NCERT Solutions for Class 11 Business Studies Chapter 7 - Formation of a Company

Short Answer Questions:

1. Name the stages in the formation of a company.

Ans. Formation of a company is a complex activity, involving these stage which are as follows:

Promotion: Identification of business opportunities, analysis of its prospects and initiating steps to form a company is known as promotion of a company.
Incorporation: Registration of company as body corporate under Companies Act, 2013 is known as incorporation.
Subscription of Capital: A public company is raising funds from the public by means of issue of shares and debentures is known as capital subscription.
Commencement of Business: The registrar issues certificate of commencement of business which is a conclusive evidence of completion of formation requirement of a company.

2. List the documents required for the incorporation of a company.

Ans. When an entrepreneur decides to incorporate a company, certain documents must be submitted. These documents include:

Memorandum of association, which outlines the company's objectives, scope, and powers.
Articles of association, which define the company's internal regulations, management, and operational procedures.
Written approval from the proposed directors to serve as directors and an undertaking to purchase the required qualification shares.
A legal confirmation by a lawyer that all necessary documents and requirements have been submitted for registration and the registered office address of the company.

3. What is a prospectus? Is it necessary for every company to file a prospectus?

Ans. A prospectus is a document that invites the public to apply for shares or debentures of a company or to make deposits in the company. It can include any notice, circular, advertisement or other document that invites offers from the public for the subscription or purchase of shares or debentures. Public companies issue prospectuses when they want to raise funds from the public by issuing shares or debentures.
How ever, not every company is required to file a prospectus. In cases where a prospectus is not necessary, a statement in lieu of prospectus can be filed with the Registrar of Companies Act instead of the Articles of Association. Private companies are not obligated to file a prospectus.

4. Briefly explain the term ‘Return of Allotment’.

Ans. A Return of Allotment is a document that contains information about shareholders, such as their names and addresses, and the number of shares allocated to them. This statement is submitted to the Registrar of Companies and is signed by a director or secretary. The Return of Allotment must be filed with the Registrar of Companies within 30 days of the date of allotment. By submitting a Return of Allotment, the company confirms that it has received the minimum subscription required. This document is an important record that provides a comprehensive overview of the share allocation process and helps ensure that the company is complying with relevant regulations and laws.

5. At which stage in the formation of a company does it interact with SEBI

Ans. A company must raise funds from the public through the issuance of shares and debentures during the capital subscription stage. To ensure investor protection, the company needs to follow SEBI's rules and guidelines. Therefore, it is necessary to seek SEBI's approval before proceeding with capital subscription, ensuring compliance with necessary regulations and guidelines.

Long Answer Questions:

1. What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect to a company promoted by them.

Ans. Promotion is the initial stage of forming a company, where a business opportunity is identified and a company is established to pursue it. The promoter is responsible for undertaking the necessary steps to set up the company and bring together the required resources to commence the business. While promoters are not agents or trustees of the company, they must act in good faith and disclose any personal gain obtained from the dealings.
While promoters are not entitled to claim expenses incurred in the promotion of the company, they may be reimbursed for pre-incorporation expenses. The company can also compensate promoters for their efforts by paying a lump sum amount or commission on property purchases or shares sold. Additionally, the company may allocate shares or debentures to promoters or provide them with an option to buy securities at a later date.

2. Explain the steps taken by promoters in the promotion of a company.

Ans. The important steps taken by promoters in the promotion of a company are as follows:

Identification of Business Opportunity: The first step to be taken by a promoter is to identify a business opportunity. The opportunity may be in respect of producing a new product or service or making some product using a different process or any other opportunity having an investment potential.
Feasibility Studies: All the identified business opportunities may not be feasible or profitable as real projects. The promoters, therefore, undertake detailed feasibility studies to investigate all aspects of the business they intend to start. Various types of feasibility have to be assessed which include:
(i) Technical Feasibility
(ii) Financial Feasibility
(iii) Economic Feasibility
Name Approval: The promoters have to select a name for the company and submit an application to the registrar of companies of the state in which the registered office of the company is to be situated, for its approval. The proposed name may be approved if it is not considered undesirable
Fixing up Signatories to the Memorandum of Association: Promoters have to decide about the members who will be signing the Memorandum of Association of the proposed company. Usually the people signing memorandum are also the first Directors of the company. Their written consent to act as Directors and to take up the qualification shares in the company is necessary.
Appointment of Professionals: Certain professionals such as mercantile bankers, auditors, etc. are appointed by the promoters to assist them in the preparation of necessary documents which are required to be submitted with the Registrar of Companies.
Preparation of Necessary Documents: The promoter takes up steps to prepare certain legal documents which include Memorandum of Association, Articles of Association and Consent of Directors. These documents have to be submitted under the law, to the Registrar of the Companies for getting the company registered.

3. What is a ‘Memorandum of Association’? Briefly explain its clauses.

Ans. Memorandum of Association is the most important document as it defines the objectives of the company. No company can legally undertake activities that are not contained in its Memorandum of Association. As per section 2(56) of The Companies Act, 2013 “memorandum” means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.
The Memorandum of Association is a legal document that contains several clauses which define the purpose and structure of a company. The key clauses are:

Name Clause: This clause contains the name of the company which has been approved by the Registrar of Companies, and it should not violate any laws or be identical to an existing company's name.

Registered Office Clause: This clause specifies the state in which the registered office of the company is located, although the exact address is not required at this stage.

Objects Clause: This is the most important clause, as it outlines the purpose for which the company is formed. It is divided into two sub-clauses: Main Objects and Other Objects, which describe the business activities that the company is authorised to undertake.

Liability Clause: This clause limits the liabilities of the members of the company to the amount unpaid on their shares.

Capital Clause: This clause specifies the maximum amount of capital that the company can raise through the issue of shares, and the division of this capital into shares of a fixed face value.

4. Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’

Ans.

Basis	Memorandum of Association	Articles of Association
Purpose	Defines the objects for which the company is formed	Outlines the internal rules and regulations for managing the company
Position	Main document of the company	Subsidiary document that is subordinate to the Memorandum of Association and the Companies Act
Relationship	Defines the relationship of the company with outsiders	Defines the relationship of the members and the company
Validity	Acts beyond the Memorandum of Association are invalid and cannot be ratified even by a unanimous vote of the members	Acts beyond the Articles of Association can be ratified by the members, provided they do not violate the Memorandum of Association
Necessity	It is compulsory for every company to file a Memorandum of Association	It is not compulsory for a public limited company to file Articles of Association, but it is advisable
Alteration	Alteration of Memorandum of Association is quite difficult and requires approval of certain statutory authorities	Articles of Association can be altered by passing a special resolution by the members

5. What is the meaning of ‘Certificate of Incorporation’?

Ans. The certificate of incorporation is a legal document that signifies the formation of a company as a separate legal entity. It contains the date on which the company legally comes into existence, and this date determines the beginning of the company's existence. The certificate of incorporation acts as a confirmation of the legality of the company's registration, and any flaws in the registration process are overlooked once the certificate is issued. This certificate is crucial as it allows the company to commence its operations immediately. In essence, the certificate of incorporation serves as undeniable proof of the company's existence, and it is essential for any business looking to operate legally.

6. Discuss the stages of formation of a company?

Ans. The stages of formation of a company are as follows:

Promotion: The first stage of company formation is promotion, where a group of people conceive the idea of starting a business and decide to form a company. The promoters then conduct a feasibility study to determine whether the business is viable.
Incorporation: Once the promoters are convinced of the viability of the business, they draft the Memorandum of Association and the Articles of Association. The Memorandum contains the objectives of the company, while the Articles lay down the rules and regulations for its management. These documents are then filed with the Registrar of Companies, along with the registration fee and other necessary documents. If the Registrar is satisfied with the documents, a Certificate of Incorporation is issued.
Capital Subscription: After incorporation, the company issues a prospectus inviting the public to subscribe to its shares. The prospectus contains information about the company's objectives, management, and financials. The public then subscribes to the shares of the company, and the capital of the company is raised.
Commencement of Business: Once the capital is raised, the company can start its business operations. The Board of Directors is appointed, and the company starts its operations as per the objectives mentioned in the Memorandum.
Statutory Compliance: A company must comply with various statutory requirements like filing annual returns, holding Annual General Meetings, and maintaining statutory books. These compliance requirements are necessary to ensure the smooth functioning of the company and avoid penalties.