Contracts. These are not legally binding on the company unless it ratifies them after incorporation.
Answer: If a company does not receive 90% of the issued capital within the specified time, it cannot allot shares and must return all the money received from applicants within 15 days.
