B.com(H/P)|CH-5 Formation of the Company, Promoters| Company law | Sem-2/4th Sol Du NEP SOL DU Law

Name: B.com(H/P)|CH-5 Formation of the Company, Promoters| Company law | Sem-2/4th Sol Du NEP SOL DU Law
Uploaded: 2025-01-29T04:31:07.000Z
Duration: 1 h 10 min 13 s

Company Law: Formation and Promotion

Introduction to Company Law

The discussion begins with an introduction to the important series on Company Law, applicable for B.Com programs, including nursing students.

Focus is placed on Chapter 5, which covers the formation of a company, promotion, promoters, and online registration.

Key Topics in Company Formation

The session emphasizes understanding promoters' roles as they are frequently questioned in exams. Legal positions of promoters will also be discussed.

Four essential steps for company formation are outlined:

Promotion of the company

Incorporation of the company

Flotation or raising capital

Commencement of business

Steps for Company Formation

The first step involves promoting the idea of a company; this is crucial for planning and financing.

Incorporation must be done through the Registrar of Companies (ROC), followed by flotation to raise necessary capital from public sources.

Finally, commencement means starting operations once all previous steps are completed.

Detailed Breakdown of Promotion

Promotion is defined as the initial stage where ideas about forming a business are developed. It’s essential for registration and organizing financial plans.

This stage includes brainstorming business ideas regarding what type of company it should be and how it will operate financially.

Role and Definition of Promoters

Promoters bring forth business ideas and determine operational aspects such as directors' appointments and subscriber numbers.

A promoter's role encompasses conceptualizing how a company will function, including its size and authorized capital requirements.

Legal Definition of Promoters

According to Section 2(69), a promoter is identified as someone whose name appears in the prospectus issued when launching a new company.

Promoter Functions and Responsibilities

How to Become a Promoter

To become a promoter, there are three main methods:

Your name must be included in the prospectus.

You need to file annual returns as per Section 92.

You must have control over the company, either directly or indirectly.

Identifying a Promoter

A promoter can be identified as:

A shareholder of the company.

A director within the company.

Any other individual who has control over the company’s operations.

Key Functions of a Promoter

The most important functions of a promoter include:

Initiating business operations and bringing forth business ideas.

Raising funds necessary for starting and running the business.

Discovery and Investigation

The promoter is responsible for:

Discovering new business ideas or expansions.

Conducting detailed investigations regarding costs, profitability, production processes, and product demand.

Resource Assembly

Another critical function is assembling resources needed by the company:

This includes purchasing materials, acquiring land, machinery, etc., essential for business operations.

Document Preparation and Contracts

The promoter also prepares all necessary documents required to start the company:

This includes drafting Memorandum of Association (MOA) and Articles of Association (AOA).

Additionally, they handle entering into preliminary contracts before the company's official formation:

Understanding the Role of Promoters in Company Formation

Initial Steps in Company Formation

The promoter is responsible for initiating the company formation process, including securing necessary funds to start operations.

Until the company is officially established, the promoter holds liability for any financial commitments made on behalf of the company.

Naming the Company

The promoter selects a unique name for the company, ensuring it does not resemble existing companies to avoid identity conflicts.

This selection process is crucial as it establishes the company's brand and legal identity.

Appointment of Financial and Legal Advisors

The promoter also appoints bankers, solicitors, and underwriters essential for raising capital and ensuring legal compliance.

Underwriters play a critical role by agreeing to purchase shares if public investment falls short of required amounts.

Capital Requirements and Public Investment

A minimum amount (e.g., 90% of total capital needed) must be raised through public investment; otherwise, the company may be disbanded.

If public investors only contribute partially (e.g., 5 crores instead of 10), promoters must secure additional funding from underwriters or banks.

Legal Position and Responsibilities of Promoters

Promoters are fiduciaries who must act in the best interest of the company rather than their personal gain.

Understanding the Role and Responsibilities of a Promoter in Business

Importance of Full Disclosure by Promoters

Promoters must provide full disclosure for every transaction they engage in, as they are responsible for the company's welfare and profits.

If a promoter begins to lie or hide information, it can lead to significant issues for the company. Thus, transparency is crucial.

Example of Ethical Dilemmas in Transactions

A promoter may want to sell a truck valued at ₹1 crore to their own company for ₹1.5 crore, which would yield them a profit of ₹50 lakhs. This scenario raises ethical concerns about self-interest versus company interest.

The board of directors must approve such transactions, ensuring that the sale is conducted with full consent and awareness of potential conflicts of interest.

Legal Implications and Company Rights

If a promoter hides any details from the company regarding transactions, the company has the right to reject the sale or recover any profits made from it. This emphasizes accountability within corporate governance.

The legal position holds that promoters should always act in favor of the company's benefits rather than their personal gains. Understanding this principle is vital for maintaining ethical standards in business practices.

Rights Granted to Promoters

Right to Recover Expenses

Promoters have the right to claim reimbursement for expenses incurred while operating on behalf of the company, reinforcing their role as stakeholders invested in its success.

Partial Recovery Rights

In cases where multiple promoters share expenses, they collectively bear costs but can seek partial recovery based on individual contributions towards those expenses incurred during business operations.

Right to Remuneration

Promoters are entitled to remuneration for their efforts; however, this often comes in forms other than cash—such as shares—which aligns their interests with long-term growth and stability within the company structure.

Liabilities Associated with Being a Promoter

Responsibilities Upon Incorporation

Company Incorporation and Promoter Liabilities

Understanding False Information in Company Incorporation

The concept of "false information" refers to incorrect details provided by promoters during a company's incorporation. If any promoter submits misleading information, all promoters may face penalties.

Section 447 states that if false information is provided during the incorporation process, liability falls on the promoters. It emphasizes the need for accurate information to avoid legal repercussions.

Promoters are liable for losses or damages incurred by the company due to misleading information. This means that if a promoter provides incorrect data leading to financial loss, they will bear responsibility.

Full Disclosure Requirements

Companies must ensure full disclosure of all relevant information regarding their operations. Failure to provide complete transparency can result in fines up to ₹1,00,000 or five times the amount involved in fraudulent transactions.

Any profit gained through fraudulent activities must be returned at five times its value. This serves as a deterrent against dishonest practices among promoters.

Consequences of Fund Diversion

If funds are diverted for personal gain using company resources, severe penalties apply, including potential imprisonment for up to six years and hefty fines.

Non-compliance with corporate regulations during inspections can lead to additional penalties such as six months of imprisonment and significant fines.

Steps in Company Formation

Initial Steps for Company Promotion

The formation of a company involves four key steps: promotion (planning how the company will operate), incorporation (registering with ROC), capital raising (securing necessary funds), and commencing business operations.

Mandatory Registration Requirements

Before registration, it is essential that directors obtain their Director Identification Number (DIN). This number is crucial for identifying directors legally.

A digital signature must also be obtained for official documentation purposes. Both DIN and digital signatures need to be submitted to the Ministry of Corporate Affairs (MCA).

Registration Process Overview

After gathering necessary documents like DIN and digital signatures, one must approach the Registrar of Companies (ROC) for name availability checks before proceeding with registration.

Company Registration Process Overview

Name Availability Check

The registrar of companies will check the availability of the proposed names within 7 days. If a name is accepted, it will be confirmed; if rejected, an alternative name must be provided.

Upon acceptance, the chosen name is reserved for 60 days during which company formation activities must commence. Failure to act within this period results in the name being released for others.

Document Filing Requirements

After selecting a name, necessary documents must be filed with the Registrar of Companies (ROC), including the Memorandum of Association (MOA) and Articles of Association (AOA).

A declaration confirming that all information in MOA and AOA is accurate must be submitted by promoters along with affidavits from shareholders and directors affirming compliance.

Company Address and Director Details

The address where the company will operate needs to be provided, specifically where its head office will be located.

Details about subscribers (shareholders) and first directors are required, including their consent to serve as directors.

Submission of Additional Documents

Directors' consent forms and identification numbers (DIN), along with digital signatures, need to be submitted as part of the registration process.

An agreement outlining statutory declarations regarding compliance must also be filed by directors indicating their readiness to join the company.

Final Steps in Registration

Once all documentation is correctly submitted, ROC will approve the registration if no steps are missed or errors found.

Following approval, a Certificate of Incorporation will be issued confirming that the company has been established legally.

Incorporation Certification

Issuance of Corporate Identity Number

The ROC provides a Certificate of Incorporation detailing when and where the company was established along with a Corporate Identity Number (CIN).

Capital Raising Strategies

Companies can raise capital through issuing shares or debentures. Initial funding typically comes from share issuance.

Understanding Public and Private Companies

Key Differences Between Public and Private Companies

A public company can raise funds directly from the public, while a private company cannot. Private companies need to engage underwriters or banks to help them secure subscriptions for funding.

The ease of raising capital is highlighted, with public companies having a more straightforward process compared to private entities.

Incorporation and Business Operations

For a public company, establishing a solid business foundation is crucial. This includes determining the location and type of business operations that will be initiated.

The discussion emphasizes the importance of incorporation for businesses, indicating that understanding this process is essential for new entrepreneurs.

Understanding Company Structure

First-time learners may find the concepts challenging; however, key areas such as promoters' roles, their functions, legal positions, rights, liabilities, and duties are fundamental to grasping corporate structure.

It’s suggested that if time permits, one should also familiarize themselves with the incorporation process of companies as it is relatively straightforward.

Conclusion and Engagement Encouragement

The chapter concludes with an invitation for viewers to like, share, and subscribe if they found the content helpful.