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Chapter Analysis
Intermediate20 pages • EnglishQuick Summary
The chapter 'Formation of a Company' discusses the process of setting up a company, focusing on the stages of promotion, incorporation, and subscription of capital. It explains the roles and responsibilities of promoters, the legal requirements for forming a company, and the documentation needed at each stage. The chapter also highlights the differences between private and public companies in terms of raising capital and the legal formalities involved.
Key Topics
- •Stages of company formation
- •Role of promoters
- •Legal documents for incorporation
- •Differences between private and public companies
- •Capital subscription process
- •SEBI regulations
- •Memorandum vs. Articles of Association
- •Certificate of Incorporation
Learning Objectives
- ✓Specify the important stages in the formation of a company
- ✓Describe the steps involved in each stage of company formation
- ✓Specify the documents to be submitted to the Registrar of Companies
- ✓State the need for Certificate of Incorporation and Certificate to Commence Business
- ✓Understand the role of SEBI in capital subscription
- ✓Differentiate between Memorandum of Association and Articles of Association
Questions in Chapter
Name the stages in the formation of a company.
Page 171
List the documents required for the incorporation of a company.
Page 171
What is a prospectus? Is it necessary for every company to file a prospectus?
Page 171
Briefly explain the term ‘Return of Allotment’.
Page 171
At which stage in the formation of a company does it interact with SEBI?
Page 171
What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them.
Page 171
Explain the steps taken by promoters in the promotion of a company.
Page 172
What is a ‘Memorandum of Association’? Briefly explain its clauses.
Page 172
Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’
Page 172
What is the meaning of ‘Certificate of Incorporation’?
Page 172
Discuss the stages of formation of a company?
Page 172
Additional Practice Questions
What are the key differences between a private and a public company in terms of capital subscription?
mediumAnswer: A private company does not need to issue a prospectus or meet minimum subscription requirements, while a public company must do both. The public company needs regulatory approvals and must meet certain transparency standards.
Explain the role of SEBI in the capital subscription stage.
mediumAnswer: SEBI's role is to ensure that a public company making an offer to the public discloses all material information necessary for investors' protection. It ensures the company meets its regulatory requirements before allowing public subscriptions.
What legal formalities must be completed during the incorporation stage of a company?
hardAnswer: During incorporation, a company must submit the Memorandum of Association, Articles of Association, consent of directors, name approval, and declaration of compliance, along with paying the registration fee to the Registrar of Companies.
How do the Articles of Association affect the management of a company?
mediumAnswer: The Articles of Association define the company's internal rules and regulations, outlining the management structure and governance, roles and responsibilities of directors, and procedures for shareholder meetings.
Why is the Certificate of Incorporation critical for a company?
easyAnswer: The Certificate of Incorporation legally signifies the birth of a company, enabling it to commence business, and serves as conclusive evidence of its legal existence.
Discuss the fiduciary position of promoters in the context of company formation.
hardAnswer: Promoters hold a fiduciary position wherein they must not misuse their power or position for personal gain. They should disclose profits made during the company formation process and must not earn undisclosed profits.
What are the consequences of non-compliance with registration requirements?
hardAnswer: Non-compliance can lead to refusal of incorporation, legal penalties, and disqualification of directors. It can also invalidate business operations and contracts signed before compliance.
Describe the function of underwriters in capital subscriptions.
mediumAnswer: Underwriters guarantee the sale of shares by purchasing unsold shares, thereby minimizing risk for the issuing company, and enabling completion of capital raising despite potential low public subscription.
How is the liability of company members determined as per the Memorandum of Association?
easyAnswer: Member liability in a company is typically limited to the extent of unpaid share capital as defined in the liability clause of the Memorandum of Association.
What is the significance of the prospectus in a public company?
mediumAnswer: The prospectus serves as an invitation and information document for the public to invest in the company's shares, providing all necessary disclosures required by law to make informed investment decisions.