Incorporation  of a Company In India

When a company is formed, it's usually through a process called incorporation. This makes the company legally distinct from the people who invest their money and work to manage it. The first step in forming a company is often called "promotion." During this stage, someone, known as a promoter, convinces others to invest money in the proposed company even before it's officially formed. Promoters can also make deals on behalf of the company before or after it's legally incorporated, and they can organize the sale of company shares. The Companies Act, 2013, along with the Companies (Incorporation) Rules, 2014, outline the rules and procedures for forming companies and related matters.

Advantages of Incorporation

Incorporation has several advantages for a company compared to other types of business organisations:
1. Independent Existence: Once a company is incorporated, it gains its own separate identity. This means it exists independently of its owners, known as members.
2. Limited Liability: One major advantage is the limitation of liability. In a company, the liability of its members is limited to the extent of the shares they own. This protects their personal assets in case the company faces financial issues.
3. Share Transferability: Incorporation allows for easy transfer of shares. Shares in a company can be bought and sold without needing consent from other members, as long as the company's Articles of Association allow it. However, some restrictions may apply in private limited companies.
4. Perpetual Existence: A company can exist indefinitely. Even if members change due to death or bankruptcy, the company continues to operate. It only ceases to exist when it's officially wound up.
5. Separate Property: Incorporated companies own their property separately from their members. The company can buy, sell, and own property in its own name, and members don't have direct ownership rights over the company's assets.
6. Contracts and Legal Action: Because it's a separate legal entity, a company can enter into contracts with its members and take legal action against them if needed.
7. Legal Capacity: A company can sue and be sued in its own name, making legal matters more straightforward.
8. Professional Management: Companies can attract professional managers because working for a company offers them a higher status and potentially better opportunities in the business world.

Stages of incorporation of a company

Company formation is the process of establishing a new business entity, typically through the legal procedure known as incorporation. After incorporation, the business becomes a distinct legal entity separate from its founders. Those initiating the company are referred to as promoters, responsible for taking the necessary steps to bring the company into existence. The formation process comprises four key stages:
A. Promotion: Involves conceptualising the business idea and taking initial actions to make it a reality.
B. Incorporation: This step involves formally registering the company with the relevant government authorities to obtain legal recognition.
C. Capital Subscription: Involves attracting investors to contribute capital to the company by purchasing shares or stocks.
D. Commencement of Operations: Once the company is legally established and sufficient capital is secured, it can begin its commercial activities.

Promotion of Company

In the business context, "promotion" isn't about advertising or marketing; rather, it's the initial stage in bringing a company into existence. Think of it as the starting point for forming a business. The individuals responsible for this stage are known as promoters.
Promoters are the ones who conceive the idea of starting a company. Before officially registering the company under the relevant laws (like the Companies Act), promoters need to make several critical decisions:
Business Concept: They need to decide on the type of business they want to establish.
Formation Approach: Promoters must choose whether to start a new company from scratch or acquire an existing business.
Legal Structure: If they opt for a new company, they must determine whether it should be a private or public entity.
Capitalization: Promoters need to calculate how much capital is required to get the business off the ground.
Once these decisions are made, promoters take the necessary steps to gather the essential elements for the business and secure the funding needed to launch the venture. This involves organising the financial resources, acquiring property, and assembling the necessary managerial expertise to turn the business idea into a reality. Essentially, promotion is about spotting business opportunities, planning the financial aspects, and laying the groundwork for the company's future success.

Incorporation

In the process of forming a company, the second step is incorporation or registration, which officially establishes the company's existence. Here's what happens during this stage:
Name Approval: First, the promoters need to ensure the chosen name for the company is available and acceptable. They apply to the Registrar of Companies to check if the name is free for use. Certain rules apply, like not having the same name as an existing company, and using "Private Ltd." or "Limited" at the end based on the company type.
Application Filing: Next, they submit an application to the Registrar of Companies in the state where the company's registered office will be located. This application includes important documents like the Memorandum of Association, Articles of Association, agreements with directors, and a declaration confirming legal compliance.
Payment: The company pays the necessary stamp duty and filing fees based on its authorized share capital.
Compliance Declaration: There's a declaration confirming compliance with relevant laws and rules. It's signed by either a lawyer, company secretary, or chartered accountant, and filed with the Registrar of Companies.
Additional Documents for Public Companies: For public companies, additional documents like a list of directors and their consents, along with an undertaking to purchase qualification shares, are required.
Certificate of Incorporation: Once all documents are in order, the Registrar scrutinizes them. If everything checks out, the Registrar registers the company and issues a Certificate of Incorporation. This certificate marks the official birth of the company, and its existence begins from the date mentioned on the certificate.
So, the Certificate of Incorporation is like the company's birth certificate. Once it's issued, the company is legally formed and can only be dissolved through the procedures outlined in the law. Even if there are mistakes in the certificate, it cannot be canceled outright.

Capital Subscription

Once the company receives the Certificate of Incorporation, the next step is to secure the necessary funds to operate the business. This means the company can start raising the capital needed to kickstart and sustain its operations.
For a private company, it can begin its operations immediately after getting the Certificate of Incorporation. However, for a public limited company, it needs to follow two additional stages: capital subscription and commencement of business.
In the capital subscription stage the company arranges to raise the required capital. To safeguard investors, SEBI has issued guidelines for disclosure and investor protection. If a public company plans to issue shares to the public, it needs to comply with these guidelines. The directors will file a prospectus with the Registrar of Companies and issue it to the public on the specified date. Interested investors apply for shares and submit the application money to the company's designated bankers. The bankers then forward these applications to the company for consideration by the directors. If at least 90% of the capital issue is subscribed to and all other requirements are met, the directors pass a resolution for share allotment. However, if the minimum subscription isn't met within 120 days, no allotment can be made, and all money received is refunded.
If a public company opts for the private placement of shares, it needs to file a "statement in lieu of prospectus" with the Registrar of Companies. This must be done at least three days before the directors pass the resolution for the first share allotment. The contents of a prospectus and a statement in lieu of a prospectus are similar.
In summary, public companies can raise funds either from the public through a prospectus or through private sources by filing a statement in lieu of a prospectus.

Business Commencement

Unlike a private company, a public limited company must go through additional formalities before it can begin its operations. It can only obtain the Certificate of Commencement of Business after fulfilling these requirements.
Simply put, a public limited company needs to meet certain legal obligations regarding its capital before it can receive the Certificate of Commencement of Business from the Registrar of Companies. Here are the conditions:
The company must have allotted shares payable in cash up to the minimum subscription amount.
Each director of the company must have paid the application and allotment money on the shares they hold, just like other shareholders.
No money should have been refunded due to failure to get permission for shares or debentures to be traded on any recognized stock exchange.
A declaration, verified by one of the directors or the secretary, confirming that the above requirements have been met, must be filed with the Registrar.
Once these requirements are fulfilled, the company is granted the Certificate to Commence Business. This certificate serves as conclusive evidence that the company has complied with all legal formalities and is authorized to start its operations. It's important to note that if a company fails to commence business within a year of its incorporation, the court has the authority to wind it up.

In conclusion, forming a company brings many benefits like being separate from its owners, having limited responsibility, and being able to easily sell shares. The process has steps like getting investors, registering the company, raising money, and starting a business. Once a company gets its official paperwork, it can begin to operate. Following the rules is key, and if a company doesn't start within a year, it might have to close. By doing things right, a company can use its official status to grow and succeed.

FAQs

Q.1 How is a company incorporated in India ?
Ans. Incorporating a company through Simplified Proforma for Incorporating Company electronically (SPICe -INC-32), with eMoA (INC-33), eAOA (INC-34), is the default option and most companies are required to be incorporated through SPICe only.
Q.2 Can a company be incorporated without share capital ?
Ans. Section 8 Company may be incorporated as a company limited by shares or by Guarantee (with or without share capital.
Q.3 Which was the first private company in India?
Ans. The East India Company (EIC) was an English, and later British, joint-stock company founded in 1600 and dissolved in 1874.
Q.4 What is the full form of ROC ?
Ans.Registrar of Companies (ROC) India.
Q.5 What is the time limit for incorporation of a company after name approval ?
Ans. 20 days.