ISBR COLLEGE

BBA 3RD SEMESTER (2019-2020)

CORPORATE ENVIRONMENT

UNIT – I FORMATION OF COMPANY

Meaning of company:- An association or an organization which is registered or incorporated under the

companies act of 1956 is called a company. It is an artificial person created by law.

Definition.:-According to justice Lord Lindley. “ An association of many persons who contribute

money of money’s worth to a common stock and invest in some trade and business and who share profit
and loss arising therefore”.

Features or Characteristics of Company

• Registration: - The company is created only when registered under the companies act Of 1956.
• Legal entity:- A company is an artificial person with a legal entity of its own. It acts through the board
of directors elected by the share holders.
• Common Seal:- The company being an artificial legal entity or person, it can’t act on Its own. So, it
acts through natural person’s life or the secretary who is authorized Hence, The need for a common seal
of the company for all the contracts entered into by the Directors or the secretary. The common seal is
like the signature of a company.
• Perpetuity: - The Company which is registered never dies with retirement or death of its members as
is the case with partnership. The company will survive for the longer Period.
• Limited liability:- In a company, by shares, the liability of members is limited to the Nominal value
of the shares held by them. In respect of partly paid shares, the liability Extends upto the balance of the
nominal value of shares.
• Separation of ownership and management:- In a company, the shareholders are the Owners but the
management is interested to the board of directors who are separate from Form the body of shares
holders.
• Transferability of shares:- In a public limited company, the shares can be easily Transferred from
one person to another.

Kinds of companies
1. Chartered Company:- It a company is incorporated under a special monarch. It is called a chartered
company. For eg:- East Indian company, the chartered bank of Australia, china an India were
Incorporated by the grant of a special royal charter. These companies are not there in India at present.

2. Statutory Company:- A company which is created by a special act of the legislature is Called a
statutory company. The state bank of India, industrial finance corporation, life Insurance, corporation of
India etc are the examples of this kind.

3. Registered Company:- A company brought into existence by registration with the Registrar of the
companies under the companies act of 1956 is called registered company.

Types of registered company are:-

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 A. Private company Private Company:- A private company has been defined as a company
which:-
 Limits the number of members 50
 Restricts the transfer of shares from one shareholder to another.
 Prohibits an invitation to the public to subscribe to its shares and debentures.

B. Public Company:- Public Company is a company which requires at least 7 members to form
and there is maximum limit. It can invite the public to subscribe its shares and debentures and it
does not restrict the transfer of its shares from one shareholder to another.

C. Unlimited company:- The companies in which the liability of the members is Unlimited is
called unlimited company.

D. Companies limited by guarantee:- In these companies, each member gives a guarantee for
the debts of a company upto a certain extent. Eg:- Trade associations, clubs and societies which
formed to promote social and cultural Activities.

E. Companies limited by shares:- In these companies, liability being limited by shares, The
member is called upon to pay only the unpaid amount on the shares held by him.

4. Government company:- A company in which not less than 51% of share capital is held By the
central government and or any state government or governments is called a Government company. For
Eg:- Hindustan Aeronautics Limited (HAL), Indian Telephone Industries (ITI),Bharath Electronics
Limited (BEL).

5. Foreign Company:- A foreign company is that company which is incorporated in a Foreign country,
but which has established a place of business in india. Under section 592 of companies act, every
foreign company must, within 30 days of the Establishment of the business field with the registrar the
following documents.
a) A certified copy of its memorandum and articles of association.
b) The full address of the registered office of the company.
c) The list of directors and the secretary of the company with required particulars.
d) The name and address of the person authorized to receive any notice or documents etc.

6. Holding and Subsidiary Company:- A company which has control over another Company is called
holding company in other words, a company which holds more than 50% of the share capital in other
company is called a holding company
A company which is controlled by other company is called a subsidiaries company. Eg:- Company A
has 60% of share capital in Company B Here, Company A is called a Holding company and Company
B is called a subsidiary Company.

7. One Man Company:- It refers to a company, in which only one person holds the Entire share
capital, but in order to meet the statutory requirements of minimum number Of members, some of
dummy members mostly his relatives, friends, hold one or two Shares each.

Difference between Private Company and Public Company

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 Basis Private Company Public Company
1. Formation 1. It can commence its business 1. It can commence its business only after
immediately after incorporation incorporation as well as obtained of
commencement of business certificates.
2. End words of the name 2. It uses the word private 2. It uses the word limited in his name
limited in its name.
3. Membership 3.Minimum 2 members and 3. Minimum 7 members and maximum
maximum 50 members unlimited
4. Prospectus 4. It is not required to file 4. It must file the prospectus with the registrar
prospectus with registrar of the of the company.
company.
5. Allotment of shares 5. No legal restriction on 5. There are certain restriction.
allotment of shares
6. MOA / AOA 6. Atleast 2 members must sign 6. Atleast 7 members must sign MOA &
memorandum of association and AOA.
7. Public issue of capital articles of association
7. It is prohibited from inviting 7. It can invite public to subscribe capital.
public to subscribe capital
8. Transfer of Shares. 8. No shares are transferable and 8. Shares are freely transferable an they can be
cannot be quoted in the stock quoted on stock exchange.
9. Directors exchange.
9. It must have atleast 2 directors 9. It must have atleast 3 directors.

10. Minimum capital
requirement.
11. Statutory meeting
12. Share warrant
10. It requires atleast Rs. 5 lakhs. 10. It requires atleast Rs. 1 lakh.
11. It doesn’t require to hold 11. It must hold statutory meeting and file a
statutory meeting. statutory report with registrar of company
12. It cannot issue share warrant within 6 months
12. It can fromwarrant.
issue share the date of obtainment

13. Quorum. 13. Minimum 2 members must 13. Minimum 5 members must be present to
be present to conduct meeting. conduct the meeting.
14. Managerial remuneration 14. No restrictions on managerial 14. Total managerial remuneration shouldn’t
remunerations. be more than 11% of net profit.

Conversion of Private Company into Public Company

A Private Company can be converted into Public Company by altering its articles of Association and
passing special resolutions and by deleting those provisions relating to-
a) Restriction of transfer of shares.
b) The limitations of the maximum membership
c) Prohibition of invitation to the public for subscribing to it shares.

Duties of a secretary while converting the Private Company into a public company.

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1) To arrange a board meeting in consultation with directors and finalise the plan of Conversion and all
general meeting for passing resolution for the conversion of the Company.
2) To prepare a new set of articles in consultation with board of directors.
3) To issue notices and circulars of the extra-ordinary general meeting as per the decision Of the board.
4) To get the resolution passed at the extra-ordinary general meeting.
5) To file prospectus with the registrar of the companies.
6) To file with the registrar, a notice of increase of share capital.
7) To get from the registrar a new certificate of incorporation, the changed name.
8) To take steps to raise additional capital from the public if needed for the further Expansion of
business.

Conversion of Public Company into Private Company

As per the companies amendment act 1960, the conversion of public company into Private company
requires the approval of the central government. The public Company should put the proposal before
the central government regarding the Conversion of public company into private company ltd. The
central government After scrutinizing (Verifying) the proposal, they permit the conversion into a private
Company. Only if it is in the interest of the company.

Duties of the Secretary and the steps for the conversion of public company into private Company
ltd.
1) To arrange board meeting with the board of directors for calling an extraordinary General meeting.
2) To insure notices and circulars of extra ordinary general meeting.
3) To get the special resolution passed at the extra-ordinary general meeting, regarding The conversion
of public into private company.
4) To file with the registrar, copies of special resolution within 30 days of the date of Resolutions.
5) To apply to the central government with necessary documents for the approval of Concern.
6) To publish about the conversion in leading newspapers and the newspaper clippings to be sent to
government.
7) After obtaining the approval of the central government to file with the registrar within one month of
proposal.

FORMATION OF A COMPANY
In the formation of a public limited company mainly four stages are involved:-
• Promotion
• Incorporation
• Capital Subscription
• Commencement of business or trading certificate
In the formation of a private it company only the first two stages say –
Promotion
Incorporation are involved

Promotion of company:-
The steps which are taken to persuade / motivate a number of persons to come together for the
achievement of a common objective through the company form is called promotion.
The person or the persons who undertake the responsibility to bring the company into existence are
called promoters.

Steps in promotion of a company

The promotion may be undertaken either for starting a new business or Expanding the existing business
or for forming a holding company for a merger etc.
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The company promotion has involved 4 stages.

a) Discovery of an idea
The promoters starts with an idea to start some business either in new field or existing field of business.
He makes preliminary investigation to find out whether the particular business is useful and he roughly
estimates income and expenditure of the proposed business.

b) Detailed Investigation:-
The promoter needs to make detailed investigation of his idea with the assistants of many experts like
engineers, chemists, market analysis’s, finance experts, management consultants etc. on the basis of
reports of these experts the promoters would be in a position to know the capital requirements, place of
location, size of the unit, demand condition in the market, price of product, cost of production, Written
on capital etc. A detailed investigation will help him to compare the estimated income is enough to meet
the cost of production and other expenses.

c) Assembling:- After detailed investigation, if he is satisfied with practicability and profitability of

the proposal concern, he starts assembling preposition, assembling means getting the support and
consent of other persons to act as a director or founders, arranging for patents, a suitable site for the
company, machinery and equipment etc.

Incorporation:- After taking all preliminary steps of for registration an application along with the
necessary documents stamp duty, registration fees etc. has to be made to the registrar for the issue of
certificate of incorporation.

After verification of the document, if the registrar is satisfied he will issue a certificate of incorporation.
Steps and formalities for the incorporation of the company

The following documents to be filed with the registrar:

• Memorandum of Association (MOA) with atleast 7 persons subscribed, each one share, if it is a public
company. If it is a private company atleast 2 persons with the shares subscribed.
• Articles of Association (AOA) except where table ‘A’ considered as companies articles.
• Address of the registered office
• A list of directions with their names, address and occupation
• Consent of directions in writing to act ac directions if it is a public company.
• An undertaking by directions to take and to pay for any qualification shares. This is not required for
private company.

Capital Subscription:- Public company having share capital has to undergo 2 additional stages:-

 Subscription stage
 Commencement of business

In the capital formation stage the company has to make necessary arrangements for obtaining
necessary capital for the company.

For this purpose immediately after getting the certificate of incorporation, The company calls a
meeting to deal with the following:-
• Appointment or confirmation of appointment of secretary if one has already been appointed by the
promoters at the promotion stage.
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• Adoption of preliminary contracts which include the promoters enter into contracts on behalf of the
proposed company such as contract for purchasing of properties, assets, existing business etc.
• Adoption of a draft of prospectus or the statement in view of prospectus.
• Appointment of bankers solicitors, auditors, legal advisor brokers etc.
• Listing of shares on stock exchange.
• Adoption of undertaking contracts.
• Number of Shares to be issued.
• Collection of share capital etc.

Commencement of business: The commence the business the business commencement certificate is
required. To obtain this the following conditions must be filled.
1. A prospectus or a statement in lieu of prospectus has to be filed with the registrar of the company
2. The number of shares allotted should not be less than the minimum subscription as mentioned in the
prospectus.
3. If the directors have taken up and paid for any qualification shares, the amount paid on such shares
should not be less than the amount paid by other member.
4. A declaration is that no money is refundable to the applicants of shares if they fail to make full
payment of shares.
5. A declaration of compliance by one of the directors or secretary that shares have been allotted for the
amount not less the minimum subscription and also that all the conditions regarding the commencement
of business have been complied with.
6. The registrar after receiving the declaration of compliance with the provisions of section 149 from
the secretary or one of the directors along with required filing fee, will routine the declaration and if
satisfied will issue a certificate to commence the business. From the date of this certificate, the
company is entitled to commence its business.

Duties of a Company secretary before incorporation

• To help promoters in making detailed investigation of the proposed business.
• To help the promoters in drawing up the financial plan for the approval of the business.
• To attend all preliminary meetings of promoters and keep a record of proceedings of their meetings.
• To get the approval from the registrar for the proposed name of the business.
• To help the promoters in drafting of memorandum of association and articles of association
• To follow the SEBI (Security Exchange Board of India).
• To collect the certificate registration from the registrar.
• To send a notice of the registered office of the company to the registrar within the 30 days of the date
of registration.

Meaning of memorandum:
It is the most important as well as the primary document of the company without this document no
company can be registered in India. Hence it is also called as life giving document or character of the
company it defines companies’ relationship with share holders and outside world. It has to be divided
into paragraphs, consecutively numbered and printed.

Clauses or contexts of memorandum of Association

Name Clause: - This clause contains the name of the company. The name selected should not be
similar to that of the existing company. The name of the company must be approved by the central govt.
The name of the Public company must have limited and private company must have private ltd. If
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company is formed not with the object of declaring dividend, but to promote culture, art etc. The central
govt may permit the company to drop the word limited.

Situation or Domicile Clause: - In this clause the name of the state in which the registered office of the
company is situated is mentioned. This clause fixes the jurisdiction (limit) of the court for all the legal
matters and that of the registrar of the company for the company manners.

Object Clause: - This clause defines the object for which the company is formed. The object should be
legal and must not be inconsistent with the companies act. The object must not be the general. A
company is not legally allowed to carry any business other than specified in this clause.

Liability Clause: - This clause states that the liability of members is limited to the face value of the
shares up by them. If a members has already paid some amount on shares, he can called upon to pay
only the unpaid amount on shares.
Capital Clause: - In this clause, particulars regarding the amount of share capital with which the
company is proposed to be registered and the division of share capital into a fixed amount are included.

Association or subscription Clause: - The subscribes to the memorandum will give a declaration to
this clause and express the desire to purchase a number of shares mentioned against the respective
names .

Alternation of memorandum of association

The procedure for alternation of the memorandum of association as per the companies’ act of 1956 is as
follows: -

(1) Alteration of Name Clause Steps or Procedure: - Ascertainment The secretary has to certain from
the registrar whether the proposed name is desirable or not.

 Written approval from Central government: - If the registrar informs him that the name
proposed is not desirable then the secretary has to obtain written permission from central
government for changing the name.
 Board meeting: - The secretary has to arrange a board meeting for recommending the changed
name to the members and to call an extra-ordinary general meeting.
 Special resolution: - The secretary has to get the special resolution at the extra-ordinary
general meeting.
 Copy of special resolution to registrar: - Within 30 days of passing a resolution, a copy of the
same has to be filed with the registrar.
 Obtainment of fresh incorporation certificate: - On filing of the resolution the registrar
makes necessary changes in the register and issues fresh certificate of incorporation with
changes name.
 Arrangement for change of name: - The secretary has to arrange for the change of name on
all the documents and seal etc and also should inform all the parties who are dealing with the
company.

(2) Alteration of domicile or situation clause Change within the City: - If a company wants to
change its registered office from one place to another within the city, town etc. The board of directors
will pass a resolution and the same to be informed the registrar within 30 days of passing the resolution.
Change within the State: - A special resolution must be passed and a notice of such change should be
given to the registrar within 30 days of passing the resolution.

Change of registered office from one state to another: - The shifting of the registered office from one
state to another involves the following steps: -
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i) Passing a special resolution at an extra-ordinary general meeting.
ii) Filing a copy of resolution with the registrar of companies within 30 days of resolution.
iii) Under section 17 of the companies act, the company may after its provisions of memorandum of
association by special resolution with the permission of central govt and the information about the
change of registered office to be given to the parties dealing with the company.
iv) Getting a certificate of registration of the transfer from the registrar of both the states.
v) Giving a notice of a location of new office to the registrar of the state to which the company is
shifted within 30 days of the transfer.

(3) Alteration of object Clause: - A change in object clause can be affected by passing a special
resolution and with the sanction of central govt. Steps or procedure to change the object clause To
arrange board meeting, to discuss the proposed change and also to call an extra-ordinary meeting to
pass a special resolution. To send notice of extra-ordinary general meeting to all the members and also
to debenture holders, creditors etc.

(4) Alteration of capital clause: - A company may alter its capital at the general meeting for the
following purposes. For increasing the capital For reorganization of capital For reduction of capital
As per section 94 of the companies Act, the company limited by shares or guarantee and having share
capital if so authorized by articles may alter the share capital in the following ways: -
• Increases its shares capital by the issue of new shares
• Consolidate its share capital
• Convert its shares into stock and vice-versa.
• Sub- divide its shares into shares of into shares of smaller amount.
• Cancel the shares which have not been taken.
• Procedure to increase authorized share capital
• To see the articles allow the company to raise the share capital
• If not resolution is required
• To convene a board meeting to fix a date, time and venue of general meeting
• Notice in writing to be serve to the members at least 21 days before the general meeting.
• To hold general meeting to pass ordinary or special resolution with 3/4th majority
• A copy of resolution passed at the general meeting with regard to increase in capital to be filed with
the registrar of companies.
• Other documents such as-memorandum of association articles of association and demand draft to be
filed with the registrar.
Procedure for consolidation or subdivision of shares
• If articles don’t permit, resolution is required to alter the articles.
• Board meeting to be convened to call for ext general meeting.
• Notice of extra-ordinary general meeting to be given to the members and they are asked to surrender
their old share certificates.
• Issue new shares certificates
• Copy of consolidation and subdivision of shares to be filed with the registrar.

Reduction of capital
An extra-ordinary general meeting has to be convened for the purpose of passing a special resolution.
After passing the resolution a petition must be made to the court for obtaining confirmation of special
resolution for reduction of capital.
The duties of secretary in connection with reduction of capital
• To arrange a board of directors meeting, to consider a plan of reduction and to fix the date of extra-
ordinary general meeting.
• To send the members the notices of extra-ordinary general meeting.
• To get a special resolution passed at the extra-ordinary general meeting for reduction of capital.
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• To file a copy of minutes with the registrar.
• To make an application to the court only with the copy of minutes for the confirmation order.
• To receive the court order of confirmation for reduction of capital.
• To file a copy of court order and minutes describing particulars of reduction with the registrar.
• To take necessary steps to execute the scheme of reduction of capital.
Articles of Association (AOA) :The articles are the internal regulation of the company on the basis of
which its internal affairs are managed. They lay down the powers of directors, share holders and
officers.
• Contests of articles of association
• Share capital and variation of rights.
• Calls on shares
• Transfer, transmission, forfeiture of shares and surrendered of shares.
• Issue of share warrants
• Alteration and reduction of capital
• Voting and reduction of capital
• Borrowing powers.
• Proceedings at the board and the general body meetings.
• Appointment, powers, duties, qualifications, remuneration etc of the directors.
• Dividends and services
• Maintenance of books of accounts and their audits
• The company seal
• Winding up

Steps to alter articles [Secretarial Procedure]

• To arrange board meeting for the alteration of articles and also to fix up the date, time and place of
extra-ordinary general meeting.
• To see that the alterations don’t violate the provisions of company law.
• To issue notice of general meeting to the members 21 days before the meeting
• To get the resolution passed at the extra-ordinary general meeting.
• File a copy of resolution to registrar within 30 days.
• To file an altered printed copy of articles of association to the registrar within 3 months of resolution.
Differences between MOA & AOA
Memorandum of Association Articles of Association
It governs external relations of a company It governs internal relations of a company

It is a character which sets out the constitution of a It is the Bye-law of the company for internal
company administration
It states the objects for which the company is formed It states the rules for carrying out the business

If defines limits and powers of company It defines rights and duties of directors, members etc.

It is compulsory for incorporation It is not compulsory for incorporation. Instead of this

table – A can be prepared
It is a primary and fundamental documental document It is secondary and subsidiary of a company
of a company
It can be altered by a special and subject to sanction It can be altered by special resolution without any
court or central govt as the case may be approval from court or central Government

Prospectus: - The companies’ act 1956 defines prospectus as. “A Prospectus, notice, circular,
advertisement or other document inviting offers from the public for the subscription or purchase of any
shares or debentures of anybody corporate”.
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Contents of prospectus: - Section 56 of the companies act lays down that every prospectus shall have
 State the matters specified in part I of schedule II
 Set out the reports specified in part II of schedule II.
Part I of schedule II
A. General Information
1. Name and address of registered office of company.
2. Consent of central govt for issue.
3. Name of regional stock exchanges and other stock exchanges when the application is made for
listing of present issue.
4. Provisions of sub section 1 of section 68 A of companies act relating to punishment of
fictitations prospectus.
5. Statement of declaration about refund of money is the minimum subscription of 90% or not
received within 90 days from the date of close of the issue.
6. Date of opening and closing of issue
7. Name and address of the auditors, underwriters etc.
B. Capital Structure of the company : It includes authorized capital, issued capital, subscribed capital,
paid-up capital etc.
C. Terms of present time
1. Terms of payments
2. Rights of instrument holders (deposit holders debentures holders)
3. How to apply – availability of forms, node of payment etc.
4. Any special tax benefits for the company and its share holders.
D. Particulars of issue
1. Objects
2. Project cost
3. Means of financing (including of the promoters)
E. Company Management and Project
1. History, objects and present business of the company.
2. Promoters and their background
3. Names, addresses and occupation of manager, M.D and other directors.
4. Location of the project
5. Plant & machinery technology, process etc.
6. Infrastructure facilities like water, electricity, transport, banking etc.
7. Nature of products – consumer or industrial products.
8. Implementation of the projects so far.
F. As per section 370 (1B) any capital issue made during last 3 years.
1. Name of the company
2. Year of issue & Types of issue
3. Amount of issue
4. Date of closure of issue
5. Date of completing share certificates
6. Rate of dividend etc.
7. Outstanding litigation pertaining to
8. Matters that affect operations, finance including disputed tax liability of any nature.
9. Criminal prosecution launched against the company
10. Particulars of any default in meeting statutory dues towards instrument holders like debenture
holders deposit holders etc.
Part II of schedule II

A. General Information
 Consent of directors, auditors, advocate, managers etc to issue.
 Expert opinion obtain if any
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  Reasons for change of directors, auditors in last 3 years if any.
 Authority and details of resolution passed for issue.
 Procedure and time schedule for allotment and issue of certificates
 Names and addresses of company secretary, legal advisors, auditors, managers etc.

B. Financial Information [Reports to be set out]

 A report by auditor of the company with respect to: -
 Profit and losses and Assets and liabilities
 The rate of dividend for each class of shares.

C. Statutory and other Information

 Minimum subscription
 Expenses of issue giving separately fee payable to –Advisors
 Registrars to the issue
 Managers to the issue etc.
 Underwriting commission and brokerage
 Previous issue for cash
 Date of purchase of property
 Details of the directors and their remuneration appointment etc.
 Rights of members regarding voting, dividends etc.

Part III of schedule II

 In the case of a company which has been carrying on business for less than five financial years,
the reference in Part II of the scheduled for 5 financial years will mean only for the years for
which the company has been carrying on business
 Any report by accountant , required by Part II shall be made by accountant, qualified under the
companies act for appointment as auditor of the company
 The time and place at which copies of all balance sheets and profit loss accounts, material
contracts and document etc, can be inspected should also be specified under this part.
 The prospectus must end with the declaration that all relevant provisions of the companies act
1956, and the guidelines issued by the govt. have been complied with and no statement made in
prospectus is contrary to the provisions of the companies act 195 and the rules there under.
Objects of Prospectus
 To inform public about the forming of a new company
 To inspire the investors, to invest in shares or debentures.
 To preserve the authentic record of the terms on which the investors have been invited.

STATEMENT IN LIEU OF PROSPECTUS

A public company not raising its share capital from general public, need not issue a prospectus.
However, it should file a ‘Statement in lieu of Prospectus’ (Which contain almost the same particulars)
with the Registrar.
This document must be in accordance with the Schedule III of the Companies Act and must include
practically the same information as required in the prospectus. If a private company converts into a
public company, it has to issue a prospectus or file a statement in lieu of prospectus to the registrar.

LIABLITY FOR ‘UNTRUE STATEMENTS’ IN THE PROSPECTUS (SECTION 62-63)

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Untrue Statement
According to Sec. 65 (1) of the companies Act, 1956-

 A statement included in prospectus shall be deemed to be untrue, if the statement is misleading

in the form and context in which it is included; and
 Where the omission from a prospectus of any matter is calculated to mislead, the Prospectus
shall be deemed in respect of omission, to be a prospectus in which an untrue statement is
included.
 The expression ‘includes’ with reference to a prospectus means, included in the prospectus
itself or contained in any report or memorandum appearing on the face thereof or by reference
incorporated therein or issued therewith.
 A person who has applied for shares in the company, and who has been allotted shares has
certain remedies against the company and the persons issuing the prospectus. But a buyer of
shares in the open market or a subscriber to the memorandum has no such right. If, however, a
prospectus is issued with the object of including persons to buy shares in the open market, any
person who buys shares even in the open market on the basis of the statement made in it has a
right of action if the statements are untrue or there is material omission from the prospectus.
 A false statement or omission of material gives rise to civil as well as criminal liability.

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