Chapter – 3

Formation and Incorporation of Companies

Promoter
 Who has been named as such in a prospectus or is identified by the company in the
annual return or
 Who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise or
 In accordance with whose advice, directions or instructions as Board of Directors of the
company is accustomed to act.
Company Formation (STAGES)
1. Promotion
2. Registration
3. Floatation
4. Commencement of Business
Steps for Formation of Company
1. Reservation of name by filing an e-application
2. Preparation (drafting and signing of Memorandum of Association and its submission to
Registrar by e-filing and e-stamping
3. Drafting, Signing and Submission of Articles of Association electronically and e-
payment of stamp duty
4. Consent of persons nominated as Directors to act as Directors through e-filing
5. Statutory declaration of compliance
6. Getting the certificate of incorporation digitally signed by Registrar of Companies.

Filings of documents with Register of Companies for Company Incorporation

Documents to be filed with Register of Companies for Company Incorporation
1. Memorandum and Articles of Association duly signed (stamp duty is to be paid by e-
payment on MCA portal)
2. A Declaration of Compliance in that all requirement of the Act and Rules relating to
registration have been complied with.
3. An affidavit from each of the subscriber of memorandum and from persons named as first
directors in Articles.
4. Name of the State where registered office of the company is proposed to be situated on
incorporation.
5. Particulars of name, residential address and other prescribed particulars of every
subscriber with proof of identity.
6. Particulars of persons mentioned in the Articles as First Directors,, their names, DIN,
residential address, nationality and other particulars with i.d proof
7. Particulars of interest of persons mentioned in the Articles as First Directors in other
firms or bodies and their willingness to act as directors of the company.
Corporation Identity Number (CIN)
1. Every incorporated company is given a unique Corporate Identity Number.
2. It is mentioned in the Certificate of Incorporation by the Registrar of Companies
3. It is required to be quoted in all forms
4. It has 21 alpha-numeric code
 Chapter – 7
Share capital and debenture
SHARE CAPITAL
Share Capital means the capital raised by the issue of shares. The amount invested by the
shareholders towards the face value of shares are collectively known as Share Capital which is
quite distinct from the capital put in by individual shareholders. The Central Government
notified Companies Rules 2014 which came in to force from 1.4.2014.
The share capital is divided as shown below:
Authorized Capital – Section 2(8)
Authorized Capital/Nominal capital/Registered capital refers to that amount which is stated in
the ‘Capital Clause’ of the Memorandum of Association as the share capital of the company.
This is the maximum limit of the share capital of the company.
Issued Capital – Section 2(50)
Issued Capital refers to the nominal value of that part of authorized capital, which has been
subscribed for the signatures to Memorandum of Association, allotted for cash or for
consideration other than cash and, allotted as Bonus shares.
Subscribed Capital – Section 2(86)
Subscribed Capital refers to such part of the capital which is subscribed by the members of a
company. It is that portion of the issued capital at face value which has been subscribed for or
taken by the subscribers of shares in the company.
Called up Capital – Section 2 (15)
Called up capital means such part of the capital, which has been called for payment. It is that
portion of the subscribed Capital which has been called up or demanded by the company.
Paid up Share – Section 2 (64)
Paid up share capital means such aggregate amount of money credited as paid up as is equivalent
to the amount received as paid up in respect of shares issued and also includes any amount
credited as paid up in respect of shares of the company but does not include any other amount
received in respect of such shares by whatever name called.
Unissued Capital
Unissued Capital refers to that portion of the authorized capital which has not yet been issued.
Uncalled Capital
Uncalled capital refers to that portion of the issued capital which has not yet been called up by
the company.
Definition of Share
Section 2(84) of the Companies Act, 2013 defines ‘share’ as share in the share capital of
company and includes stock except where distinction between share and stock is expressed or
implied’. A share is a right to participate8 in the profits made by the company. It is an interest
measured by a sum of money. Section 2 (7) of the Sale of Goods Act defines ‘goods’ means any
kind of movable property other than actionable claim and money. It includes stock and shares. In
India. Shares are considered as goods.
Kinds of share Capital (Section 43)
Section 43 mended to provide that there shall be two kinds of share capital namely
(a) equity share capital includes equity shares with voting rights or equity shares with
differential rights as to dividend voting or otherwise
(b) Preference share capital: Preference share capital carries a preferential right with respect
to payment of dividend and also for repayment of capital at the time of winding up.
Nature of Share of Debentures (Section 44)
The shares or debentures or other interest of any member in a company shall be movable
property transferable in the manner provided by articles of the company.
Numbering of Shares (Section 45)
Every share in a company having a share capital shall be distinguished by its distinctive number.
This section does not apply to share held with the depository.
Share Certificate (Section 46)
Share certificate is a certificate issued by the company to the members of the company under the
common seal specifying the number of shares held by him and the amount paid on each share. A
member of a company has a right to receive a share certificate. Every share certificate shall be
issued under the common seal of the company and is shall be signed by two directors or persons
authorized by the two directors and the secretary or some other person appointed by the board for
the purpose.
Contents of Share Certificate
A share certificate usually contains the following particulars:
1. Name of the company
2. Address of the Registered office of the company
3. Date of issue
4. Name of the allottee / transferee
5. Certificate Number
6. Number of shares held
7. Distinctive Numbers
8. Folio Number
9. Amount paid on the shares
COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014
The provisions of these rules shall apply to
(a) All unlisted public companies;
(b) All private companies; and
(c) Listed companies,
So far as they do not contradict or conflict with any other provision framed in this regard by the
Securities and Exchange Board of India.
According to Rule 5 of companies (Share capital and Debenture Rules) 2014, where shares
are not in demat form, the following points have to be noted:
(1) Where a company issues any share capital, no certificate of any share or shares held in
the company shall be issued, except-
(a) In pursuance of a resolution-passed by the Board;
(2) Every certificate of share or shares shall be in Form No.SH.1
(3) Every certificate shall be issued under the seal of the company and signed by-
(a) Two directors
(b) The secretary
However, in companies wherein a Company Secretary is appointed under the previsions
of the Act, he shall deemed to be authorized for the purpose of this rule.
(4) The particulars of every share certificate issued shall be entered in the Register of
Members along with the name (s) of person.
(5) To whom it has been issued, indicating the date of issue.
Issue of Duplicate Share Certificate
(1) A duplicate certificate of shares may be issued, if such certificate
(a) Have been loss or destroyed; or
(b) Has been defaced, mutilated or torn and is surrendered to the company.
(2) Issue of a Duplicate share certificate or the duplicate thereof, the form of such to be
entered in the register of members
Where a share is held in depository form, the record of the depository is the prima face of the
interest of the beneficial owner.
If a company with intent to defraud issues a duplicate certificate of shares, the shall be
punishable with fine which shall not be less than five value

Rule 6 of the Companies (Share capital and Debenture Rules), 2014 gives details on issue of
renewed of duplicate share certificate. Accordingly,
The company may charge
 Not exceeding Rs.50/- certificate for replacement of certificate
 The duplicate share certificate shall be not issued without payment of fees not exceeding
rupees fifty per certificate.
 A certificate is issued in any of circumstances shall be stated in the Register and the word
“duplicate” shall be stamped or printed on the face of the share certificate;
 In case unlisted companies, the duplicate share certificates shall be issued within a period
of three months and in case of listed companies such certificate shall be issued within
fifteen days, from the date of submission of complete documents with the company
respectively.
 The particulars of every share certificate issued shall be entered in a Register of Renewed
and Duplicate Share Certificate maintained in Form No.SH.2
 The register share be kept at the registered office of the company it shall be kept in the
custody of the company secretary.
 All entries made in the Register of Renewed and Duplicate Share Certificate shall be
authenticated by the Company Secretary or such that person as may be authorized by the
Board for the purposes of sealing and signing the share certificate.
Distinction between Share and Stock
S.No Share Stock
1 A share has a nominal value A Stock has no nominal value
2 Shares can be either fully or partly paid up Stock can always be fully paid up
3 All shares are of equal shares directly to A company cannot issue stock directly to
the public the public
4 All shares are of equal denomination Stock may be of different denomination
5 Share has distinctive numbers Stock does not have distinctive numbers
6 Shares can be issued by private and public Only public limited companies can
company
7 Shares cannot be transferred in fractions Stock can be transferred in fractions

VOTING RIGHS
Subject to the provisions of Section 43 and 50 (2), Section 47 (1) of the Act, provides that
(a) every member of a company limited by shares and holding equity share capital shall have
a right to vote on every resolution placed before the company; and
 (b) his voting right on a poll shall be in proportion to his share

Equity Shares with Differential Rights

Rule 4 of Companies (Share capital and Debentures) Rules, 2014 deals with equity share
with different rights. Accordingly,
(1) No company limited by shares shall issue equity shares with differential rights as to
dividend voting or otherwise, unless it complies with the following are namely:-
(a) The articles of association of the company authorizes the issue of shares with
differential rights;
(b) The issue of shares is authorized by an ordinary resolution passed at a general
meeting of the shareholders:
(c) The equity shares of a company are listed on a recognized stock exchange
(d) The shares with differential rights shall not exceed 26% of total paid up equity share
capital
(e) The company having record of profits for the last three years;
(f) The company has filing financial statements and annual returns for three financial
years immediately in which it is decided to issue such shares;
(g) The company has no subsisting default in the payment of a declared dividend to its
shareholders
(h) The company has not defaulted in payment in payment of the dividend on preference
shares or repayment of any term loan from a public financial institution or State level
financial institution.
(2) Every member of a company limited by shares and holding any preference share capital
shall, in respect of such capital have a right to vote9 only on resolutions placed before the
company, which directly affect the rights attached to his preference shares and any
resolution for the winding up of company or for the repayment or reduction of its equity
or preference share capital and his voting right on a poll shall be in proportion to his
share in the paid-up reference share capital of the company.
However, where the dividend in respect of a class of preferences has not been
paid for a period of two years or more, such class of preference shareholders shall have a
right to vote on all he resolutions placed before the company.

Variation of Shareholders Rights

 Where a share capital of the company is divided into different classes of shares the
consent I writing of the holders of not less than three-fourths of the issued shares of that
class or by means of a special resolution passed at a separate meeting of the holders of
the issued shares of that class.
 If provision with respect to such variation is contained in the memorandum or articles of
the company; or
 If variation by one class of shareholders affects the rights of any other class of
shareholders.
 Where the holders of not less than 10% of the issued shares of a class did not consent to
such variation they may happy to the Tribunal to have the variation cancelled.
 The decision of the Tribunal on any application under sub-section (2) shall be binding on
the shareholders.
  The company shall, within thirty days of the date of the order of the Tribunal, file a copy
with the Registrar.
 Where an default is made in complying with the provisions of his section, the company
shall be punishable with fine which shall not be less than Rs. 25,000/- but which may
extend to five lakh rupees.

Company to accept unpaid share capital, although not called up

A company may, if so authorized by its articles, accept from any member the whole or a part of
the amount remaining unpaid on any shares held by him, even if no part of that amount has been
called up
 A member of the company limited by shares shall not be entitled to any voting rights in
respect of the amount paid by him under sub-section (1) until that amount has been called
up.
Section 50 provides that a company can accept from any member the whole or a part of the
amount remaining unpaid on any shares without being called up and he will not be entitled to
any voting rights on the amount paid by him unless amount has been called up.
Section 51 provides that a company may, if so authorized by its articles, pay dividends in
proportion to the amount paid-up on each share.

Issue of Shares at a Premium (Section 52)

A company can issue shares at premium for cash the aggregate amount of the premium received
shall be transferred to a securities premium account.

Application of premiums received on issue of shares

The securities premium account may be applied by the company
 To issue bonus shares
 In writing off the preliminary expenses of the company,
 In writing off the expenses of or the commission paid or discount allowed on, any issue
of shares or debentures of the company;
 In providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company; or
 For the purchase of its own shares
The securities premium account may be applied by such class of companies, as may be
prescribed and whose financial statement comply with the Accounting Standards prescribed for
such class of companies under section 133
 In paying up unissued equity shares of the company to be issued to members of the
company as fully paid bones section shares; or
 In writing off the expenses of or the commission paid or discount allowed on any issue of
equity shares of the company; or
 For the purchase of its own shares or other securities under section 68.

Prohibition on Issue of Shares at Discount (Section 53)

SWEAT EQUITY SHARES
Definition of Sweat Equity Shares (Section 2(88))
Sweat Equity means shares issued by a company to its employees at a discount or for
consideration, other than cash.
The Summary of Rule 8 of Companies (Share capital and Debentures) Rules 2014 is given
below:
1) A company other than a listed company, which is not required to comply with the SEBI
Regulations on sweat equity, shall not issue sweat equity shares to its directors or
employees at a discount or for consideration other than cash.
2) The term ‘employee’ means
A permanent employee of the company who has been working in India or outside India,
for at least last one year.
3) The special resolution authorizing the issue of sweat equity shares shall be valid for
making he allotment within a period of not more than 12 months from the date of passing
of the special resolution.
4) The company shall not issue sweat equity shares for more than 15% of the existing paid
up equity share capital in a year or shares of the issue value of Rs.5 crore, whichever is
higher.
5) The sweat equity shares issued to directors or employees shall be locked in non for a
period of three years from the date of allotment.
6) The sweat equity shares to be issued shall be valued at a price determined by a registered
value.
7) The register of Sweat Equity Shares shall be maintained at the registered office of the
company.
8) The in the register shall be authenticated by the Company Secretary of the company

Conditions for Issue of Sweat Equity Shares (Section 54)

1. The issue is authorized by a special resolution passed by the company.
2. The resolution specifies the number of shares, the current market price, consideration, if
any, and the class or classes of directors or employees to whom such equity shares are to
be issued;
3. Not less than one year has elapsed since the date on which the company had commenced
business; and
4. If the equity shares of the company are listed, the sweat equity shares are issued in
accordance with SEBI Regulations.
5. If they are not so listed, the sweat equity shares are issued in accordance with prescribed
rules.
(A) A company may issue sweat equity shares of a class of shares already issued, if the
following conditions are fulfilled, namely:
 The issue is authorized by a special resolution passed by the company;
 The resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to whom
such equity shares are to be issued;
 Not less than one year has, at the date of such issue, elapsed since the date on
which the company had commenced business; and
  If the equity shares of the company are listed on a recognized stock exchange, the
sweat equity shares are issued in accordance with the regulations made by the
SEBI. If they are not so listed, the sweat shares are issued in accordance with
prescribed rules.
 The rights, limitations, restrictions and provisions as are for the time being
applicable to equity shares shall be applicable to the sweat equity shares issued
under this section. The of such shares shall rank paripassu with other equity
shareholders.
Issue and Redemption of Preference Shares (Section 55)
1. Company limited by shares shall issue any irredeemable preference shares.
2. A company limited by shares may, if so authorized by its articles, issue preference shares
which are liable to be redeemed within a period not exceeding 20 years from the date of
their issue. However, a company may issue preference shares for a period exceeding
twenty years for infrastructure projects subject to the redemption of such percentage of
shares as may be prescribed on an annual basis at the option of such preferential
shareholders.
Further,
(a) no such shares shall be redeemed except out of the profits of the company which
would otherwise be available for dividend or out of the proceeds of a fresh issue of
shares for the purposes of such redemption;
(b) no such shares shall be redeemed unless they are fully paid;
where such shares are proposed to be redeemed out of the profits of the company,
shall, out of such profits, be transferred, a sum equal to the nominal amount of the
shares to a reserve, to be called the Capital Redemption Reserve Account.
3. Where a company is not in a position o to redeem any preference shares or to pay
dividend, it may, with the consent of the holders of three-fourths in value of such
preference shares and with the approval of the Tribunal on a petition made by it in this
behalf, issue further redeemable preference shares equal to the amount due, including the
dividend thereon, in respect of the unredeemed preference shares.
4. The capital redemption reserve account may be applied by the company, in paying up
unissued shares of the company to be issued to members of the company as fully paid
bonus shares.
The procedural formalities for issue and redemption of preference shares under Rule 9 are
given below:
(1) A company having a share capital may, if so authorized by its articles, issue preference
shares subject to the following conditions, namely:-
 The issue of such shares has been authorized by passing a special resolution in the
general meeting of the company.
 The company, at the time of such issue of preference shares, has no subsisting
default in the redemption of preference shares issued either before or after the
commencement of this Act or in payment of dividend due on any preference
shares.
(2) A company issuing preference shares shall set out in the resolution, particulars in respect
of the following matters relating to such shares, namely:-
(a) The priority with respect to payment of dividend or repayment of capital vis-à-vis
equity shares; (b) The participation in surplus fund; (c) the participation in surplus
 assets and profits, on winding up which may remain after the entire capital has been
repaid; (d) the payment of dividend on cumulative or non cumulative basis. (e) the
conversion of preference shares into equity shares into equity shares. (f) the voting
rights; (g) the redemption of preference shares.
(3) Where a company issues preference shares, the Register of Members maintained under
section 88 shall contain the particulars in respect of such preference share holders (s)
(4) A company intending to list its preference shares on a recognized stock exchange shall
issue such shares in accordance with the regulations made by the SEBI in this behalf.
(5) A company may redeem its preference shares only on the terms on which they were
issued or as varied after due approval of preference shareholders under section 48 of the
Act and the preference shares may be redeemed:-
 At a fixed time or on the happening of a particular event;
 Any time at the company’s option or
 Any time at the shareholder’s option

Articles of Association
It is another important document as it contains the rules any regulations for its internal
functioning of the company.
Contents of the Articles
1. The extent to which the regulations in Table A are to be excluded.
2. Adoption or execution of preliminary contracts if any.
3. Share capital, different classes of shares, rights attached thereto, etc.
4. Allotment of shares, calls on shares,
5. Procedure relating to forfeiture of shares and their-re-issue.
6. Issue of share certificates and share warrants.
7. Rules regarding transfer of shares and transmission of shares.
8. Conversion of shares into stock.
9. Payment of underwriting commission on shares and debentures.
10. Alteration of share capital.
11. Qualification and remuneration of directors.
12. Borrowing powers of directors.
13. Appointment, qualification, powers, duties, remuneration, etc of managing director,
manager, manager and secretary.
14. Appointment of directors.
15. Rules regarding use of common seal of company, Board meetings and voting rights of
members, proxies and polls.
16. Procedure for conducting different kinds of general meetings.

CONTENTS OF MEMORANDUM
The Memorandum of every company shall contain the following clauses
1. The name clause. The name of a company establishes its identity and is the symbol if its
existence.
(a) Undersirable name to be avoided. A company cannot be registered by a name which, in
the opinion of the Central Government, is undesirable.
 Identical with or resemble too nearly to the name of an existing company registered under
this Act or any previous company law; or
 Misleading i.e., suggesting that the company is connected with or having the patronage
of, the Central Government, any State Government or any local authority, corporation or
body constituted by the Central Government or any State Government under any law for
the time being in force.
 Search word or expression, as may be prescribed.
(b) ‘Limited’ or ‘Private Limited’ as the last word or words of the name. The
Memorandum shall state the name of the company with ‘Limited’ as the last word of the
name in case of a public limited company and with ‘Private Limited’ as the last words of
the name in case of a private limited company.
(c) Prohibition of use of certain names. Emblems and Names (Prevention of Improper
Use) Act, 1950 prohibits, the use of or registration of a company or firm with, any name
or emblem specified in the Schedule to that Act. Emblem or official seal of the United
Nations Organisation, the world Health Organisation.
2. Publication of name
(a) Paint or affix its name, and the address of its registered office, and keep the same
painted or affixed, on the outside of every office or place in which its business is
carried on.
(b) Have its name engraved in legible characters on its seal;
3. The registered office clause
(a) A company shall, on and from the fifteenth day of its incorporation.
(b) The company shall furnish to the Registrar verification of its registered office within
a period of thirty days of its incorporation.
4. The object clause. The objects of a company shall be clearly set forth in the
Memorandum. The object clause both defines and confines scope of the company’s
powers, and once registered, it can only be altered as provided by the Act.
5. The capital clause. The Memorandum of a company, having a share capital, shall state
the amount of the share capital with the company is to be registered and the division
thereof into shares of a fixed amount. The shares issued by a company can only be equity
shares or preference shares.
6. The liability clause. The Memorandum of a company limited by shares or by guarantee
shall also state that the liability of its members is limited. This means that the members
can only be called upon to pay to the company at any time the uncalled or unpaid amount
on the shares held by them.
7. The association clause. The association clause states: “We, the several persons whose
names and addresses are subscribed, are desirous of being formed into a company in
pursuance of this Memorandum of Association. The names, addresses and describer has
to take at least 1 share.
The Memorandum shall be signed by at least 7 subscribers in the case of a public
company, and by at least 2 subscribers in the case of a private company one person,
where the company to be formed is to be one person company that is to say, a private
company. The signature of each subscriber shall be attested by at least 1 witness who
cannot be any of the other subscribers.
Comparision between a share certificate and share warrent
S.No Share certificate Share Warrant
1 It can be issued whether the shares are fully It can be issued only when the share are
or partly paid fully paid
2 It can be transferred by executing a proper It can be transferred by mere delivery
transfer deed
3 It entitles the person named in it to the It entitles it’s bearer to the shares
shares specified in the share certificate specified in the share warrent
4 It can be issued by both a public and private It is issued only by a public company
company limited by shares.
5 It is not a negotiable instrument It is a negotiable instrument
6 It’s holder is a member of the company Its holder is not a member of the
company. We can be considered a
member for specified purpose only if
company articles provision
7 It’s holder is qualification as a direct of a It’s holders is not so qualified
company were the qualification shares
persicribed
8 It’s holder is entitled to percent a petition It’s holder is not entitled to present a
for winding un of the company petition for winding up of the company
9 It is issued without any approval of central It can be issued only with the prior
government more over, there need not be approual of the central government more
any authority in company articles for it’s over the company article must authorize
issue. the company for it’s issue.
10 It transfer attracts stamp duty i.e the stamp It’s transfer does not attract any stamp
duty is payable on the transfer of the share duty i.e no stamp duty is payable on the
certificate transfer of share warrant
11 A nominal stamp duty is payable of the A heavy stamp duty is payable on the
issue of a share certificate issue of a share warrant
12 The dividend to its holden is paid usually The divided to it holden is paid the
cheque introduction of a attached
with it.

MCA -21 – ELECTRONIC FILING OF FORMS FROM 15-9-2006

Ministry of Corporate Affairs (MCA) had launched a programme for managing the work relating
to filing of documents. The physical filing of all forms had been converted into electronic filing .
It was almost a paperless working of MCA except in a few cases where paper work is
unavoidable due to legal and statutory requirements. The project is termed as ‘MCA-21’. The
project became fully operational on 2006.
MCA-21 project is designed to fully automate all processes related to enforcement compliance of
legal requirements under Companies Act, 1956.
The following nine matter6s are covered under MCA-21 project since 15-9-2006
 Registration and incorporation of new companies.
 Filing of annual returns and balance sheets.
 Filing of forms for change of name/address/director’s details.
 Registration, modification and verification of charges
 Inspection of documents.
 Issue of certified copies.
 Application for permissions required under provisions of Company Law
 Approvals from Central Government, Regional Director and ROC (It will be sent
physically by post.)
 Investor grievance redressal.
MCA-21 Scheme does not cover matters relating to liquidation of companies.