2012 [ ] CORPORATE

Thoth Consulting
Vipin Srinath
As per 2012 Syllabus of Bangalore University. In accordance with Syllabus of 1st Semester B.Com
Unit 1
Joint Stock Company
Meaning & Definition
A company form of business organisation is known as a Joint Stock Company. It is a
voluntary association of persons who generally contribute capital to carry on a particular
type of business, which is established by law and can be dissolved only by law.
The companies in India are governed by the Indian Companies Act, 1956. The Act defines a
company as an artificial person created by law, having a separate legal entity, with
perpetual succession and a common seal.
Features of Joint Stock Companies
a) Legal formation: No single individual or a group of individuals can start a business
and call it a joint stock company. A joint stock company comes into existence only
when it has been registered after completion of all formalities required by the Indian
Companies Act, 1956.
b) Artificial person: Just like an individual, who takes birth, grows, enters into
relationships and dies, a joint stock company takes birth, grows, enters into
relationships and dies. However, it is called an artificial person as its birth, existence
and death are regulated by law and it does not possess physical attributes like that
of a normal person.
c) Separate legal entity: Being an artificial person, a joint stock company has its own
separate existence independent of its members. It means that a joint stock company
can own property, enter into contracts and conduct any lawful business in its own
name. It can sue and can be sued by others in the court of law. The shareholders are
not the owners of the property owned by the company. Also, the shareholders
cannot be held responsible for the acts of the company
d) Common seal: A joint stock company has a seal, which is used while dealing with
others or entering into contracts with outsiders. It is called a common seal as it can
be used by any officer at any level of the organisation working on behalf of the
company. Any document, on which the company's seal is put and is duly signed by
any official of the company, become binding on the company. For example, a
purchase manager may enter into a contract for buying raw materials from a
supplier. Once the contract paper is sealed and signed by the purchase manager, it
becomes valid. The purchase manager may leave the company thereafter or may be
removed from the job or may have taken a wrong decision, yet for all purposes the
contract is valid till a new contract is made or the existing contract expires.
e) Perpetual existence: A joint stock company continues to exist as long as it fulfils the
requirements of law. It is not affected by the death, lunacy, insolvency or retirement
of any of its members. For example, in case of a private limited company having four
members, if all of them die in an accident the company will not be closed. It will
continue to exist. The shares of the company will be transferred to the legal heirs of
the deceased members.
f) Limited liability: In a joint stock company, the liability of a member is limited to the
extent of the value of shares held by him. While repaying debts, for example, if a
person owns 1000 shares of Rs. 10 each, then he is liable only upto Rs 10,000
towards payment of debts. That is, even if there is liquidation of the company, the
personal property of the shareholder cannot be attached and he will lose only his
shares worth Rs. 10,000.
g) Democratic management: Joint stock companies have democratic management and
control. That is, even though the shareholders are owners of the company, all of
them cannot participate in the management of the company. Normally, the
shareholders elect representatives from among themselves known as ‘Directors’ to
manage the affairs of the company.
Types of Companies
1. Private Limited Company: These companies can be formed by at least two individuals
having minimum paid–up capital of not less than Rupees one lakh. As per the
Companies Act, 1956 the total membership of these companies cannot exceed 50.
The shares allotted to its members are also not freely transferable between them.
These companies are not allowed to raise money from the public through open
invitation. They are required to use “Private Limited” after their names. The
examples of such companies are Combined Marketing Services Private Limited,
Indian Publishers and Distributors Private Limited, Oricom Systems Private Limited,
2. Public Limited Company: A minimum of seven members are required to form a
public limited company. It must have minimum paid–up capital of Rs 5 lakhs. There is
no restriction on maximum number of members. The shares allotted to the
members are freely transferable. These companies can raise funds from general
public through open invitations by selling its shares or accepting fixed deposits.
These companies are required to write either ‘public limited’ or ‘limited’ after their
names. Examples of such companies are Hyundai Motors India Limited, Steel
Authority of India Limited, and Dr. Reddy Laboratories Limited etc.
3. Government Company: In these companies the Government (either state or central
government or both) holds a majority share capital i.e., not less than 51%. However,
companies having less than 51% share holding by the government can also be called
Government companies provided control and management lies with the
government. Examples of government companies are: Mahanagar Telephone Nigam
Limited, Bharat Heavy Electricals Limited.
4. Indian Company: A company having business operations in India and registered
under the Indian Companies Act, 1956 is called Indian Company. An Indian company
may be formed as a public limited, private limited or government company.
5. Foreign Company: A foreign company is a company formed and registered outside
India having business operations in India.
6. Holding Companies: A holding company is a company or firm that owns other
companies' outstanding stock. It usually refers to a company which does not produce
goods or services itself; rather, its purpose is to own shares of other companies.
7. Subsidiary Companies: A subsidiary, in business matters, is an entity that is
controlled by a separate higher entity. The controlled entity is called a company,
corporation, or limited liability company; and in some cases can be a government or
state-owned enterprise, and the controlling entity is called its parent (or the parent
Companies Act, 1956
In India, the Companies Act, 1956, is the most important piece of legislation that empowers
the Central Government to regulate the formation, financing, functioning and winding up of
companies. The Act contains the mechanism regarding organisational, financial, and
managerial and all the relevant aspects of a company. It empowers the Central Government
to inspect the books of accounts of a company, to direct special audit, to order investigation
into the affairs of a company and to launch prosecution for violation of the Act.
The Companies Act is administered by the Central Government through the Ministry of
Corporate Affairs and the Offices of Registrar of Companies, Official Liquidators, Public
Trustee, Company Law Board, Director of Inspection, etc.
Under the Companies Act, 1956, the term 'company' means " a company formed and
registered under the Act or an existing company i.e. a company formed or registered under
any of the previous company laws". The basic objectives underlying the law are :
A minimum standard of good behaviour and business honesty in company
promotion and management.
Due recognition of the legitimate interest of shareholders and creditors and of the
duty of managements not to prejudice to jeopardise those interests.
Provision for greater and effective control over and voice in the management for
A fair and true disclosure of the affairs of companies in their annual published
balance sheet and profit and loss accounts.
Proper standard of accounting and auditing.
Recognition of the rights of shareholders to receive reasonable information and
facilities for exercising an intelligent judgement with reference to the management.
A ceiling on the share of profits payable to managements as remuneration for
services rendered.
A check on their transactions where there was a possibility of conflict of duty and
A provision for investigation into the affairs of any company managed in a manner
oppressive to minority of the shareholders or prejudicial to the interest of the
company as a whole.
Enforcement of the performance of their duties by those engaged in the
management of public companies or of private companies which are subsidiaries of
public companies by providing sanctions in the case of breach and subjecting the
latter also to the more restrictive provisions of law applicable to public companies.
Steps in Formation of a Joint Stock Company
Stage –I Promotion
Stage- II Incorporation
Stage- III Raising of Capital
Stage- IV Commencement of Business
Stage 1 – Promotion
Promotion of a business simply refers to all those activities that are required to be
undertaken to establish a new business unit for manufacturing or distribution of any
product or provide any service to the people. It starts with conceiving an idea of business or
discovers an opportunity for doing a business, assess its feasibility and then take the
necessary steps to launch the business unit. The whole process is called business
‘promotion’ and the person who does it is called the ‘promoter'.
Functions of a promoter:
1. To discover an idea for establishing a company.
2. To make detailed investigation about the demand for the product, availability of
power, labour, raw material, etc. etc.
3. To find out suitable persons who are willing to act as first directors of the company
and are ready to sign on the Memorandum of Association.
4. To select bank, legal advisor, auditors, underwriters for the company.
5. To prepare essential documents of the company
6. To prepare draft of the Memorandum of Association, Articles of Association,
Prospectus of the company and get them printed.
7. To submit all the documents, required for incorporation with the Registrar.
8. To arrange for advertisement of prospectus of the company in the newspapers.
9. To meet all the preliminary expenses for floating of a company.
10. To make contracts with vendors, underwriters and managing director of the
11. To raise the required finances and get the company going.
12. To make proper arrangement for the office of the company.
Stage 2 – Incorporation
A company cannot be formed or permitted to run its business without registration. Infact, a
company comes into existence only when it is registered with the Registrar of Companies.
For this purpose the promoter has to take the following steps:
1. Approval of Name: It has to be ensured that the name selected for the company
does not match with the name of any other company. For this, the promoter has to
fill in a “Name Availability Form” and submit it to the Registrar of Companies along
with necessary fees. The name must include the words(s) ‘Limited’ or ‘Private
limited’ at the end. Once it is approved, the promoter can proceed with other
formalities for the incorporation of the Company.
2. Filing of Documents: After getting the name approved the promoter makes an
application to the Registrar of Companies of the State in which the Registered Office
of the company is to be situated for registration of the company. The application for
registration must be accompanied by the following documents.
a) Memorandum of Association (MOA): It defines the objectives of the company
and states about the range of activities or operation. It must be duly
stamped, signed and witnessed. The clauses in the memorandum are:
Name Clause: It contains the name by which the company will be
established. As you know, the approval of the proposed name is
taken in advance from the Registrar of the companies.
Situation Clause: It contains the name of the state in which the
registered office of the company is or will be situated. The exact
address of the company's registered office may be communicated
within 30 days of its incorporation to the Registrar of Companies.
Objects Clause: It contains detailed description of the objects and
rights of the company, for which it is being established. A
company can undertake only those activities which are mentioned
in the objects clause of its memorandum.
Liability Clause: It contains financial limit up to which the
shareholders are liable to pay off to the outsiders on the event of
the company being dissolved or closed down.
Capital Clause: It contains the proposed authorised capital of the
company. It gives the classification of the authorised capital into
various types of shares, (like equity and preference shares) with
their numbers and nominal value. A company is not allowed to
raise more capital than the amount mentioned as its authorised
capital. However, the company is permitted to alter this clause as
per the guidelines prescribed by the companies Act.
Subscription Clause: It contains the name and address of at least
seven members in case of public limited company and two
members in case of a private limited company, who agree to
associate or join hands to get the undertaking registered as a
company. It contains a declaration by persons who are desirous of
being formed into and agree with the terms and conditions of the
b) Articles of Association (AOA). It contains the rules and regulations regarding
the internal management of the company. It must be properly stamped, duly
signed by the signatories to the Memorandum of Association and witnessed.
Preliminary contracts
Use and custody of common seal
Allotment, calls and lien on shares
Transfer and transmission of shares
Forfeiture and re-issue of shares
Alteration of share capital
Issue of share certificates and share warrants
Conversion of debt into shares
Procedure of holding and conducting company meetings
Voting rights and proxies of members
Qualification, appointment, remuneration and power of Directors
Borrowing powers and methods of raising loans
Payment of dividends and creation of reserves
Accounts and audit
Winding up
Distinction between the Memorandum and Articles
Memorandum of Association
Articles of Association
It is the charter of the company that defines
It consists of the rules and regulations framed
the fundamental conditions and objects under
to govern this internal management of the
which it was incorporated
Clauses in the memorandum cannot be
Members have the right to alter by way of a
altered so easily and alteration usually
special resolution and generally there is no
requires an approval from Central Govt or
need to obtain permission from Court of
Company Law Board
Company Law Board.
The Memorandum cannot include any clause
The Articles are subordinate to both
that is contrary to the provisions in the
Companies Act and Memorandum.
Companies Act
The memorandum generally defines the
The Articles defines the relation between the
relationship between the Company and the
company and its members and between the
Acts of the company beyond the scope of
Acts of the director beyond the Articles can be
Memorandum are deemed void and ultra virus ratified by the shareholders.
and cannot be ratified unanimously by all
Stage 3 – Raising of Capital
After the company is incorporated, the next stage is to raise the necessary capital. In case of
a private limited company, funds are raised from the members or through arrangement
from banks and other sources. In case of a public limited company the share capital has to
be raised from the public. This involves the following:
a) Preparation of a draft prospectus and get it inspected (vetted) by SEBI to ensure that
all information given in the prospectus fully complies with the guidelines laid down
by SEBI in this regard.
b) Filing a copy of the prospectus with the Registrar of Companies.
c) Issue of prospectus to the public by notifying in a newspaper and inviting the public
to apply for shares as prescribed in the prospectus.
d) If the minimum subscription has been received, shares should be allotted to the
applicants as per SEBI guidelines and file a return of allotment with the Registrar of
e) Listing of shares in a recognised stock exchange so that the shares can be traded
there. Preferably, consent of a stock exchange for listing should be obtained before
issue of the prospectus to the public.
Prospectus – Meaning and Contents
The companies Act, 1956 defines prospectus as any document described or issued as a
prospectus and include any notice, circular, advertisement or other documents inviting
deposits from the public or inviting offer from the public for the subscription of shares. It is
circulated among the public in printed pamphlets. It gives all necessary information about
the company so that the prospective shareholders may fully understand the objectives and
the plans of the company.
The following important matters are included in the prospectus:
The prospectus contains the main objectives of the company, the name and
addresses of the signatories of the memorandum of association and the number of
shares held by them.
The name, addresses and occupation of directors and managing directors.
The number and classes of shares and debentures issued.
The qualification share of directors and the interest of directors for the promotion of
The number, description and the document of shares or debentures which within
the two preceding years have been agreed to be issed other than cash.
The name and addresses of the vendors of any property acquired by the company
and the amount paid or to be paid.
Particulars about the directors, secretaries and the treasures and their
The amount for the minimum subscription.
If the company carrying on business, the length of time of such businesses.
The estimated amount of preliminary expenses.
Name and address of the auditors, bankers and solicitors of the company.
Time and place where copies of balance sheets, profits and loss account and the
auditors report may be inspected.
The auditor's report so submitted must deal with the profit and loss of the company
for each year of five financial years immediately preceding the issue of prospectus.
If any profit or reserve has been capitalized, the particulars of such capitalization will
be stated in the prospectus.
Statement in Lieu of Prospectus
If a company does not want to issue a prospectus to the public for subscription of the
shares, this statement is required to be issued to the public for necessary information. It
must be signed by every person named in it as director or by his agent authorized in writing:
The nature of the information of this document is more or less similar to that given in the
prospectus. A copy of this statement must be filed with registrar within prescribed time.
This provision does not apply to private company.
Book Building
Book Building is essentially a process used by companies raising capital through Public
Offerings-both Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs) to aid price and
demand discovery. It is a mechanism where, during the period for which the book for the
offer is open, the bids are collected from investors at various prices, which are within the
price band specified by the issuer. The process is directed towards both the institutional as
well as the retail investors. The issue price is determined after the bid closure based on the
demand generated in the process.