Formation of Companies under Companies Act, 2013: A Quick Guide

Forming a company in India is a structured process defined by the Companies Act, 2013. This procedure ensures that all businesses comply with the legal requisites to maintain the integrity of corporate operations within the country. The formation of a company, whether it be a Private Company, One Person Company (OPC), or Public Company, follows specific stages each with its own set of requirements and legal formalities. The stages involved are as follows-

1- Promotion of company

2- Incorporation or Registration of company

3- Capital subscription

4- Commencement of business

While only the first two stages are required for formation of a Private Company or an One Person Company (OPC), all four stages are required for formation of a Public Company.

STAGE-1: PROMOTION

Promotion is a stage which involves conception of business idea and translating it into a working reality. Promotion is essentially planning of a new business venture. It involves answering questions like –

What to do? How to do? Where to do?

1.1. PROMOTER:

A promoter is a person involved in the process of promotion. In other words a promoter is a person who first conceives the idea of a business and then makes attempt to convert the idea into a venture and get it officially registered.

According to the Company Law, an individual, firm, association of person or company can be a promoter.

Section-2(69) defines a promoter as a person-

a) Who has been named as such in the Prospectus of the company or has been identified by the company in the annual return referred to in Section 92, or

b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder director or otherwise, or

c) In accordance with whose advise or instruction, the Board of Directors is assumed to act.

1.2. STEPS IN PROMOTION OR FUNCTIONS OF PROMOTER

I- Discovery of Business Idea – It involves generation of idea in the brain of some person.

II- Scanning for Business Opportunity – The next step is to look for whether a business opportunity actually exists or not.

III- Detailed Investigation and Feasibility Study – It is to check whether the venture practically possible or not. It involves – financial feasibility, technical feasibility, operational feasibility, marketing feasibility etc.

IV- Assembling Resources – In this stage a practical shape is given to the business idea based on the feasibility studies. Promoters make arrangement for procurement of materials, land, machinery etc.

IV- Documentation – It involves preparation of necessary contracts, agreements and documents such as memorandum of association, articles of association, banker’s agreement etc.

STAGE-2: INCROPORATION/ REGISTRATION

In this stage, the company formally puts an application for registration before the Registrar of Company complying with all legal formalities and documentation.

2.1. STEPS BEFORE PROCEEDING WITH PROCEDURE OF FILING DOCUMENTATION-

I – The company’s objective must be lawful and should not be anything forbidden by law or contrary to public policy.

II- Directors Identification Number (DIN) must be obtained.

III- Digital signatures (D-Sign) of the promoters must be obtained.

IV- Both DIN and D-Sign must be registered with Ministry of Corporate Affairs (MCA) web portal for enabling digital signatures on e-forms.

2.2. DOCUMENTS TO BE SUBMITTED WITH THE REGISTRAR OF COMPANY

I – Memorandum of Association (MOA) – It is the constitution of company which regulates how the company would regulate with the outsiders. It includes the name, address, objectives, registered office, nature of its liabilities, capital it is authorized to raise etc. It is mandatory for all types of companies.

II- Articles of Association (AOA) – It is the bylaws of the company which governs its interaction with the insiders. It includes the rules and regulations of the company. However, filing of AOA is not required for a public company limited by shares.

III- Information of Head Office of the company

IV- Name and Particulars of Directors with DIN and written consent

V- Statutory Declaration by Company’s lawyer, CA, CMA or CS

VI – Agreements with Managing Director, Manager or any other such agreement.

VI- Payment of requisite fees

The companies can apply for registration and file the statutory documents online through MCA21 web application designed by the Ministry of Corporate Affairs (MCA).

2.3. CERTIFICATE OF INCORPORATION Under Section-7(2)

On properly filing all the documents and complying with all legal formalities, the company obtains “Certificate of Registration” from the ROC in form of a Corporate Identification Number (CIN) of 21 digits. With this certificate a company officially comes into existence.

2.4. EFFECTS OF CERTIFICATE OF INCORPORATION

I- The company officially becomes registered or comes into existence.

II- The company can sue and be sued on its own name.

III- The certificate is an evidence of company’s legal existence.

IV- Company can hold its own properties

V- Company can borrow on its own name.

Private Companies and OPC can right away start their business operation on obtaining this certificate as they are now allowed to raise fund from the public through issue of shares.

STAGE-3: CAPITAL SUBSCRIPTION

This step is necessary for public companies as they need to raise fund from the public through issue of shares and debentures. It involves the following steps:

I- Obtaining permission from the SEBI for public issue of shares.

II- Issuing Prospectus – It is a document issued by the company inviting public to subscribe its shares.

III- Submission of Prospectus or Statement in lieu of prospectus with the Registrar of Company.

IV- Appointment of Banker who will manage the cash inflow and outflow during the issue process.

V- Appointment of Underwriter, who will subscribe the shares issued by the company in case the minimum subscription is not reached for a commission called underwriter’s commission.

VI- Registration with stock exchange

VII- Issue of shares through IPO (Initial Public Offering)

As per the guidelines of SEBI, 90% of the shares issued by the company must be subscribed by the public which is known as minimum subscription. So if a company issues 1,00,000 shares, its 90% i.e. 90,000 must be subscribed by public without which the company can’t go for allotment of shares and if it fails to reach the minimum subscription within 120 days from the closure of the issue, it must refund the application money already received. In such case, underwriters come to the rescue of company.

STAGE-4: COMMENCEMENT OF BUSINESS

After fulfilling all the provisions of Section-10(A) of the Companies (Amendment) Act, 2019, a public company becomes eligible to obtain ‘Certificate of Commencement of Business’ from the ROC. It’s only after issue of this certificate, a public company can officially commence its business operations.

Conclusion: The formation of a company in India as per the Companies Act, 2013, is a detailed process that ensures companies are set up with a solid legal foundation. This process not only helps in establishing a company’s legal identity but also lays the groundwork for its future operations, ensuring compliance with Indian corporate laws and regulations. Whether it’s a private, public, or OPC, understanding and following these stages meticulously can lead to a successful business venture.