2.1 Incorporation of Company
The incorporation of a company refers to the legal process that is used
to form a corporate entity or a company. An incorporated company is a separate
legal entity on its own, recognized by the law. These corporations can be
identified with terms like ‘Inc’ or ‘Limited’ in their names. It becomes a
corporate legal entity completely separate from its owners.
Steps in Incorporation of a Company
A group of seven or
more people can come together so as to form a public company whereas,
only two are needed to form a private company. The following steps are involved
in the incorporation of a company.
1. Ascertaining Availability
of Name
The first step in the
incorporation of any company is to choose an appropriate name. A company is
identified through the name it registers. The name of the company is stated in
the memorandum of association of the company. The company’s name must end with
‘Limited’ if it’s a public company and
‘Private Limited’ if its a private company.
To check whether the
chosen name is available for adoption, the promoters have to write an
application to the Registrar of Companies of the State. A 500 rupee is paid
with the application. The Registrar then allows the company to adopt the name
given they fulfil all legal documentation formalities within a period of three
months.
2. Preparation of Memorandum
of Association and Articles of Association
The memorandum of
association of a company can be referred to as its constitution or rulebook.
The memorandum
states the field in which the company will do business,
objectives of the company, as well as the type of business the company plans to
undertake. It is further divided into five clauses
- Name Clause
- Registered Office Clause
- Objects Clause
- Liability Clause
- Capital Clause
Articles of Association
is basically a document that states rules which the internal management of the
company will follow. The article creates a contract between the company and its
members. The article mentions the rights, duties, and liabilities of
the members. It is equally binding on all the members of the company.
3. Printing, Signing and
Stamping, Vetting of Memorandum and Articles
The Registrar of
Companies often help promoters to draw up and draft the memorandum and
articles of association. Above all, with promoters who have no previous
experience in drafting the memorandum and articles.
Once these have been
vetted by the Registrar of Companies, then the memorandum of association and
articles of association can be printed. The memorandum and articles are
consequently divided into paragraphs and arranged chronologically.
The articles have to be
individually signed by each subscriber or their representative in the presence
of a witness, otherwise, it will not be valid.
4. Power of Attorney
To fulfil the legal
and complex documentation formalities of incorporation of a company, the
promoter may then employ an attorney who will have the authority to act on
behalf of the company and its promoters. The attorney will have the authority
to make changes in the memorandum and articles and moreover, other documents
that has been filed with the registrar.
5. Other Documents to be Filed
with the Registrar of Companies
The First –
e-Form No.32 – Consent of directors
The Second – e-Form
No.18 – Notice of Registered Address
The Third –
e-Form No.32. – Particulars of Directors
6. Statutory Declaration in
e-Form No.1
This declaration,
furthermore states that ‘All the requirements of the Companies Act and the
rules thereunder have been compiled with respect of and matters precedent and
incidental thereto.’
7. Payment of Registration
Fees
A prescribed fee is to
be paid to the Registrar of Companies during the course of incorporation. It
depends on the nominal capital of the companies which also have share capital.
8. Certificate of
Incorporation
If the Registrar is
completely satisfied that all requirements have been fulfilled by the company
that is being incorporated, then he will register the company and issue a
certificate of incorporation. As a result, the incorporation certificate
provided by the Registrar is definite proof that all requirements of the Act
have been met.
2.2 Prospectus of Company
PROSPECTUS DEFINITION
Section 2(70) of
the Act defines prospectus as “A prospectus means any document
described or issued as a prospectus and includes a red herring prospectus
referred to in section 32 or shelf prospectus referred to in section 31 or any
notice, circular, advertisement or other document inviting offers from the
public for the subscription or purchase of any securities of a body corporate.”
Thus, it is clear from the
above definition of the prospectus that, a prospectus is a just an invitation
to offer securities to the public and not an offer in the contractual sense.
What is a Prospectus?
A prospectus is a document issued by the
company inviting the public and investors for the subscription of its
securities. A prospectus also helps in informing the investors about the risk
of investing in the company. A Prospectus is required to be issued only after
the incorporation of the company. These documents describe stocks, bonds and
other types of securities offered by the company. Mutual fund companies also
provide a prospectus to prospective clients, which includes a report of the
money’s strategies, the manager’s background, the fund’s fee structure and a
fund’s financial statements. A prospectus is always accompanied by
performance history and financial information of the company. The reason for
accompanying such information along with the prospectus is to make sure
that, the investors are well aware of the company’s background and overall
performance and the investors do not fall into the prey of investing in a bad
company.
Companies that are required to issue a prospectus
A public listed company who
intends to offer shares or debentures can issue prospectus.
A private company is
prohibited from inviting the public to subscribe to their shares and thus
cannot issue a prospectus. However, a private company which has converted
itself into a public company may issue a prospectus to offer shares to the
public.
Contents of a Prospectus
In general, the Prospectus includes the following main
contents.
1.Name of the Company and the Address of the
Registered Office.
2. Main objects of the Company and the names,
addresses, and occupation and the number. of Shares purchased by the Members
signing the Memorandum.
3. Different kinds of Shares and their number and
detailed information of Redeemable Preference Shares.
4. Qualification Shares to be held by the Directors.
Provisions in the Articles regarding the Remuneration of the Directors and
Managing Directors.
5. Names, addresses, and occupation of Directors, Managing
Directors, and Managers, etc of the Company.
7. Minimum Subscription amount to be raised by selling
the Shares
8. Date of Starting selling the shares and date of
closing.
9. Amount to be paid on each Share on Application and
at the time of Allotment of Shares.
10. the Company has made any Option Contract with any
person regarding the sale of Shares and Debentures its detailed information.
11. Detailed information of Shares ad Debentures
issued by accepting reward other than a cash reward.
12. If the Company decides to sell some Shares on
Premium, then information regarding the amount of Premium on each Share and for
what purpose the Company will utilize the amount of Premium
13. The Company makes Guarantee Contract regarding the
sale of Shares and Debentures, then names and addresses of the Underwriters and
the Amount of Underwriting the Commission to be given to the Underwriters
14. If a company has decided to raise some Assets from
the amount of the sale of Shares the Description and Price of the Assets and
the Names of the Sellers and the Mode of Payment, etc. are to be mentioned in
the Prospectus.
15. The estimated amount of Preliminary Expenses.
16. Names and Addresses of the Promoters of the
Company and the amount to be paid to them or the nature of Benefits to be given
to them.
17. Brief description of important Contracts.
18. Names and Address of the Auditors of the Company.
19. The interests of Directors and Promoters are
involved in the Promotion of the Company and the Assets purchased by the Company
then information regarding the nature and proportion of their interest
20. Rights, facilities and controls regarding
different kinds of Shares
21. The rights of Members are controlled, then the
nature of such Controls.
22. The place where the Profit and Loss Accounts and
Balance Sheet will be available for inspection and the time required for it.
23. Provisions regarding Reserves and Capitalisation
etc.
24. Auditors Report in the case of old Companies
25. Report of the Accountant in the case of old Companies
STATEMENT IN LIEU of PROSPECTUS
In general, the Public Companies have to issue the Prospectus for
selling their Shares and Debentures, but under the Act, it is not binding for
every Company to issue a Prospectus. The Companies which sell their Shares
Capital and Debentures privately need not publish and issue Prospectus to the
public. However, under the Act, they have to prepare a Statement containing, in
brief, the information given in the Prospectus, and submit it to the Registrar
of Companies. This Statement is called a Statement in Lieu of Prospectus.
If the Companies limited by Shares do not publish the prospectus has to submit Statement instead of Prospectus to the Registrar of
Companies, at least 3 days before the Allotment of Shares or Debentures. They
cannot allot Shares or Debentures unless they submit this Statement to the
Registrar. This Statement should be signed by every Director.
Conditions in which the Statement in Lieu of
Prospectus is to be submitted
In the following conditions a Statement in Lieu of Prospectus
is to be submitted to the Registrar…
1. If a Public Company has not issued a Prospectus
during the period of its Formation.
2. If a Company, in the beginning, is registered as a
Private Company and later on it is converted into a Public Company.
3. If a Public Company has prepared a Prospectus
during the period of its Formation but has not allotted its Shares or
Debentures at that time and later on it has to sell its Shares or Debentures.
4. The Share Capital of a Company is easily raised
without making any special efforts.
Misstatements
in the Prospectus
Contravention of Section 26 of the Companies Act, 2013
If a prospectus is issued in
contravention of the provisions of this section, then the company shall be
punishable with a fine, not less than fifty thousand rupees which may extend to
three lakh rupees, and
Every person who is a party to
the issue of the prospectus shall be punishable with imprisonment for a term
which may to three years or with a fine, not less than fifty thousand rupees
which may extend to three lakh rupees, or with both.
Criminal Liability for Misstatement in the prospectus
Where a prospectus is issued
which includes any statement which is untrue or misleading in form or context
or any matter is likely to mislead the investor, then every person who
authorizes the issue of the prospectus shall be punishable with imprisonment for a
a term which may not be less than six months, but which may extend to ten years;
or a fine not less than the amount involved in fraud but it may extend to three
times the amount of fraud; or with both.
Civil Liability for Misstatement in the prospectus
If there is any inclusion or
the omission of any matter in the prospectus issued, which is misleading and the person who has subscribed the securities has sustained any loss or damage, then
the company and every person who is a director, promoter and expert at the time
of issue of the prospectus, shall be responsible and be liable for punishment under
section 36 of the act, and shall be liable to pay compensation to every person
who has sustained such loss or damage?
Types
of Prospectus under the Companies Act, 2013
There are four types of prospectus, which are as under:
Abridged
Prospectus
According to Section 2(1) of the Act, abridged
prospectus means a memorandum containing such salient features of a prospectus
as may be specified by the SEBI by making regulations in this behalf. It means
that a company cannot issue application form for the purchase of securities unless
such form is accompanied by an abridged prospectus.
Deemed
Prospectus
According to Section 25(1) of the Act, where a
company allows or agrees to allot any securities of the company with a view to
all or any of those securities being offered for sale to the public. Any
document by which such offer for sale to the public is made is deemed to be a
prospectus by implication of law.
Shelf Prospectus
According to Section 31 of the Act, Shelf
prospectus is a prospectus in respect of which the securities or class of
securities included therein are issued for subscription in one or more issues
over a certain period without the issue of a further prospectus. Only the
companies which have been prescribed by the SEBI can issue a Shelf prospectus
with the Registrar.
Red Herring
Prospectus (RHP)
According to Section 32 of the Act, an RHP
means a prospectus which does not have complete particulars on the price of the
securities offered and quantum of securities to be issued. A company may issue
an RHP prior to the issue of a prospectus. The company shall file RHP with
Registrar at least three days prior to the opening of the subscription list and
the offer. An RHP carries the same obligations as are applicable to
the prospectus and any variation between the RHP and a prospectus shall be
highlighted as variations in the prospectus
2.3 MOA of Company
Memorandum Of Association
The Memorandum of
Association or MOA of a company defines the constitution and the scope of powers of the company. In simple words, the MOA
is the foundation on which the company is built. In this article, we will look
at the laws and regulations that govern the MOA. Also, we will understand the
contents of the Memorandum of Association of a company.
Object of
registering a Memorandum of Association or MOA
The MOA of a
company contains the object for which the company is formed. It identifies the
scope of its operations and determines the boundaries it cannot cross.
It is a public
document according to Section 399 of the Companies Act, 2013. Hence, any person who enters into
a contract with the company is expected to have knowledge of
the MOA.
Under no
circumstance can the company depart from the provisions specified in the memorandum. If it does so, then it would be ultra vires the company and void.
Format of Memorandum of Association (MOA)
According to
Section 4 of the Companies Act, 2013, companies must draw the MOA in the form
given in Tables A-E in Schedule I of the Act. Here are the details of the
forms:
Table A: Form for the memorandum of association of
a company limited by shares.
Table B: Form for the memorandum of association of
a company limited by guarantee and not having a share capital.
Table C: Form for the memorandum of association of
a company limited by guarantee and having a share capital.
Table D: Form for the memorandum of association of
an unlimited company.
Table E: Form for the memorandum of association of
an unlimited company and having share capital.
Content of the MOA
The following
information is mandatory in an MOA:
Name Clause
For the private
limited company, the name of the company must have the words ‘Private Limited’ as the last
words.
This is not
applicable to companies formed under Section 8 of the Act who must include one
of the following words, as applicable:
- Foundation
- Forum
- Association
- Federation
- Chambers
- Confederation
- Council
- Electoral Trust, etc.
- Registered Office Clause
It must specify
the State in which the registered office of the company will be situated.
Object Clause
It must specify
the objects for which the company is being incorporated. Further, if a company
changes its activities which are not reflected in its name, then it can change
its name within six months of changing its activities. The company must comply
with all name-change provisions.
Liability Clause
It should specify
the liability of the members of the company, whether limited or unlimited.
Also,
For a company limited by shares – it should specify if the liability
of its members is limited to any unpaid amount on the shares that they hold.
For a company limited by guarantee – it should specify the amount undertaken
by each member to contribute to:
The assets of the
company when it winds-up. This is provided that he is a member of the company
when it winds-up or the winding-up happens within one year of him ceasing to be
a member. In the latter case, the debts and liabilities considered would be
those contracted before he ceases to be a member.
The costs,
charges, and expenses of winding up and the adjustment of the rights of the
contributors among themselves.
Capital Clause
This is valid only
for companies having share capital. These companies must specify the amount
of Authorized capital divided into shares of fixed amounts. Further, it must
state the names of each member and the number of shares against their names.
Association Clause
The MOA must
clearly specify the desire of the subscriber to form a company. This is the
last clause.
For One-Person-Company
The MOA must
specify the name of the person who becomes a member of the company in the event
of the death of the subscriber.
Keep in mind the
following aspects before submitting the MOA:
Print the MOA
Divide it into
paragraphs
Number the pages
in sequence
Ensure that at
least seven people sign it (2 in the case of a private limited company and one
in case of a One Person Company).
Have at least one
witness to attest the signatures
Enter particulars
about the signatories and witnesses like address, description, occupation, etc.
2.4 Article of Company
ARTICLES OF ASSOCIATION
In corporate governance, a company's articles of association (AoA, called articles of
incorporation in some
jurisdictions) is a document which, along with the memorandum of
association (in cases
where the memorandum exists)
form the company's constitution defines the responsibilities of the directors, the kind of business
to be undertaken, and the means by which the shareholders exert control over
the board of directors.
It refers to that document of
the company in which rules of internal management to achieve the objective laid
down in the memorandum of association are stated.
Definition of Articles of Association -
According to Section 2 (2) of the Indian Companies
Act, "Articles means the Articles of Association of a Company as
originally framed or as altered from time to time in pursuance of any previous
Company Laws or of this Act". Thus, it is clear that the Articles of the association
are the Rules made for the Internal Management of a Company. These Rules are
prepared within the limitations given in the Memorandum of Association.
The following Companies have to compulsorily prepare
the Articles of Association:
1) Private
Companies having Liability Limited by Shares.
2) Companies having Liability Limited by Guarantee
Contents of Articles of Association:
The scope of the Articles of a Company is very wide.
The main items included in the Articles are as under.
1) If some or all rules of the Schedule A of the Act
are not being accepted it should be mentioned in the Articles
2) Information regarding Preliminary Contracts.
3) Detailed information regarding the Share Capital of
the Company.
4) Rules and procedures regarding the Allotment of
Shares.
5) Minimum subscription limit
6) Rules regarding Share Certificates and Share
Warrants and procedures to issue them.
7) Powers of the Company regarding the raising of the
Loans.
8) Rules and procedures to be adopted for recovering
the Price of Shares purchased by the members.
9) Rules and procedures regarding the Transfer and
Transmission of Shares.
10) Rules regarding smooth conduct of General Meeting
of the Company.
11) Rules regarding Internal Management of the
Company.
12) Rules regarding selection, appointment, and
remuneration of the Directors and the Meetings of the Board of Directors.
13) Common Seal of the Company and rules regarding its
use.
14) Rules regarding Accounting and Auditing of the
Company.
15) Procedure regarding the Dissolution of the
Company.
16) Rules regarding Resolutions.
17) Provisions regarding the appointment, duties,
responsibilities, powers, qualifications and remuneration each of the Managing
Directors, Managers, and Secretary, etc.
18) Rules regarding the appointment and remuneration
of the Auditors.
19) The voting power of the Members
20) Rules regarding the Capitalisation of Profit.
21) Rules regarding the Change in the Share Capital.
22) Method of the Conversion of the Shares into the
Stocks.
23) Rules regarding the Disbursement of the Dividend
and the Creation of Reserve Funds.
24) Rules regarding the calls on Shares, forfeiture of
shares, Resale of the Forfeited shares and Surrender of Shares.
25) Rules regarding the Underwriters of the Shares and
Debentures.
Importance of Articles of Association
For the smooth conduct and management of the Business
of a Company, certain fixed rules are necessary. In the absence of such rules,
the officials of the Company will not be able to take Decisions on different occasions.
It will create confusion in the Organisation. Hence, in order to avoid such
confusion, the Companies Act has made it binding for every Company to prepare
its Articles. The importance of the Articles of Association can be discussed as
under.
1) Importance from the point of view of the Company
2) Importance from the point of view of the Directors.
3) Importance from the point of view of the Members or
Shareholders.
1) Importance from the point of view of the Company:
Articles of Association are prepared for the Internal Management of a Company.
Hence, they are very important from the point of view of a Company. The organisation created for the achievement of objects in the Memorandum is
managed by Articles. As a result, various activities of a Company can be
effectively controlled. In the Articles, the duties, responsibilities and
authority of different Officers are clearly mentioned. As a result, these
Officers clearly know their duties, responsibilities and authority and they can
perform their duties and responsibilities in the best manner. The rules
regarding Routine work of a Company are clearly mentioned in the Articles.
Hence, the Company can smoothly conduct its business.
2) Importance from the point of view of the Directors:
Articles of Association play an important role as a part of Contracts between
the Company and the Directors. Hence, while managing a Company, the Directors
have to take all such Decisions which will not violate the rules and provisions
of the Articles. While taking every Decision the Directors have to see that it
is within the Articles. The Directors have always to keep the Articles in their
hands for ready reference. Hence, Articles are called a 'Bool of Ready
Reference' for Directors. Articles are very useful for the Directors for
determining the scope and limitations of their work.
3) Importance form the point of view of the Members or
Shareholder: According to Section 36 of the Indian Companies Act, the relations
between the Company and the Members have accepted all the provisions in the
Articles by mutual contract. The members can also compel the Company to conduct
the Business of the Company on the basis of the Provisions in the Articles. The
Shareholders have a right to see that the Provisions in the Articles are being followed
or not. These rights are regarding Powers of Shareholders, Meeting of
Shareholders, Voting Powers and Provisions related to the Directors. Similarly,
if the Shareholders do not follow the rules regarding Calls on Shares, Share
Transfer, Share Forfeiture and Surrender of Shares the Company has a right to
take necessary action against the Shareholders who are the defaulters.
BASIS FOR COMPARISON
|
MEMORANDUM OF ASSOCIATION
|
ARTICLES OF ASSOCIATION
|
Meaning
|
Memorandum of Association is
a document that contains all the fundamental information which are required
for the incorporation of the company.
|
Articles of Association is a document containing all the rules and regulations that govern the company.
|
Defined in
|
Section 2 (56)
|
Section 2 (5)
|
Type of Information
contained
|
Powers and objects of the
company.
|
Rules of the company.
|
Status
|
It is subordinate to the
Companies Act.
|
It is subordinate to the
memorandum.
|
Retrospective Effect
|
The memorandum of association of the company cannot be amended retrospectively.
|
The articles of association can be amended retrospectively.
|
Major contents
|
A memorandum must contain
six clauses.
|
The articles can be drafted as per the choice of the company.
|
Obligatory
|
Yes, for all companies.
|
A public company limited by
shares can adopt Table A in place of articles.
|
Compulsory filing at the
time of Registration
|
Required
|
Not required at all.
|
Alteration
|
Alteration can be done,
after passing Special Resolution (SR) in the Annual General Meeting (AGM) and
previous approval of Central Government (CG) or Company Law Board (CLB) is
required.
|
Alteration can be done in
the Articles by passing Special Resolution (SR) at the Annual General Meeting
(AGM)
|
Relation
|
Defines the relation between
company and outsider.
|
Regulates the relationship
between the company and its members and also between the members inter se.
|
Acts done beyond the scope
|
Absolutely void
|
Can be ratified by
shareholders.
|
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