In this blog post,  Sreeraj K.V., a student of Government Law College, Ernakulam, Kerala writes about the norms for registering a company in India. The post includes areas such as the purpose of incorporation of a company, procedures to be followed, the effect of incorporation as well as the principle which has been laid down regarding the functions of a company. 

 

Introduction

India is a mixed economy where there are both public as well as private limited companies which invest their time and money for the development of our country. The Companies Act, 1956 plays an inevitable role in providing certain rules and guidelines regarding the registration of both public as well as private companies in our country.  In India, the most commonly used corporate form is the limited company, unlimited companies are relatively uncommon. A company is formed by registering the Memorandum of Association as well as articles of association with the Registrar of the Companies of the State in which the main office is to be located. Not only the native companies but also companies abroad who are engaged in business activities in India are permitted to open branches in India strictly for the purpose of carrying out the following functions:

• To represent the parent company in various activities in India such as buying/selling of agents in India.
• To conduct various research works by the parent company so that the results will be made available to Indian companies.
• To undertake export/import trading activities.
• To promote various technical and financial collaborations with Indian companies.[1]

Incorporation of a Company

All companies working in India are incorporated by complying with certain procedures mentioned under Section 25 of the Companies Act. The first step for the formation of the company is obtaining the approval of the name of the company by the Registrar of the Companies (ROC) of the concerned State where the company is starting its registered office. The approval is provided upon certain conditions such as there must not be an existing company in the same name. The name must also end with the word ‘private limited’ for private companies as well as ‘limited’ for public companies.[2]

 

Stepwise Procedures for Formation or Incorporation of a New Company

• Selection of the type of the company 
• Selection of name of the proposed company
• Application for the Directors Identification Number and Digital Signature
• Drafting of Memorandum and Articles of Association
• Stamping, digitally signing and e-filing various documents with the Registrar.
• Payment of fees
• Obtaining certificate of incorporation
• Preparation and filing of prospectus/statement in lieu of prospectus and e-Form 19/20 for obtaining the certificate of commencement of business.
• Obtaining a certificate for commencement of business.[3]

Memorandum and Articles of Association

Memorandum of Association, as well as Articles of Association, are the most important documents during the time of incorporation of a company. The Memorandum of Association can be stated as the Constitution of the company. It contains the scope of the company in conducting its business as well as the relationship of the company with the outside world. On the other hand, the Articles of Association contains certain rules and regulations which guide the internal affairs of the company as well as its objectives and purpose of incorporation. The ROC will provide the certificate of incorporation after the required documents are presented along with the prescribed registration fee, which is scaled according to the shares of the company prescribed in its Memorandum.

The public company has an option of inviting the public for subscription to its share capital. The company has to issue a prospectus which provides information about the company to its investors.   There are certain other miscellaneous documents to be filed duly along with the Memorandum of Association as well as Articles of Association for the incorporation of a company, like:

• Declaration of compliance, duly stamped
• Notice of the situation of the Registered office of the company
• Particulars regarding Directors, managers or secretary
• Authority executed on a non-judicial stamp paper, in favor of any one of the subscribers to the Memorandum authorizing him to make necessary changes like a correction in the documents, if necessary.
• The ROC’s letter indicating the availability of the name of the company.[4]

As mentioned before, all the provisions regarding the registration and incorporation of a company are stated under section 25 of the Companies Act. In India, the number of  companies registering so the Central Government has implemented online service regarding registration of companies. It makes the registration much simpler, easier as well as time effective when compared to the manual mode of registration.

The Act was last amended in 2013 and contained certain provisions such as mandatory attainment of Digital Signature, Directors Identification Number, Validity of the name approved by the ROC, preparation of both the Memorandum as well as the Articles of Association, application of incorporation in case of a private company, proper proof of identity of the Directors and certain other important information regarding the company.

 

Advantages of Incorporation of a Company

1. Corporate existence: After the incorporation, the company enjoys full rights as a separate legal entity, and becomes capable of functioning independently, as a corporate individual, apart from its members.
2. Liability: Liability of the members is limited depending upon the amount of shares subscribed by them. In the case of a company limited by guarantee, the liability of a member is limited to the amount guaranteed by him.
3. Transferability of shares: Shares can be transferred easily, without the consent of any other member.
4. Perpetual existence and succession: A company incorporated never dies. The death or insolvency of the members does not affect the existence of the company.
5. Capacity to sue and be sued: A company being a body corporate, can sue and be sued in its name.

Once the company is registered, it becomes a body corporate, the only method to end the company is in the way of winding up. The certificate of incorporation cannot be cancelled by the Registrar of Companies, even though it is irregular.

 

Doctrine of Ultra Vires

‘Ultra’ means beyond and ‘vires’ means powers. So the term ‘ultra vires’ means beyond the powers of a company. The company can perform only certain objectives which are stated in the object clause. It can also perform certain acts, which are incidental or consequential to the specific objects of the company. The object of this doctrine is to protect the interest of the investors and creditors by ensuring that the company does not utilize money on those acts, which is not contemplated by any creditors or shareholders of the company. This principle is clearly portrayed in the case of Lakshmana Sami Mudaliyar v. LIC of India.[5]

 

Conclusion

Registration and incorporation of a company plays an inevitable role in the Business and Economic sector in recent times. It can be stated that a company can enjoy no freedom of operations unless and until it is incorporated under the Companies Act by complying with all its formalities. The reason behind this can be stated as even the Government can look into matters of companies only when it is registered and has documented proof. The government can also provide certain benefits and concessions to those companies which are incorporated so that it can develop its own field of operations by implementing various developmental plans of a vivid nature.

 

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References:

[1] Retrieved on: http://www.legalserviceindia.com/company%20law/company_formation_procedure.htm

[2] Retrieved on: http://www.legalserviceindia.com/company%20law/company_formation_procedure.htm

[3] Retrieved on: http://www.newagepublishers.com/samplechapter/001586.pdf

[4] Retrieved on: http://www.legalserviceindia.com/company%20law/company_formation_procedure.htm

[5] Lakshmana Sami Mudaliyar v. LIC of India 1963 AIR Sc 1185