2014 [ ] CLSP

Vipin MK
For Bangalore University Students
Professor Vipin 2014
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
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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, etc.
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.
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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 company).
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
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 shareholders.
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
A check on their transactions where there was a possibility of conflict of duty and interest.
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
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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 company.
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:
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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
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 agreement
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.
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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
It is the charter of the company that defines the
fundamental conditions and objects under which it
was incorporated
Clauses in the memorandum cannot be altered so
easily and alteration usually requires an approval
from Central Govt or Company Law Board
The Memorandum cannot include any clause that is
contrary to the provisions in the Companies Act
Articles of Association
It consists of the rules and regulations framed to
govern this internal management of the company.
The memorandum generally defines the
relationship between the Company and the
Acts of the company beyond the scope of
Memorandum are deemed void and ultra virus and
cannot be ratified unanimously by all shareholders.
The Articles defines the relation between the
company and its members and between the
Acts of the director beyond the Articles can be
ratified by the shareholders.
Members have the right to alter by way of a special
resolution and generally there is no need to obtain
permission from Court of Company Law Board.
The Articles are subordinate to both Companies Act
and Memorandum.
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:
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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 Companies.
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 company.
The number, description and the document of shares or debentures which within the two
preceding years have been agreed to be issued 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 remuneration.
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.
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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.
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