Learning Objectives
- Understand the stages of company formation
- Learn about the promotion stage and role of promoters
- Understand the incorporation stage and documents required
- Know about the capital subscription stage (for public companies)
- Learn about the commencement of business stage
- Understand key documents: MOA, AOA, Prospectus
Key Concepts
Stages of Company Formation
The formation of a company involves four stages: Promotion, Incorporation (Registration), Capital Subscription (for public companies only), and Commencement of Business.
Stage 1: Promotion
Promotion is the first stage where the idea of forming a company is conceived and preliminary steps are taken. A Promoter is the person who conceives the business idea, assembles the factors of production, brings together people who agree to form the company, and takes the necessary steps for incorporation.
Functions of a Promoter: identifying the business opportunity, conducting feasibility studies, assembling resources (land, machinery, capital), selecting professionals (bankers, auditors, solicitors), preparing the Memorandum and Articles of Association, getting them signed by subscribers, and arranging registration with the Registrar of Companies (ROC).
Stage 2: Incorporation (Registration)
For registration, the following documents must be filed with the Registrar of Companies (ROC):
- Memorandum of Association (MOA): The constitution of the company defining its scope of activities and relationship with the outside world. It contains 6 clauses: Name Clause, Registered Office Clause, Objects Clause, Liability Clause, Capital Clause, and Subscription Clause (Association Clause).
- Articles of Association (AOA): Rules and regulations for internal management of the company (share transfer, meetings, director appointments, voting rights, dividends).
- Consent of proposed directors, declaration of compliance, address of registered office, and statutory declarations.
After scrutiny, the ROC issues the Certificate of Incorporation, giving the company a separate legal existence. A private company can commence business immediately after incorporation.
Stage 3: Capital Subscription (Public Companies Only)
A public company must raise capital by issuing a Prospectus -- an invitation to the public to subscribe for shares. The prospectus contains details about the company, its directors, terms of issue, financial projections, risk factors, and application procedure. The minimum subscription (at least 90% of the issue) must be received within 120 days, failing which the application money must be refunded.
Stage 4: Commencement of Business
After obtaining the Certificate of Incorporation and meeting the minimum subscription requirement, a public company receives the Certificate of Commencement of Business from SEBI/ROC. Only after this can a public company begin its business operations. Note: Under the Companies Act 2013, a company can commence business after filing a declaration that every subscriber has paid the value of shares and the paid-up capital meets requirements.
Memorandum of Association (MOA) vs Articles of Association (AOA)
MOA defines the scope and powers of the company (external document); AOA defines the internal management rules. MOA is supreme -- any act beyond MOA is ultra vires (void). AOA is subordinate to MOA. Every company must have a MOA; AOA may adopt Table F (model articles in the Companies Act) if a company does not frame its own.
Summary
Company formation is a multi-stage process starting with promotion (idea conception and planning), followed by incorporation (registration with ROC and receiving the Certificate of Incorporation), capital subscription (for public companies through prospectus), and commencement of business. Key documents include the MOA (defining company scope and external relationships) and AOA (governing internal management). The MOA is the supreme document, and any act beyond its scope is ultra vires. The prospectus is an invitation to the public to subscribe for shares and must contain all material information for informed decision-making.
Important Terms
- Promoter
- A person who conceives the idea of forming a company and takes necessary steps for its incorporation.
- Memorandum of Association (MOA)
- The constitution of the company defining its objects, powers, and relationship with the outside world.
- Articles of Association (AOA)
- The document containing rules and regulations for the internal management of the company.
- Certificate of Incorporation
- The birth certificate of a company issued by the ROC, granting it separate legal existence.
- Prospectus
- A public document inviting the public to subscribe for shares or debentures of a company.
- Ultra Vires
- Acts beyond the scope of the company's MOA; such acts are void and have no legal effect.
- Minimum Subscription
- The minimum amount of capital that must be raised before shares can be allotted (90% of the issue for public companies).
Quick Revision
- Four stages: Promotion, Incorporation, Capital Subscription, Commencement of Business.
- Promoter conceives the idea and arranges for company formation.
- MOA has 6 clauses: Name, Registered Office, Objects, Liability, Capital, Subscription.
- MOA is supreme and defines external scope; AOA governs internal management.
- Certificate of Incorporation gives the company a separate legal existence.
- Public companies must issue a Prospectus to raise capital from the public.
- Minimum subscription (90%) must be received within 120 days.
- Private companies can commence business immediately after incorporation.
Practice Tips
- Memorise the 6 clauses of MOA with brief descriptions -- frequently examined.
- Understand the distinction between MOA and AOA with at least 5 points of difference.
- Learn the sequence of stages and what documents are required at each stage.
- Practice distinguishing between private and public companies at each stage of formation.