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Incorporation Filing
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Incorporation Filing:
Incorporation involves the registration of the company under the companies Act. It is the legal process through which a company is recognized as a legal entity. A company is said to have been incorporated or registered when it gets the Certificate of Incorporation from the registrar of Joint Stock companies. The following are the documents to be filed with the registrar for this purpose.
1. Memorandum of Association It is the most important document to be filed with the Registrar. It is also known as charter of the company. It contains the name of the company, the place of its registered office, the objects of the company, the liability of the members, the amount of its authorised capital. It must be signed by at least 7 persons, in case of a public limited company and two persons in case of a private company.
2. Articles of Association It is another important document. It contains the rules and regulations regarding the internal management of the company. Public limited company need not necessarily file the Articles of Association.
3. Notice of the situation of the registered office This document gives out the address of the registered office or the place where the registered office is situated.
4. Statement of the nominal capital The authorised capital of the company is stated in this document. A company cannot raise more capital than its authorised capital.
5. List of persons who have consented to act as directors It contains the names and addresses of the persons who have agreed to act as the directors. Thus the first directors are nominated but not elected because there will be no shareholders before Incorporation.
6. Consent of the directors in writing to act as such
Each director has to give his full name, address, occupation, age, date of birth and nationality and should put his signature declaring that he has given his consent to act as a director of the company.
7. An undertaking in writing by the directors to take up and pay for the qualification shares This is an undertaking signed by the directors stating that they have agreed to purchase and pay for the prescribed qualification shares. A person to be appointed as a director of a public limited company has to take at least one share or the number of shares as prescribed by articles of the company.
8. Statutory declaration This is a declaration by an advocate or a person who is engaged in the formation of the company that all the necessary legal formalities are undertaken.
All the above documents have to be duly filed with the Registrar with proper fees per document and stamp duty, registration fees at the prescribed rate. On receipt of these documents, the registrar will scrutinize them. On being satisfied, he will enter the name of the company in a register maintained for the purpose. After that, he will issue a Certificate of Incorporation. This Certificate is a conclusive proof that the company has been born in the eyes of law. The company gets legal existence from the date given in the certificate.
A private company can commence business from the date of its incorporation. But a public company cannot commence business after its Incorporation. It must get another certificate called Certificate of Commencement of Business.
Raising of Capital:
After a company has been incorporated, the next step is to raise the necessary capital. In a private company, capital is raised from the promoters and other members without issuing a prospectus. But a public limited company has to issue a Prospectus or file a Statement in Lieu of Prospectus. It gives details about the amount of shares issued. Prospective investors can get the prospectus and application form free of charge from the companys bankers or from its registered office. They will submit the applications with the application money to the bankers of the company. Then the bankers will forward all applications to the company. After the minimum subscription amount is received, the directors will proceed to allot the shares to the applications. After the allotment of shares, a Return of Allotment must be filed with the Registrar of companies.
Commencement of Business:
The last step in the formation of a public limited company is to secure Certificate of Commencement of Business. This will be issued by the Registrar only when the following declarations have been filed:
a. Prospectus or Statement in Lieu of prospectus. b. Declaration by the company that minimum subscription amount is collected. c. Declaration by the company that the directors have taken up and paid for their qualification shares. d. Declaration by the secretary or directors that all the legal requirements have been complied with.
If the Registrar is satisfied that all the condition have been fulfilled, he issues a certificate to commence businesses. No public limited company can start its business without obtaining this certificate. If the business is started before the date, a fine of Rs. 500/- per day of default may be charged.
Stages in Company Promotion:
A. Memorandum of Association The Memorandum of Association is the basic document of the company. It is called the Charter of the company. The superstructure of the company is based on it. It defines the scope of activities of the company. It defines the company relations with outsiders. The company has to work within the limits laid down in the memorandum.
Memorandum of Association is to be drafted into paragraphs, consecutively numbered and printed. It must be signed by at least 7 persons in the case of a Public Limited Company and 2 persons in the case of a Private Limited Company. A memorandum must be carefully drafted.
Memorandum of Association must have the following clauses:
a) Name Clause: This clause contains the name of the company. The name selected should not be similar or identical with that of any existing company. The name of the company must end with the word, limited. If it is a Private company the name should end with the words Private Limited. b) Situation clause: In this clause, the State in which the companys registered office is located should be given. c) Objects clause: It is the most important clause in the Memorandum of Association. Great care should be taken in drawing up this clause. It defines and confines the scope of the operations of the company. The objects of the company must be legal and be very clearly defined. The company can exercise only such powers which are expressly stated in the clause. d) Liability clause: This clause states that the liability of members is limited to the face value of the shares taken up by them. A shareholder is not liable for the debts of the company. His liability is limited to the amount of the shares held by him. e) Capital clause: This clause must state the amount with which the company is registered and the number of shares into which it is divided. f) Association and subscription clause: Under this clause subscriber to the Memorandum express their consent to form a company and sign the agreement to associate for that purpose. This should be signed by not les than seven in the case of a public limited company and two in the case of a private limited company. They must sign it before a witness who must also sign on it.
Importance of Memorandum of Association:
1. A Company cannot be registered without filing this document 2. The limits or boundaries of the Company are determined by the memorandum 3. Informs the object of the business 4. Informs the name, address, and capital of the company 5. The provisions of the document cannot be altered without adopting a special resolution.
B. Articles of Association
An article of Association is another important document which is filed with Registrar along with the Memorandum of Association. The article of association is a document containing rules and regulations for the internal management of the company. It describes the regulations for the attainment of the objects mentioned in the Memorandum of the company. They determine the relationship between the company and its members, as well as among the members themselves.
Articles must be printed, divided into paragraphs, numbered consecutively and signed by each subscriber of the Memorandum and filed with the Registrar.
A Private company must necessarily file its articles. A Limited company can adopt the rules of Table A, if it does not prepare its articles.
The Articles embody the powers of the Directors and officers of the company and refer to the rights of the shareholders. Mode and form of the company business is also defined in the Articles of Association.
Contents of the Articles:
a) Share capital and its sub division into different classes of shares. b) The procedure for making calls on shares, transfer, transmission, forfeiture and surrender of shares. c) Alteration and reduction of capital. d) Appointment, powers, duties, qualifications, remuneration etc of Directors. e) Appointment of Manager, Managing Director, Secretary. f) Declaration of dividend. g) Procedure for conducting different kinds of meetings. h) Maintenance of books of accounts and their audit. i) Share certificates and share warrants. j) Seal of the company. k) Winding up.
C. Prospectus
Prospectus is a circular inviting the public to subscribe to the shares of the company. It will be in the form of an appeal describing the prospects of the company and the benefit which the investor gets by becoming its shareholder. The Companies Act defines prospectus as any notice, circular, advertisement, or other invitation offering to the public for subscription or purchase of any shares or debentures of a body corporate.
The prospectus contains the following information:
1. The contents of the memorandum. 2. Kinds and the number of shares into which capital is divided, and the value of each share. 3. Names, addresses and description of the directors and managers. 4. Minimum subscription. 5. The names of underwriters, their commission and the opinion of the directors regarding the capacity of the underwriters to discharge the obligations. 6. Preliminary expenses. 7. The interest of the directors, if any, in the contracts of the company. 8. Period during which subscriptions will be received. 9. Particulars of the property purchased by the company and of the sellers. 10. Remuneration of the promoters. 11. If the company is formed to take over running business, its profit and loss account and affairs.
The preparation of the prospectus requires great care. It must contain only facts. At the same time it must be appealing to the investors to purchase the shares. There should not be any inaccurate or misleading statement. It must give out full information. It must be dated and signed by the directors. If the prospectus contains misleading statements or fails to disclose any fact required by the Company Law, the directors are liable to punishment.
The punishment may extend up to a fine of Rs.5000/- or two years imprisonment or both, if it is proved that the director made the misleading statements deliberately to deceive the public.
This is intended to safeguard the interests of the investing public from being misled by wrong statements and exaggerations. Then a copy of the same must be filed with the Registrar before it is issued to the public. In case the company does not issue a prospectus, a Statement-in-lieu of the prospectus must be filed with the Registrar.
D. Statement in lieu of Prospectus
Every public company has to file a prospectus with the registrar. If a public company could get the required capital by some private arrangement, it may not issue a prospectus. But in that case, it must file a statement in lieu of prospectuses with the registrar. It must be delivered to the registrar for registration at least three days before the first allotment of shares and debentures. If the company fails to comply with these provisions, the company and every director shall be liable to a fine up to Rs.1000/-. If the statement in lieu of prospectus contains any untrue or misleading statement, any person who is authorised delivery to the registrar of such document, shall be liable to imprisonment up to 2 years or of fine up to Rs.5000/- or both.
Statement in lieu of prospectus should be in the form set out in part I of Schedule III of the Indian Companies Act. The contents are more or less the same as in the case of prospectus. It should be dated and signed by each director. It should state when it was delivered to the Registrar for registration. It should indicate the number and types of shares, rights of the shareholders, details of property purchased, underwriting, treatment of reserves, and names of auditors, bankers and legal advisors.
Allotment:
The Board of Directors, after the last date of applications, shall meet and decide about the allotment of shares. The Secretary of the Company should first prepare Applications and Allotment Sheets and place them before the meeting of Directors. The Board passes a resolution sanctioning the Allotment of specified shares to specified persons. The Secretary then informs the persons concerned about the allotment of shares to them. Letters of Allotment are written to the allottees informing the number of shares allotted to them and requesting them to pay the allotment money due on the respective shares. Letters of Regret are written to those who have not been allotted any shares. After the receipt of allotment money, the names of shareholders are entered in the Register of Members.
But however, the directors cannot allot shares unless they receive the minimum subscription.
Minimum Subscription:
Minimum Subscription is the minimum amount of the capital which a public limited company has to secure before allotting the shares. The minimum must coer the following items of the company.
1. Preliminary expenses. 2. Commission of the underwriters. 3. Working Capital. 4. Value of the assets purchased or to be purchased. 5. The loans taken to meet the expenses so far incurred.
The amount of minimum subscription is to be secured by company within 120 days from the date of prospectus. If the company fails to secure this minimum subscription within the period, the directors must wind up further proceedings. They have to return back the money so far received on applications within ten days. If they fail to do so, they are liable jointly and severally to pay the amount together with interest at the rate of 6% per annum after the expiry of the tenth day.
Underwriting of Shares:
If a company is not able to secure the minimum capital within 120 days from the date of prospectus, the directors have to wind up all further proceedings and return the money received on application. The preliminary and other expenses so far incurred and the troubles taken become waste. In order to avoid this risk, the promoters enter into an agreement with some financial institution or persons who undertake to purchase the shares if the public fail to take them up. These institutions or persons to undertake to purchase the shares which are not taken up by the public are called underwriters. They are given commission for such undertaking.
A company is said to underwrite its shares when it enters into a contract with underwriters. Generally, companies underwrite all the shares which are issued to the public. The shares that are taken by the promoters and their friends need not be underwritten. The underwriters get commission on the entire amount of shares underwritten by them. If the public do not take the shares then the underwriters have to take them up. If the public take up 40% of shares, the underwriters have to take up the remaining 60%. But they get commission on the entire amount. If the public subscribe to all the shares issued, the underwriters need not take any shares. Still they get the omission on the entire amount.
The amount of commission paid to the underwriters is regarded by the company as an insurance premium paid to cover the risks involved in raising the share capital within the limited time.
When shares of a company are underwritten with sound financial institutions the financial success of the company is ensured. The investors will have a guarantee that the company is bound to come into existence.
In consideration of their services, the underwriters get some commission on the shares underwritten. The commission should not be more than 5% of the issue price of the shares and 2% of the price of the debentures. The underwriters commission may be paid in cash or in shares or partly in cash and partly in shares.
Preliminary Expenses:
A large amount of money must be spent to incorporate a company and to secure capital. These expenses are called preliminary expenses. These expenses are also called formation expenses. These expenses will be met by the promoters first. After incorporation, they recover them from the company.
The following are some of the important items of expenditure which constitute preliminary expenses.
a) Costs of preparing and printing the Memorandum of Association and Articles of Association. b) Costs involved in preparing other documents to be filed with the Registrar for Incorporation. c) Stamp duty and fee for registration of the documents. d) Costs of drafting preliminary agreement and stamp duty thereon. e) Costs involved in preparing, printing and issuing prospectus to the public. f) Any fee payable to experts for estimating the values of assets which the company intends to acquire. g) Costs of preparing and printing share certificates, allotment letters, debenture bonds, trust deeds, etc. h) Cost of making common seal. i) Cost of statutory and other financial books. j) Any other expenses incidental to the promotion of the company.
Related Topics:
1. Functions of Promoters 2. Preferential Shares 3. Equity Shares 4. Debentures
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