An Overview of Formation of a Company

To fully understand the formation process of a company, one can divide the formalities into Four distinct stages:

• Promotion

• Registration

• Incorporation 

• Subscription of capital/ Commence of Business

Promotion of a Company 

Promotion is the first stage in the formation of a company. It involves a business idea and taking the necessary initiatives to form a company. It includes planning and organising all necessary resources to set up a business. The person who performs all the activities during the promotion stage is called a promoter. The promoter can be an individual, group of people, or even an institution. The steps involved in the promotion stage are discussed below:

• The promotion stage starts when the promoter discovers a business idea either to set up a new business or to expand an existing business. 

• The promoter starts investigating cost, profitability, production process, the demand for the product, etc. and takes the help of specialists like CA, engineers who analyse and make reports out of ideas shared. After the completion of the report, the promoter decides the size, location, and capital requirement of the business.

Registration of a Company 

• Name Approval: It is necessary for every company to get its name approved by the registrar. The registrar approves the name only if the name does not match any other company’s name.

• Fixing up Signatories to MOA: The promoter decides who will sign the Memorandum of association, and therefore, they become the first director of the company. He makes sure the written consent as a director is being given by the people who have signed the memorandum of association and have bought the qualification shares.

Appointment of Professionals: The promoter then appoints:

• Broker/ Underwriters: They will ensure the availability of capital by the sale of company security.

• Solicitors: To deal with legal matters of the company.

• Bankers: For smooth financial dealings. 

Preparation of Necessary Documents: The company prepares these legal documents like Memorandum of association, Article of association, Prospectus etc. because they have to be submitted at the time of incorporation. 

Certificate of Incorporation 

Registrar then issues the certificate of incorporation. Once the registration is done, from the date printed on the certification of incorporation, the company is said to be legally born and considered as a separate legal entity with perpetual succession. It is said to be the legal evidence that the company has come into existence. 

Capital Subscription Stage 

In the case of a Private company, after getting the certificate of incorporation, it can start its business activities. But it's not the same Public Ltd. company, It has to perform three additional steps to get the certificate of commencement of business which includes SEBI approval, filling of the prospectus, appointment of bankers, brokers, and underwriters, minimum subscription, application to the stock exchange, and finally the appointment of shares. 

Commencement of Business 

Once the private company receives the deed of incorporation, it can begin operations. Once the company receives its memorandum of incorporation, the company issues a prospectus inviting the public to join its share capital. A minimum subscription is set in the prospectus. After that, the minimum number of shares specified in the prospectus must be sold.

Once the required number of shares have been sold, a certificate is sent to the registrar along with a letter from the bank confirming that all funds have been received. The registrar then examines the document. Once all legal formalities have been completed, the registrar issues a certificate known as a “Business Commencement Certificate”. On a specific date, it is then called the date of commencement of business. This is definitive proof that a public limited company has started its business activities. 

Case Study 

Mill Private Limited was merged into a public company called Mill Ltd. Transformed in order to diversify its products and issue shares to raise long-term funds.

As a compliance officer of the company, briefly explain to the Directors the various formalities to be fulfilled before issuing shares. Can Modern Ltd. issue a Statement in Lieu of prospectus? 

Ans: To raise funds from the public, Mill Ltd. has to issue the prospectus and undergo various formalities that are:

• SEBI Approval: Public companies are required to obtain prior SEBI approval in order to raise funds from the public.

• Submission of Prospectus: A prospectus must be submitted to the registrar. Appointment of bankers, brokers, and underwriters: Bankers receive application funds and brokers encourage the public to apply for shares. Underwriters are the people who commit to buying shares if the shares are not subscribed to the public. 

• Minimum Subscription: Company must receive the minimum subscription amount in cash within 120 days from issuance.

• Stock Exchange Application: Public companies must list their shares on the stock exchange within 10 weeks of the subscription listing cutoff date. 

Public companies may choose not to raise public funds because they believe they can raise the necessary capital privately. In this case, instead of the prospectus, a statement containing information very similar to the prospectus must be filed.

Summary 

There are two stages in the formation of a private company, promotion, and incorporation but a public company has to undergo a capital subscription stage to begin operations. Also, there are various steps and legal formalities that are required in order to register a company and commence its functioning as we have seen in the article.