Unit 2
Formation and Incorporation of a Company
Q1) EXPLAIN THE PROMOTION OF A COMPANY
A1) A business enterprise doesn't inherit existence on its own. It comes into existence as a result of the efforts of an individual or group of individuals or an establishment. That is, it's to be promoted by some person or persons. The method of business promotion begins with the conceiving of a thought and ends when that concept is translated into action i.e., the establishment of the business enterprise and commencement of its business.
Promoter in a Company
A successful promoter may be a creator of wealth and an economic prophet. The person who is concerned with the promotion of business enterprise is understood as the Promoter. He conceives the thought of starting a business and takes all the measures required for bringing the enterprise into existence.
For instance, Dhirubhai Ambani is the promoter of Reliance Industries.
The promoters determine the ways to gather money, investigate business an idea arrange for finance, assembles resources and establishes a going concern.
The company law has not given any status to promoters. He stands during a fiduciary position.
Types of Promoters
Promoters are differing types like professional promoters, occasional promoters, promoter companies, financial promoters, entrepreneurs, lawyers and engineers.
Q2) WRITE A NOTE ON REGISTRATION OF A COMPANY
A2) It is registration that brings a corporation into existence. a company is correctly formed only it's duly registered under the companies Act.
Procedure of Registration
In order to urge the company registered, the important documents required to be filed with the Registrar of Companies are as follows.
1. Memorandum of Association: it's to be signed by a minimum of seven persons for a public company and by 2 just in case of a private company. It must be properly stamped.
2. Articles of Association: This document is signed by all those persons who have signed the Memorandum of Association.
3. List of Directors: an inventory of directors with their names, address and occupation is to be prepared and filed with the Registrar of Companies.
4. Written consent of the Directors: A written consent of the directors that they need agreed to act as directors has got to be filed with the Registrar alongside a written undertaking to the effect that they're going to take qualification shares and can buy them
5. Notice of the Address of the Registered Office: it's also customary to file the notice of the address of the corporate ’s registered office at the time of incorporation. it's to tend within 30 days after the date of incorporation.
6. Statutory Declaration: A statutory declaration by any advocate of the Supreme Court or of a high court, or an attorney or pleader entitled to seem before a high court or a practicing chartered accountant in India, who engages within the Company formation or by an individual indicated within the articles as director, director, Secretary or manager of the company, mentioning that the requisites of the Act and therefore the rules there under are complied with. it's to be filed with the Registrar of Companies.
When the required documents are filed with the Registrar alongside the prescribed fee, the Registrar scrutinizes the documents. If the Registrar is satisfied, the name of the company is entered within the register. Then the Registrar issues a certificate referred to as Certificate of Incorporation.
3. Certificate of Incorporation
On the registration of Memorandum of Association, Articles of Association and other documents, the Registrar will issue a certificate known as the ‘Certificate of Incorporation‘. The difficulty of certificate is that the evidence of the very fact that the company is incorporated and therefore the requirements of the companies Act are complied with.
4. Certificate of Commencement of Business
As soon as a private company gets the certification of incorporation, it can commence its business. A public company can commence its business only after getting the ‘certificate of commencement of business. After the company gets the certificate of incorporation, a public company issues a prospectus for inviting the public to subscribe its share capital it fixes the minimum subscription. Then it's required to sell the minimum number of shares mentioned within the prospectus.
After completing the sale of the specified number of shares, a certificate is shipped to the Registrar alongside a letter from the bank stating that each one the cash is received.
The Registrar then scrutinizes the documents. If he's satisfied he issues a certificate referred to as ‘Certificate of Commencement of Business’. this is often the conclusive evidence for the Commencement of Business.
Q3) WRITE A NOTE ON PROMOTER
A3) Promoters are ‘pioneers’ and Creators’ of company. They're men of imagination and resources. The thought of starting a new company comes first within the minds of promoters. They devote time and bear risk to line up a company.
According to Guttmann and Douglas:
“Promoters may be a character who prepare the plan for formation of company and brings company into existence, as an artificial person”.
Functions of Promoters:
Q4) EXPLAIN THE DUTIES OF PROMOTER
A4) The duties of promoters are as follows
1. To disclose the secret profit:
The promoter shouldn't make any secret profit. If he has made any secret profit, it's his responsibility to disclose all the cash secretly obtained by way of profit. he's empowered to deduct the important looking expenses incurred by him.
2. To disclose all the material facts:
The promoter needs to disclose all the material facts. If a promoter contracts to sell the company a property barring making a full disclosure, and therefore the property was acquired by him at a time when he stood during a fiduciary position toward the company, the company may either repudiate the sale or affirm the contract and recover the profit made out of it by the promoters.
3. The promoter must observe to the company what he has obtained as a trustee:
A promoter stands in important position within the company. it's the duty of the promoter to form good to the company what he has obtained as trustee and not what he may get at any time.
4. Duty to disclose private arrangements:
It is the duty of the promoter to disclose all the private association resulting him profit by the promotion of the company.
5. Duty of promoter against the longer term allotters’:
When it's said the promoters substitute a fiduciary position towards the company then it does not mean that they substitute such relation only to the company or to the signatories of memorandums of company and that they also will stand in this relation to the longer term allottees of the shares.
Liabilities of Promoter:
The liabilities of promoters are given below
1. Liability to account in profit:
As we've already discussed that promoter stands during a fiduciary position to the company. The promoter is susceptible to account to the company for all secret earnings made by him without full disclosure to the corporate. The company may adopt anybody of the subsequent two courses if the promoter fails to disclose the profit.
(i)The company can sue the promoter for an amount of profit and recover an equivalent with interest.
(ii) The company can rescind the contract and may recover the cash paid.
2. Liability for misstatement within the prospectus:
Section 62(1) holds the promoter liable to pay compensation to each one that subscribes for any share or debentures on the faith of the prospectus for any loss or harm sustained by reason of any untrue statement included in it. Sec. on 62 also provides certain grounds on which a promoter can avoid his liability. Similarly Sec. 63 provides for criminal liability for mis-statement within the prospectus and a promoter may additionally also become liable under this section.
The promoter may additionally even be imprisoned for a term which can reach two years or might also be punished with the fine up to Rs. 5,000 for untrue statement within the prospectus. (Section 63).
3. Personal liability:
The promoter is personally responsible for all contracts made by him on behalf of the company until the contracts are discharged or the company takes over the liability of the promoter.
The death of promoter doesn't relieve him from liabilities.
4. Liability at the time of winding up of the company:
In the course of winding up of the corporate, on an application made with the help of the official liquidator, the court may make a promoter responsible for misfeasance or breach of trust. (Sec. 543).
Further where fraud has been alleged by the liquidator against a promoter, the court may order for his public examination. (Sec. 478).
The company can sue and may be sued in its own name.
Q5) WRITE A NOTE ON FUND RAISING
A5) Under Companies Act, 2013 a corporation can raise funds via 3 means:-
1) Deposits.
2) Loans.
3) Capital.
Under Companies Act 2013, a private Ltd. can raise funds via Capital in 2 Ways:-
1) Private Placement/ Preferential Allotment.
2) Right Issue/preferential Allotment.
PRIVATE PLACEMENT
A private placement is a sale of stock shares or bonds to pre-selected investors and institutions as an alternative than on the open market. It is an alternative to an initial public offering (IPO) for a company looking for to raise capital for expansion.
Investors invited to participate in private placement programs encompass wealthy individual investors, banks and other financial institutions, mutual funds, insurance companies, and pension funds.
One advantage of a private placement is its relatively few regulatory requirements
Private Placement:
In this method, the issuing company sells its securities privately to one or extra institutional brokers who in turn sell them to their clients and associates. This method is quite convenient and economical. Moreover, the company gets the money shortly and there is no risk of non-receipt of minimum subscription.
Private placement, however suffers from certain drawbacks. The economic institution may insist on a huge discount or different conditions for private purchase of securities. Secondly, it may no longer sell the securities in the market but keep them with it.
This deprives the public a chance to purchase securities of a flourishing company and there may be concentration of the company’s ownership in a few hands. Private placement is very appropriate for small issues particularly during depression.
Private Placement
Understanding Private Placement
There are minimal regulatory requirements and standards for a private placement even though, like an IPO, it involves the sale of securities. The sale does not even have to be registered with the U.S. Securities and Exchange Commission (SEC). The company is now not required to provide a prospectus to potential investors and detailed economic information may not be disclosed.
The sale of stock on the public exchanges is regulated by the Securities Act of 1933, which was enacted after the market crash of 1929 to ensure that investors receive adequate disclosure when they purchase securities. Regulation D of that act provides a registration exemption for private placement offerings.
The same law allows an issuer to sell securities to a pre-selected group of buyers that meet specified requirements. Instead of a prospectus, private placements are sold using a personal placement memorandum (PPM) and cannot be broadly marketed to the general public.
It specifies that only authorized investors may participate. These may include men and women or entities such as venture capital firms that qualify under the SEC’s terms.
Advantages and Disadvantages of Private Placement
Private placements have become a frequent way for start-ups to raise financing, particularly those in the internet and monetary technology sectors. They allow these companies to grow and develop while avoiding the full glare of public scrutiny that accompanies an IPO.
Buyers of private placements demand higher returns than they can get on the open markets.
As an example, Light speed Systems, an Austin-based company that creates content-control and monitoring software for K-12 educational institutions, raised an undisclosed amount of money in a non-public placement Series D financing round in March 2019. The funds were to be used for business development.
A Speedier Process
Above all, a younger company can remain a private entity, avoiding the many guidelines and annual disclosure requirements that follow an IPO. The light regulation of personal placements allows the company to avoid the time and expense of registering with the SEC.
That capability the process of underwriting is faster, and the company gets its funding sooner.
If the issuer is promoting a bond, it also avoids the time and expense of obtaining a credit rating from a bond agency.
A private placement allows the issuer to sell a greater complex security to accredited investors who understand the potential risks and rewards.
A More Demanding Buyer
The buyer of a private placement bond issue expects a higher rate of interest than can be earned on a publicly-traded security.
Because of the additional hazard of not obtaining a credit rating, a private placement buyer may not buy a bond unless it is secured with the aid of specific collateral.
A private placement stock investor may additionally demand a higher percentage of ownership in the business or a constant dividend payment per share of stock.
Q6) EXPLAIN RIGHT ISSUE/ PREFRENTIAL ALLOTMENT
A6) Preferential Offer means an issue of shares or other securities, by a corporation to any select person or group of persons on a preferential basis and doesn't include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities.
Essentials:
• For a pro-rata issuance of equity and securities converting into equity, to current equity shareholders in the company, then the shareholders of the corporate has got to approve through a special resolution, at least 3 days before such offer. The Articles of Association has got to have an enabling provision.
• The price for the security offered has got to be supported by a valuation report by a Registered Valuer.
• When obtaining the shareholder approval, the below details must be decided and included within the disclosures:
– The objects of the issue;
• The whole number of shares or other securities to be issued;
• The price or price band at/within which the allotment is proposed;
• The class or classes of persons to whom the allotment is proposed to be made;
• The proposed time within which the allotment shall be completed;
• The names of the proposed allottees and therefore the percentage of post preferential offer capital which will be held by them;
• The change in control, if any, in the company that might consequent to the preferential offer;
• The number of persons to whom allotment on preferential basis have already been made during the year, in terms of number of securities also as price;
• The justification for the allotment proposed to be made for consideration aside from cash alongside valuation report of the registered valuer.
– The pre issue and post issue shareholding pattern of the corporate.
Q7) EXPLAIN THE PROCEDURE FOR PREFRENTIAL ALLOTMENT
A7) a. Check Provision in Article regarding Preferential Allotment
b. Call Board Meeting:
• To arrange Offer Letter
• Make Proposal for Preferential Allotment
• Prepare list of persons to whom option are given
• Call EGM
c. Call EGM:
• Pass SR- are valid for 12 month
• If not completed PP in 12 Month pass another SR
• Approve Draft Offer Letter by SR
d. File MGT-14 with ROC
Attachments:-
e. Issue offer letter in PAS-4 within 30 days of record of name of persons:
• Form serially numbered
• Address to the persons to whom the offer is formed
f. Prepare complete record of Preferential Placement in PAS-5
g. File PAS-4 + PAS-5 with ROC within 30 days of issue of offer letter in GNL-2
h. Make Allotment of shares within 60 days of receipt of cash from the persons to whom right was given.
i. Called BM for allotment of shares
j. File PAS-3 with Roc within 30 days if Allotment. Attachments: – List of Allottees – BR for allotment of share
k. File Form MGT-14 alongside Resolution pass in committee meeting for allotment of shares.
l. Issue Share Certificates.
Q8) EXPLAIN CAPITAL SUBSCRIPTION
A8) Capital Subscription means, with reference to a Shareholder, the amount of money and the fair market price , as determined by the Board of Directors, of any property (other than money) paid or contributed to the corporate with reference to the Shares held or purchased by any Shareholder and “Capital Subscription” means all such amounts, collectively.
Q9) WHAT IS “COMMENCEMENT OF BUSINESS”
A9) It is a Declaration to be issued by the directors within 180 days of incorporation of company stating that the subscribers to the Memorandum of the company has paid the value of shares so agreed by them, along with a verification of registered office address of the company. This declaration need to be filed along with proof of subscription money received by the company in form 20A with the Registrar of Companies.
Concept of Certificate of ‘Commencement of Business’ was there in the erstwhile Companies Act, 1956 and it was also introduced by the Companies Act, 2013 under the Section 11 of the Companies Act, 2013. However, section 11 was omitted (deleted) by the companies (Amendment) Act, 2015 w.e.f. 29th May 2015.
Recently companies Act, 2013 has further amended by way of passing of ordinance by the President of India i.e. Sh. Ram Nath Kovind Ji on 2nd Day of November, 2018. Declaration for Commencement of business is re-introduced by way of inserting a new Section 10A after section 10 of the Companies Act, 2013. The text of Section 10A is as follow;
1. A company incorporated after the commencement of the Companies (Amendment) Ordinance, 2018 and having a share capital shall not commence any business or exercise any borrowing powers unless—
a.) declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and
b.) the company has filed with the Registrar a verification of its registered office as provided in subsection (2) of section 12.
2. If any default is made in complying with the requirements of this section, the company shall be liable to a penalty of fifty thousand rupees and every officer who is in default shall be liable to a penalty of one thousand rupees for each day during which such default continues but not exceeding an amount of one lakh rupees.
3. Where no declaration has been filed with the Registrar under clause (a) of sub-section (1) within a period of one hundred and eighty days of the date of incorporation of the company and the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may, without prejudice to the provisions of sub-section (2), initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.
After the above amendment the Ministry of Corporate affairs has further amended the Companies (Incorporation) Rules, 2014 vides Companies (Incorporation) Fourth Amendment Rules, 2018 dated 18.12.2018.
According to Companies (Incorporation) Fourth Amendment Rules, 2018, a new Rule 23A shall be introduced by the Ministry which is also reproduced below:
“23A’ Declaration at the time of commencement of business –
The declaration under section 10A by a director shall be in Form No. lNC-20A and shall be filed as provided in the Companies [Registration Offices and Fees) Rules, 2014 and the contents of the said form shall be verified by a company Secretary or a chartered Accountant or a cost Accountant in practice:
Provided that in the case of a company pursuing objects requiring registration or approval from any sectorial regulators such as the Reserve Bank of India, Securities and Exchange Board of India, etc., the registration or approval, as the case may be from such regulator shall also be obtained and attached with the declaration.”
The ordinance was come into force on 2nd Nov 2018 therefore all the provisions of this section become applicable from 2nd November 2018. Therefore every company having share capital incorporated after 2nd November 2018 has to file form 20A with 180 days i.e. before 1st May 2019. The Ministry of Corporate affairs has launched the form 20A and its available on it portal.
Flotation the issue of shares during a newly established or existing private company whereby the company goes ‘public’ and obtains a listing of its shares on the stock exchange.