FORMATION OF A COMPANY

The whole process of company formation may be divided into three distinct stages, namely:-
1. Promotion
2. Incorporation
3. Subscription
4. commencement

1. Promotion:
The process of conceiving an idea and developing it into a concrete proposition or project
to be accomplishes by the incorporation and floatation of the company is called promotion.
The person or persons take the necessary steps to accomplish these objectives are known as a
promoter.
The Promoter discovers the opportunities to make money, investigates such proportions,
assembles and finances them and thereby produces a going concern. A promoter may be an
individual, firm, syndicate, association or even a company, as long as it takes all the
necessary steps to create and mould a company and set it going. Thus, the promoters have in
their hands the power of defining how, and when, and in what manner, and under what
supervision, it shall come into existence and begin to act as a trading company.
Stages in Promotion:
There are four main stages in the promotion of the company. A brief description of each
is given below:

Discovery of idea:
A person conceiving an idea has a boundless enthusiasm for the creation of his own
mind. He is partial to it. For example, an investor is a man of mechanical skill, cleverness
and originality, but he cannot test the work of his invention by determining its economic
value. It is for the reason that an inventor is called “an impartial genius”. He has neither
“business head” nor the “gift for organizing” that the trained promoter possesses. It is in his
interest to turn over the idea to the impartial investigator, the trained promoter, who can
weigh the elements of success and failure. Promoter’s preliminary investigation will consist
in making a rough estimate of whether or not it will pay or make a detailed investigation. He
estimates probable revenues or expenditures, and then compares this estimate with actual
figures of going concern. He may then patent the invention for its commercialization.

Detailed investigation:
The second stage in promotion is detailed investigation of the idea and the plan or
proposition to discover hidden weaknesses of the plan, to determine the amount of funds
needed, and to estimate the operating expenses and probable income. When this investigation
is completed, the findings are put in a type-written report, giving the data collected, estimates
on costs and incomes, and opinion of the experts in the given fields, e.g. engineering. During
the course of this investigation, an exhaustive research into important problems shall have to
be made. These include the production problem, settled by the engineer or chemist; discovery
of demand and the proper method to reach is settled by the market analysis expert; the
 question of proper patents, settled by an expert lawyer; the problem of a proper location of
the plant, taking into consideration such factors as transport, nearness to raw materials and to
markets, satisfactory labour supply and favorable climate etc., settled in consultation with a
management consultant; the question of whether the capitalization is sufficient or the
proposed company is over-capitalized or the reverse, is settled by a financial expert. In short,
what is determined by this detailed investigation is whether the estimated income will be
large enough to take care of the estimated operating costs, interest on capital invested, and
compensation to owners for risks and services.

Assembling:
After a thorough investigation of the proposition has been made, the promoter decides
whether he wants to take the risk of promotion and decides upon a plan of capitalization.
After this, he starts to assemble the proposition. By “assembling” we mean protecting the
fundamental idea, securing all the property needed by the enterprise, and making contracts
with all the men that are selected to fill the chief managerial positions.

Financing the Proposition:

An idea has been conceived, investigated and assembled; now the promoter ha what is
known as the “proposition”. This proposition is presented to the public and underwriters in
the form of well-organized report known as “the Prospectus” in order to persuade them that
the proposition is worthy of their financing. The prospectus contains a detailed discussion of
the whole proposition and is supported by copies of the reports by the various experts
consulted during investigation. The process is also called the Capitalization of the
opportunity. This step is composed of two parts, the first being the formation of the company
to take over property, and the second being the actual taking over of the property.

INCORPORATION

The promoters select a few suitable names in order of preference indicating as far as possible the
main object of the proposed company. Then they apply to the Registrar of Companies to
ascertain as to which of the names selected by them is available for adaptation by the company.
The application form is supplied by the Registrar’s office and a fee of Rs. 10 is payable with the
application. After obtaining the approval of name, te promoters get the Memorandum and
Articles of Association drafted and printed and get the same stamped as per the Stamp Act.
Thereafter they file the following documents with the Registrar of Companies of the state in
which the registered office of the company is to be situated.
1. The Memorandum of Association to which at least seven persons (two persons in case of
a private company) have subscribed their names and each one of them has taken at least
one share.
2. The Articles of Association similarly signed.
3. A statement of nominal capital, and where it exceeds Rs. One crore, a Certificate from
the Controller of Capital Issue permitting the issue of the capital.
4. The agreement, if any, which the company proposes to enter into with nay individual for
appointment as its managing or whole-time director or manager.
 5. A statutory declaration by an advocate, an attorney, or a secretary or a chartered
accountant practicing in India engage din the formation of the company, or by a director
or any other officer of the company that all requirements of the Act and Rules there under
in respect of registration have been complied with.
6. A list of directors and their consent to act signed by each.
7. The address of the registered office.

The Registrar will scrutinize the documents, and, when satisfies that everything is in order, will
enter the name of the company on the Registrar of Companies maintained in his office. He will
issue a Certificate of Incorporation, which gives the company legal existence from the date given
on it.

Subscription

Commencement