NCERT Solutions for Class 11 Business Studies Chapter 7 Formation of a Company

NCERT
SOLUTIONS
CLASS - 11th

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Book : Business Studies Ncert Solutions | Chapter - 7 Business Studies

Class :11th

Subject : Business Studies

Chapter : 7

Chapter Name : Formation of a company

Q1 Minimum number of members to form a private company is

(a) 2

(b) 3

(c) 5

(d) 7

Answer. (a) 2

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Q2 Minimum number of members to form a public company is

(a) 5

(b) 7

(c) 12

(d) 21

Answer. (b) 7

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Q3 Application for approval of name of a company is to be made to

(a) SEBI

(b) Registrar of Companies

(c) Government of India

(d) Government of the State in which Company is to be registered

Answer. (b) Registrar of company

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Q4 A proposed name of Company is considered undesirable if

(a) It is identical with the name

(b) It resembles closely with of an existing company the name of an existing company

(c) It is an emblem of Government

(d) In case of any of the above

Answer. (d) In case of any of the above

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Q5 A prospectus is issued by

(a) A private company

(b) A public company seeking investment from public

(c) A public enterprise

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(d) A public company

Answer. (d) A public company

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Q6 Stages in the formation of a public company are in the following order

(a) Promotion, Commencement

(b) Incorporation, Capital of Business, Capital Subscription, Promotion Subscription,
Incorporation,

(c) Promotion, Incorporation,

(d) Capital Subscription, Capital Subscription

Answer. (c) Promotion, Incorporation

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Q7 Preliminary Contracts are signed

(a) Before the incorporation

(b) After incorporation but before capital subscription

(c) After incorporation but before

(d) After commencement of commencement of business

Answer. (a) Before the incorporation

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Q8 Preliminary Contracts are

(a) binding on the Company

(b) binding on the Company, if ratified after incorporation

(c) binding on the after incorporation Company

d) not binding on the Company

Answer. d) not binding on the Company

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Q1 It is necessary to get every company incorporated, whether private or public.

Answer. True

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Q2 Statement in lieu of prospectus can be filed by a public company going for a public issue.

Answer. False

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Q3 A company can commence business after incorporation.

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Answer. False

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Q4 Experts who help promoters in the promotion of a company are also called promoters.

Answer. False

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Q5 A company can ratify preliminary contracts after incorporation.

Answer. False

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6. If a company is registered on the basis of fictitious names, its incorporation is invalid.

Answer. False

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Q7 ‘Articles of Association’ is the main document of a company.

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Answer. False

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Q8 Every company must file Articles of Association.

Answer. False

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Q9 If a company suffers heavy issues and its assets are not enough to pay off its liabilities, the
balance can be recovered from the private assets of its members.

Answer. False

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Q1 Name the stages in the formation of a company.

Answer. Formation of a company is a complex activity involving completion of legal formalities
and procedures. To fully understand the process one can divide the formalities into three distinct
stages, which are: (i) Promotion; (ii) Incorporation and (iii) Subscription of capital.

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Q2 List the documents required for the incorporation of a company.

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Answer. 1. The Memorandum of Association duly stamped, signed and witnessed. In case of a
public company, at least seven members must sign it. For a private company however the
signatures of two members are sufficient. The signatories must also give information about their
address, occupation and the number of shares subscribed by them.

2. The Articles of Association duly stamped and witnessed as in case of the Memorandum.
However, as stated earlier, a public company may adopt Table A, which is a model set of
Articles, given in the Companies Act. In that case a statement in lieu of the prospectus is
submitted, instead of Articles of Association.

3. Written consent of the proposed directors to act as directors and an undertaking to purchase
qualification shares.

4. The agreement, if any, with the proposed Managing Director, Manager or whole-time director.

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Q3 What is a prospectus? Is it necessary for every company to file a prospectus?

Answer. A copy of the prospectus or statement in lieu of prospectus is filed with the Registrar of
Companies. A prospectus is ‘any document described or issued as a prospectus including any
notice, circular, advertisement or other document inviting deposits from the public or inviting
offers from the public for the subscription or purchase of any securities of, a body corporate’. In
other words, it is an invitation to the public to apply for securities (shares, debentures etc.) of the
company or to make deposits in the company. Investors make up their minds about investment
in a company primarily on the basis of the information contained in this document. Therefore,
there must not be a mis-statement in the prospectus and all material significant information must
be fully disclosed.

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Q4 Briefly explain the term ‘Return of Allotment’.

Answer. In case the number of shares allotted is less than the number applied for, or where no
shares are allotted to the applicant, the excess application money, if any, is to be returned to

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applicants or adjusted towards allotment money due from them. Allotment letters are issued to
the successful allottees. ‘Return of allotment’, signed by a director or secretary is filed with the
Registrar of Companies within 30 days of allotment. A public company may not invite public to
subscribe to its securities (shares, debentures etc.). Instead, it can raise the funds through
friends, relatives or some private arrangements as done by a private company. In such cases,
there is no need to issue a prospectus. A ‘Statement in Lieu of Prospectus’ is filed with the
Registrar at least three days before making the allotment.

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Q5 At which stage in the formation of a company does it interact with SEBI.

Answer. SEBI (Securities and Exchange Board of India) which is the regulatory authority in our
country has issued guidelines for the disclosure of information and investor protection. A public
company inviting funds from the general public must make adequate disclosure of all relevant
information and must not conceal any material information from the potential investors. This is
necessary for protecting the interest of the investors. Prior approval from SEBI is, therefore,
required before going ahead with raising funds from public.

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Q1 What is meant by the term ‘Promotion’. Discuss the legal position of promoters with respect
to a company promoted by them.

Answer. Promotion is the first stage in the formation of a company. It involves conceiving a
business idea and taking an initiative to form a company so that practical shape can be given to
exploiting the available business opportunity. Thus, it begins with somebody having discovered
a potential business idea. Any person or a group of persons or even a company may have
discovered an opportunity. If such a person or a group of persons or a company proceeds to
form a company, then, they are said to be the promoters of the company. Promoters of a
company enjoy a fiduciary position with the company, which they must not misuse. They can
make a profit only if it is disclosed but must not make any secret profits. In the event of a
non-disclosure, the company can rescind the contract and recover the purchase price paid to
the promoters. It can also claim damages for the loss suffered due to the non-disclosure of
material information.

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Promoters are not legally entitled to claim the expenses incurred in the promotion of the
company. However, the company may choose to reimburse them for the pre- incorporation
expenses. The company may also remunerate the promoters for their efforts by paying a lump
sum amount or a commission on the purchase price of property purchased through them or on
the shares sold. The company may also allot them shares or debentures or give them an option
to purchase the securities at a future date.

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Q2 Explain the steps taken by promoters in the promotion of a company.

Answer. (i) Identification of business opportunity: The first and foremost activity of a promoter is
to identify a business opportunity. The opportunity may be in respect of producing a new
product or service or making some product available through a different channel or any other
opportunity having an investment potential. Such opportunity is then analysed to see its
technical and economic feasibility.

(ii) Feasibility studies: It may not be feasible or profitable to convert all identified business
opportunities into real projects. The promoters, therefore, undertake detailed feasibility studies
to investigate all aspects of the business they intend to start. Depending upon the nature of the
project, the following feasibility studies may be undertaken, with the help of the specialists like
engineers, chartered accountants etc., to examine whether the perceived business opportunity
can be profitably exploited.

(a) Technical feasibility: Sometimes an idea may be good but technically not possible to
execute. It may be so because the required raw material or technology is not easily available.
For example, in our earlier story suppose Avtar needs a particular metal to produce the
carburettor. If that metal is not produced in the country and because of poor political relations, it
can not be imported from the country which produces it, the project would be technically
unfeasible until arrangements are made to make the metal available from alternative sources.

(b) Financial feasibility: Every business activity requires funds. The promoters have to estimate
the fund requirements for the identified business opportunity. If the required outlay for the
project is so large that it cannot easily be arranged within the available means, the project has
to be given up. For example, one may think that developing townships is very lucrative.

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Q3 What is a ‘Memorandum of Association’? Briefly explain its clauses.

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Answer. Memorandum of Association: Memorandum of Association is the most important
document as it defines the objectives of the company. No company can legally undertake
activities that are not contained in its Memorandum of Association. As per section 2(56) of The
Companies Act, 2013 “memorandum” means the memorandum of association of a company as
originally framed or as altered from time to time in pursuance of any previous company law or of
this Act. The Memorandum of Association contains different clauses, which are given as follows:

(i) The name clause: This clause contains the name of the company with which the company will
be known, which has already been approved by the Registrar of Companies.

(ii) Registered office clause: This clause contains the name of the state, in which the registered
office of the company is proposed to be situated. The exact address of the registered office is
not required at this stage but the same must be notified to the Registrar within thirty days of the
incorporation of the company.

(iii ) Objects clause: This is probably the most important clause of the memorandum. It defines
the purpose for which the company is formed. A company is not legally entitled to undertake an
activity, which is beyond the objects stated in this clause. The main objects for which the
company is formed are listed in this sub- clause. It must be observed that an act which is either
essential or incidental for the attainment of the main objects of the company is deemed to be
valid, although it may not have been stated explicitly.

(iv) Liability clause: This clause limits the liability of the members to the amount unpaid on the
shares owned by them. For example, if a shareholder has purchased 1000 shares of `10 each
and has already paid ` 6 per share, his/ her liability is limited to ` 4 per share. Thus, even in the
worst case, he/she may be called upon to pay ` 4, 000 only.

(v) Capital clause: This clause specifies the maximum capital which the company will be
authorised to raise through the issue of shares. The authorised share capital of the proposed
company along with its division into the number of shares having a fixed face value is specified
in this clause.

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Q4 Distinguish between ‘Memorandum of Association’ and ‘Articles of Association.’

Answer.

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Basics of distinction Memorandum of Article of Association
Association

Objective It forms a objective for Article of Association rules
which the company formed. of internal management of
the company. They indicate
how the objective of
company to be attained.

Position It is the main document of This is subsidiary document
the company and is and it is subordinate to both
subordinate to the company Momentum of Association
Act. and the company Act.

Relationship It defines the relationship of Article define the
the company to the relationship of the members
outsiders. and the company.

Validity Act beyond the Act which are beyond article
Memorandum of can be ratified by the
Association are invalid and members provided they do
cannot be ratified even by not violate the
unanimous vote of the Memorandum.
member.

Necessity Every company has to file a It is not compulsory to file
memorandum of Article of Association for
Association. public Ltd.

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Q5 What is the meaning of ‘Certificate of Incorporation’?

Answer. After completing the aforesaid formalities, promoters make an application for the
incorporation of the company. The application is to be filed with the Registrar of Companies of
the state within which they plan to establish the registered office of the company. The
application for registration must be accompanied with certain documents about which we have

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already discussed in the previous sections. The Registrar upon submission of the application
along with the required documents has to be satisfied that the documents are in order and that
all the statutory requirements regarding the registration have been complied with. However, it is
not his duty to carry out a thorough investigation about the authenticity of the facts mentioned in
the documents. When the Registrar is satisfied, about the completion of formalities for
registration, a Certificate of Incorporation is issued to the company, which signify the birth of the
company. The certificate of incorporation may therefore be called the birth certificate of the
company.

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Q6 Discuss the stages of formation of a company?

Answer. Formation of a company is a complex activity involving completion of legal formalities
and procedures. To fully understand the process one can divide the formalities into three distinct
stages, which are: (i) Promotion; (ii) Incorporation and (iii) Subscription of Capital

Promotion

Promotion is the first stage in the formation of a company. It involves conceiving a business idea
and taking an initiative to form a company so that practical shape can be given to exploiting the
available business opportunity. Thus, it begins with somebody having discovered a potential
business idea. Any person or a group of persons or even a company may have discovered an
opportunity. If such a person or a group of persons or a company proceeds to form a company,
then, they are said to be the promoters of the company.

Incorporation

After completing the aforesaid formalities, promoters make an application for the incorporation
of the company. The application is to be filed with the Registrar of Companies of the state within
which they plan to establish the registered office of the company.

Capital Subscription

A public company can raise the required funds from the public by means of issue of securities
(shares and debentures etc.). For doing the same, it has to issue a prospectus which is an
invitation to the public to subscribe to the capital of the company and undergo various other
formalities. The following steps are required for raising funds from the public:

(i) SEBI Approval: SEBI (Securities and Exchange Board of India) which is the regulatory
authority in our country has issued guidelines for the disclosure of information and investor
protection. A public company inviting funds from the general public must make adequate
disclosure of all relevant information and must not conceal any material information from the

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potential investors. This is necessary for protecting the interest of the investors. Prior approval
from SEBI is, therefore, required before going ahead with raising funds from public.

(ii) Filing of Prospectus: A copy of the prospectus or statement in lieu of prospectus is filed with
the Registrar of Companies. A prospectus is ‘any document described or issued as a
prospectus including any notice, circular, advertisement or other document inviting deposits
from the public or inviting offers from the public for the subscription or purchase of any securities
of, a body corporate’.

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