Formation of a Company

Formation of a company involves completion of legal formalities and

procedures. The process can be divided into three distinct stages: Promotion,
Incorporation, and Subscription of capital. These stages are appropriate for the
formation of any kind of company. A private company, as opposed to a public
limited company, is prohibited from raising funds from the public and does not
need to issue a prospectus or complete the formality of minimum subscription.
Stage 1: Promotion of a Company
1 Identification of Business Opportunity
The first activity of a promoter is to identify a business opportunity, which may involve
producing a new product or service or making a product available through a different
channel.

2 Feasibility Studies
Promoters undertake detailed feasibility studies to investigate all aspects of the business
they intend to start, including technical, financial, and economic feasibility.

3 Name Approval
After deciding to incorporate a company, the promoters have to select a name for the
company and submit an application to the registrar of companies for its approval.
Stage 2: Fixing up Signatories to the
Memorandum of Association
Appointment of
Professionals
Promoters appoint professionals
such as mercantile bankers and
auditors to assist them in the
preparation of necessary
documents required for
registration.
Preparation of
Necessary Documents
Promoters take steps to prepare
legal documents, including the
Memorandum of Association,
Articles of Association, and
Consent of Directors.
Statutory Declaration
A declaration stating that all the
legal requirements pertaining to
registration have been complied
with is submitted to the Registrar
of Companies.
Stage 3: Effect of the Certificate of
Incorporation
1 Legal Birth of the Company
A company is legally born on the date
printed on the Certificate of
Incorporation, becoming a legal entity
with perpetual succession on such date.
2 Conclusive Evidence
The Certificate of Incorporation is
conclusive evidence of the regularity of
the incorporation of a company,
signifying the legal existence of the
company.

3 Director Identification Number (DIN)

Every individual intending to be appointed as a director of a company must make an
application for allotment of Director Identification Number (DIN) to the Central Government.
Preliminary Contracts and Capital
Subscription
Preliminary Contracts
Promoters enter into certain contracts with third parties on behalf of the company during
the promotion stage, which are not legally binding on the company.

SEBI Approval
Prior approval from SEBI is required before raising funds from the public, ensuring
adequate disclosure of all relevant information and investor protection.

Minimum Subscription
The company must receive applications for a certain minimum number of shares before
going ahead with the allotment of shares.
Role of Prospectus and Allotment of Shares
Filing of Prospectus
A copy of the prospectus or
statement in lieu of prospectus
is filed with the Registrar of
Companies, serving as an
invitation to the public to
apply for securities of the
company.
Appointment of
Bankers, Brokers,
Underwriters
The company appoints
bankers, brokers, and
underwriters to assist in
raising funds from the public.
Application to Stock
Exchange
An application is made to at
least one stock exchange for
permission to deal in its
shares or debentures.
Legal Validity and Importance of the
Certificate of Incorporation

1 2
Conclusive Evidence Effect of the Certificate
The Certificate of Incorporation is conclusive evidence A company is legally born on the date printed on the
of the regularity of the incorporation of a company, Certificate of Incorporation, becoming a legal entity
signifying the legal existence of the company. with perpetual succession on such date.
Director Identification Number (DIN) and
Capital Subscription
Director Identification Number (DIN) Every individual intending to be appointed as
director of a company shall make an application for
allotment of Director Identification Number (DIN)
to the Central Government in prescribed form along
with fees.

Capital Subscription A public company can raise the required funds

from the public by means of issue of securities
(shares and debentures etc.).
Role of Prospectus and Allotment of
Shares
Filing of Prospectus
A copy of the prospectus or statement in lieu of prospectus is filed with the Registrar of
Companies, serving as an invitation to the public to apply for securities of the company.

Appointment of Bankers, Brokers, Underwriters

The company appoints bankers, brokers, and underwriters to assist in raising funds from
the public.

Application to Stock Exchange

An application is made to at least one stock exchange for permission to deal in its shares
or debentures.
Legal Validity and Importance of the
Certificate of Incorporation

1 2
Conclusive Evidence Effect of the Certificate
The Certificate of Incorporation is conclusive evidence A company is legally born on the date printed on the
of the regularity of the incorporation of a company, Certificate of Incorporation, becoming a legal entity
signifying the legal existence of the company. with perpetual succession on such date.