Previous Year Short & Long Questions With Answers: Formation of a Company

Short Answer Type Questions

Q1: At which stage does a company's formation interact with SEBI?
Ans: A company interacts with the Securities and Exchange Board of India (SEBI) at the capital subscription stage, that is, when it proposes to raise funds from the public by issuing shares or debentures. SEBI's approval and the compliance with its regulations are required for public issues (for example, an Initial Public Offering). This ensures that disclosures, investor protection measures and issue procedures meet regulatory standards before securities are offered to the public.
Q2: Experts who help promoters in the promotion of a company are also called promoters. True or False?
Ans: False.
Explanation: A promoter is the person or group that conceives the idea of forming a company and takes the essential steps to bring the company into existence. Experts who assist promoters - such as lawyers, accountants, investment bankers or consultants - provide professional services in the promotion process but are not promoters themselves. Their role is supportive and advisory, not promotional in the legal sense.
Q3: Describe how a company is formed.
Ans: The formation of a company involves a sequence of legal and procedural steps. Broadly, there are three main stages:

• Promotion: Idea generation, feasibility study, approval of the company name, appointment of experts and preparation of necessary documents (for example, the Memorandum and Articles of Association).
• Incorporation: Filing the required documents with the Registrar of Companies and obtaining the Certificate of Incorporation, which gives the company legal existence.
• Capital subscription and commencement: Raising capital by issuing shares or debentures if the company seeks public funds, complying with regulatory requirements, and then starting business operations.

• Promotion: This phase focuses on developing the idea and taking the necessary steps to form a company.
• Incorporation: Filing required documents and obtaining a Certificate of Incorporation, which gives the company legal existence.
• Capital subscription: Raising funds, if necessary, by issuing shares and debentures to the public or privately.
• Commencement of business: Completion of statutory and regulatory formalities and the formal start of business operations.

Q6: What is the meaning of "Certification of Incorporation"?
Ans: The Certificate of Incorporation is the official document issued by the Registrar of Companies that indicates the date on which a company comes into legal existence. From the date shown on this certificate, the company becomes a separate legal entity with the capacity to enter into contracts, hold property and sue or be sued.
After receiving the certificate, a private company can normally begin its operations and make arrangements for funds from founders, relatives or private investors. A public company, however, must complete any further statutory and regulatory formalities related to capital raising and public issue before it fully commences business activities.

Long Answer Type Questions

Q1: What are the categories of Promoters. ?
Ans: The following categories of promoters exist:

• Entrepreneur Promoter: An entrepreneur promotes a company based on an original idea or business opportunity. He or she takes the initiative, accepts the risks involved and often continues to manage or guide the business after formation. Entrepreneurs commonly promote small or medium enterprises.
• Professional Promoter: These are specialists such as lawyers, accountants, or professional promoters who have expertise in company formation and capital markets. They are often engaged for large or complex promotions and bring technical knowledge and experience to the process.
• Financial Promoters: Financial institutions, banks or industrial houses sometimes act as promoters, particularly when they see a favourable market for new issues or wish to establish an enterprise supported by finance. Investment bankers play an active role during buoyant securities markets.
• Occasional Promoters: Some promoters undertake promotion only once or infrequently. For example, a technical expert may promote a company to exploit a patent or invention and then return to other work. Their involvement is limited to that particular project.
• Government: The government sometimes acts as a promoter, especially in strategic or public-interest industries. State promotion has been used to establish enterprises in sectors such as infrastructure, defence, utilities and heavy industry to accelerate economic development.

Q2: Discuss the stages in the formation of a company?
Ans: A company is formed when it is registered or incorporated with the Registrar of Companies in the state where its registered office will be situated. The main stages are described below.

Promotion:

• Promotion involves performing all actions required to set up the company under the Companies Act. It begins with an idea for a business or project.
• Promoters may be individuals, partnerships, firms, associations or syndicates who take steps to establish the company.
• Typical promoter activities include:
• Recognising a business opportunity and conducting feasibility analysis
• Approval of the company name and selecting founders/subscribers
• Appointing experts (legal, financial, technical) and preparing required documents such as the Memorandum and Articles of Association

Incorporation:

• Promoters decide whether to form a public or private company based on objectives, capital requirements and scope of operations.
• They file the required incorporation application and documents with the Registrar of Companies where the registered office will be located.
• On completion of registration formalities, the date on the Certificate of Incorporation marks the company's legal existence, giving it legal capacity and perpetual succession.

Beginning of a Business:

• After incorporation, a company may begin operations. A private company can often start immediately subject to internal compliance.
• A public company that intends to raise funds from the public must fulfil further requirements such as preparing and filing a prospectus or statement in lieu of a prospectus, obtaining necessary approvals (for example, from SEBI for public offers) and engaging bankers, brokers and other experts for the issue.
• If the company seeks listing of its securities, it must approach the relevant stock exchanges and meet their listing conditions.

Q3: 'Statement instead of Prospectus' What does it mean?
Ans: A Statement in lieu of Prospectus is a document filed by a public company that does not invite public subscription for shares but may allot shares privately. It contains information similar to a prospectus and must be in the prescribed format (for example, as per Schedule III of the Companies Act).
Key points:

• It must be submitted to the Registrar of Companies at least three days before the allotment of shares and signed by each director.
• The statement should not contain any false or misleading information; penalties that apply to a false prospectus also apply to a false statement in lieu of prospectus.
• A private company, which is not permitted to invite the public, neither needs to file a prospectus nor normally file a statement in lieu of prospectus.

Q4: List the documents required for the incorporation of a company.
Ans: The following documents are typically required for incorporation:

• Memorandum of Association: Properly stamped, signed and witnessed. For a public company a minimum of seven subscribers is required; for a private company a minimum of two is required.
• Articles of Association: Stamped and attested document containing the rules for internal management of the company.
• Directors' Consent: Written consent of the proposed directors to act as directors and, where required, consent of proposed managing director or whole-time directors.
• List of Directors: Names, addresses and other relevant particulars of the proposed directors.
• Registrar's Letter: Copy of name approval letter from the Registrar of Companies.
• Statutory Declaration: Declaration that registration requirements have been complied with, duly signed.
• Documentary Evidence: Proof of payment of registration fees and other relevant payments.
• Prospectus: Required only if the company intends to raise funds from the public.

Q5: What is meant by the term 'Promotion'. Discuss the legal position of promoters concerning a company promoted by them.
Ans: Promotion is the first stage in forming a company and comprises the actions taken to bring the company into legal existence under the Companies Act. Promoters are the persons or bodies who perform promotion work - they may be individuals, firms, institutions or associations.

Regarding the legal position of promoters in relation to the company they promote:

• Promoters are not agents or trustees of the company by virtue of promotion alone; they act before the company comes into existence.
• They must disclose any personal interest in contracts entered into on behalf of the proposed company; any undisclosed profit made by a promoter is not permitted.
• Promoters prepare and present the necessary documents for incorporation and are responsible for arranging finance and experts.
• Promoters may be appointed as the first directors of the company, provided proper procedures are followed.
• They may receive remuneration, commission or shares for their services, but such benefits should be disclosed and approved as required by law or the company's rules.

Q6: What is a "Memorandum of Association"? Briefly explain its clauses.
Ans: The Memorandum of Association (MOA) is the principal constitutional document of a company. It defines the scope of the company's powers, its objectives and the relationship between the company and the outside world. The principal clauses of the MOA are:

The MOA's clauses are:

• Name Clause: States the company's name as approved by the Registrar of Companies.
• Registered Office Clause: Specifies the state where the company's registered office will be located. The exact address is to be notified within the prescribed time after incorporation.
• Object Clause: Describes the main and ancillary objects for which the company is formed. The company cannot lawfully undertake activities beyond these specified objectives.
• Liability Clause: States the extent of liability of the members, normally limited to the amount unpaid on their shares.
• Capital Clause: Specifies the authorised share capital of the company, the division of capital into shares of fixed amounts and the maximum capital the company is authorised to raise.
• Subscription Clause: Contains the names, addresses and number of shares taken by the subscribers who agree to form the company and accept its shares - this clause evidences the intention to form the company.