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HOW IS A COMPANY FORMED?

Formation of a company is a big and lengthy procedure. It means bringing your business idea into existence. This process involves the completion of a lot of legal formalities and procedures. There are three basic steps involved in the formation – Promotion , Incorporation and Subscription of capital. The important fact is that these three steps are required for the formation of a public company only. In case of the private company, the first two steps are enough. Hence, private company can be started right after the incorporation of the company. Lets discuss these steps in detail.

 

PROMOTION

Promotion means the discovery of a business opportunities and then taking the right steps to grab it. According to the Section 2 (69), a promoter is someone who has complete control over the management of the company, directly or indirectly, and this could be as a shareholder or director or any other top position.

In the promotion process, first the identification of the business opportunity is necessary to further continue the process. After this, the promoter checks the feasibility of the idea. The ides should be something that is realistic and financially and economically possible. If the promoter is satisfied with the finance requirement, then he can move ahead to launch the company.

Next, he has to give a name to his company or brand by submitting an application to the Registrar of Companies (ROC). It must be noted that the name cannot be identical or close to the name of any other existing company. Then he must decide the signatories to the memorandum of association. These signatories would be the first official director of the company. For this, their written consent is mandatory. In a public company, at least 7 signatories must sign the memorandum whereas, in a private company, only two members are enough.

Then the promoter appoints certain professionals who are going to help him in the preparation and the submission of the important documents to the ROC.

 

INCORPORATION

Incorporation basically means the legal registration of the company and receiving a ‘certificate of incorporation’. For this, the promoter makes an application for incorporation to ROC along with other mandatory documents. These other documents include the articles of association, memorandum of association, statement of authorized capital, address of the office of the company and the written consent of the signatories.

Along with the application for incorporation, a registration fee has to be submitted and the amount depends upon the amount of the authorized capital.

The ROC then analyses your application thoroughly and if they are satisfied with all the legalities and paperwork then they officially declare the company as a corporate body under the Companies Act, 2013 after which you receive the certificate of incorporation.

 

CAPITAL SUBSCRIPTION

The formation of a private company was done in the last step. This step is required for the formation of a public company. After the above two steps, the promoter must raise funds for his company which can be done through issuing shares and debentures to the general public. For this, he must take the approval of the Securities and Exchange Board of India (SEBI).

After this, a prospectus is to be filed under the ROC. A prospectus is an official document that invites the public to subscribe to the shares and debentures offered by the company.

This task is quite difficult. Therefore, some officials are appointed to ease the process. A broker is appointed to distribute the prospectus and the application form to the public and encourage them to buy the shares. A banker is appointed to collect and deposit all the money from the public. And finally, an underwriter is appointed if in case the company is not sure of receiving the minimum subscription from the public. The underwriters are those who will buy the remaining shares to fulfill minimum subscription requirement.

In order to issue the shares and debentures to the public, it is necessary for the company to be officially listed under the stock market. After that, the IPO process can be started, and shares are allotted to the prospective shareholders.