Formation of Company

NCERT Solution

Short Answer Type

Question 1: Name the stages in the formation of a company.

Answer: Following are the stages in the formation of a Company:

  1. Promotion
  2. Incorporation
  3. Capital Subscription
  4. Commencement of Business

Question 2: List the documents required for the incorporation of a company.

Answer: Following are the documents required for the incorporation of a Company:

  1. Memorandum of Association
  2. Articles of Association
  3. Consent of proposed directors
  4. Agreement, if any, with proposed managing or whole time director
  5. Statutory declaration

Question 3: What is a prospectus? Is it necessary for every company to file a prospectus?

Answer: A prospectus is ‘any document described or issued as a prospectus including any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares or debentures of, a body corporate’. In other words, it is an invitation to the public to apply for shares or debentures of the company or to make deposits in the company.

A prospectus is only required by a Company which wants to invite public to buy its shares or to invest in it. Prospectus is not required when the company opts for private investment.


Question 4: Explain the term, ‘Minimum Subscription’.

Answer: When a Company creates an ‘issue’ of shares for the public, at least 90% of the issue should be subscribed by the public. This level is called ‘Minimum Subscription’. This level has been kept so that a Company can be prevented from commencing a business without adequate capital. If the ‘Minimum Subscription’ is not achieved then allotment cannot be made and the Company will have to refund the application money to prospective subscribers.

Question 5: Briefly explain the term ‘Return of Allotment’.

Answer: If a Company does not allot the number of shares applied by applicants or no share is issued to an applicant, the Company has to refund the excess amount from the application money. After that, Return of Allotment is filed with the Registrar of Companies within 30 days of allotment. The Return of Allotment is signed by the Director of Secretary of the Company.


Question 6: At which stage in the formation of a company does it interact with SEBI?

Answer: When a Company wants to raise capital from general public, it needs to interact with SEBI for necessary formalities. SEBI (Securities and Exchange Board of India) is the regulatory authority which looks after the interests of the general public; in terms of investment in companies. Thus, it can be said that a Company needs to interact with the SEBI at Capital Subscription stage.

Question 7: Distinguish between ‘preliminary contracts’ and ‘provisional contracts’.

Answer: A preliminary contract is finalized before the incorporation of the Company, while a provisional contract is finalized after the incorporation but before the commencement of business. A preliminary contract is made by the promoter in individual capacity and is not binding on the Company. But a provisional contract is binding on the Company. The Company cannot ratify a preliminary contract.



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