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Class 11 Formation of a Company: cheat sheet
CBSE Business Studies. How a company is formed: promotion and feasibility studies, the memorandum and articles, incorporation, and capital subscription with the minimum subscription rule.
Key ideas
- A public company is formed in three stages: promotion, incorporation and capital subscription.
- The promoter spots the opportunity, runs technical, financial and economic feasibility studies, gets the name approved, fixes the signatories, appoints professionals and prepares the documents.
- The memorandum of association defines the company’s objects; an act beyond the objects clause is ultra vires and void.
- The articles of association hold the rules of internal management and work within the memorandum.
- Once the documents are filed, the Registrar issues the certificate of incorporation, the conclusive proof that the company exists.
- To raise money from the public, a company files a prospectus, appoints bankers, brokers and underwriters, and must receive the minimum subscription before it allots any shares.
- Preliminary contracts signed by promoters before incorporation do not bind the company.
Remember
| Minimum subscription (SEBI) | 90% of the issue size |
| Size of the issue | shares offered × issue price |
| Least shares that must be applied for | 90% of the shares offered |
| If the minimum is not received | no allotment; all application money is refunded |
| Clauses of the memorandum | name, registered office, objects, liability, capital, association (subscription) |
| Memorandum vs articles | objects and dealings with outsiders vs internal rules; the memorandum is harder to alter |
| Filed for incorporation | memorandum, articles, directors’ consent, name approval, statutory declaration, registered office notice, fees |
| Every director | must first obtain a Director Identification Number |
Watch out
- Taking 90% of the shares applied for: the minimum subscription is 90% of the shares offered.
- Swapping the memorandum and the articles: the objects are in the memorandum, the internal rules in the articles.
- Thinking preliminary contracts bind the company once it is formed.
Worked example
A company offers 4,100,000 shares and receives applications for 3,485,000 shares. Can it allot shares? Why?
Working: 90% of 4,100,000 = 3,690,000
Answer: No: the minimum subscription is 3,690,000 shares (90%), and it received 3,485,000. All application money must be refunded.
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