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JOINT STOCK COMPANY

Q.1. Define a joint stock company. (Mar. 96, 98; Oct. 99, 2000)Ans. Definition and Meaning:

Definition:H.L. Haney:“A Joint Stock Company is a voluntary association of individuals for profit, having its capital divided into transferable shares the ownership of which is the condition of membership”.Section 3(1) of Indian Companies Act, 1956“Company means a company formed and registered under this Act or an existing company” & Existing company means a company formed and registered under any of the previous company laws”.Meaning:Thus a company is a voluntary association, an incorporated association, an artificial person created by law, having a common seal and perpetual successionShareholder’s are the owners of the company but management lies in the hands of Board of Directors. The company conducts its business under the provision of the Indian Companies ct, 1956.

Q.2. Define a Joint Stock Company. What are its characteristics / features? (Mar. 98, Oct. 97, 99, 2000 – Long Answers)

Ans. Definition and Meaning: Same as Ans. 1Characteristics / Features of a Joint Stock Company:The characteristics / features of a Joint Stock Company are:1. Compulsory Incorporation:

A company is a voluntary association of persons formed and incorporated under the existing Corinne law. Only when it gets certificate of incorporation it comes into existence as a body corporate.

2. Artificial person: A company is an artificial person created by law. It is created by legal process and not by natural birth. Even though it has no natural personality, it has legal personality. Therefore it can enter into contracts, sue and can be sued, own property, appoint employees and borrow money like any other natural person.

3. Common Seal: Since a company is an artificial person having no physical features like a natural person, it cannot sign. Hence every company by law must have a common seal on which its name is engraved. The common seal can serve as its signature. The common seal is affixed on all important documents and

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contracts which is witnessed by signature of two directors and countersigned by secretary where ever required. The common seal is kept under the custody of directors.

4. Perpetual succession: Since the company has a separate existence from its members, directors and employees, their death, insolvency or insanity will not affect its life and existence men may come and men may go but a company remains forever. It can be wound up only under the provisions of the act.

5. Limited liability: Usually the liability of members of a company is limited to the extent of uncalled or unpaid value of shares held by them. Their personal property cannot be seized to meet the company’s liability beyond the above mentioned liability.

6. Share capital: The capital required by the company is raised by issues shares. A share is a share in the share capital of the company. The member who holds the shares of a company can transfer its ownership any other person, without the company’s permission.

7. Separation of ownership and management: In company organisation the ownership and management are separated. The shareholders who are the owners do not take active part in the everyday affairs of the company. Instead, they elect their representatives known as Directors, who with the help of managers and employees manage the company. Thus, there is division of labour and specialisation.

8. Legal Entity: Since the company is created by law it has separate legal existence compared to its members. Therefore the members cannot be personally held responsible for the acts of the company.

9. Large membership: The company is owned by a larger number of members – maximum of 50 in the case of private limited company and unlimited number of members in the case of a public limited company.

Q.3. What re the advantages / merit of a Joint Stock Company? (Mar. 96, Oct. 98, 2002, 2003)

Ans. Defination and Meaning – Same as Ans. 1Advantages / Merits of a Joint Stock Company:The advantages / Merits of a Joint Stock Company are:1. Large Capital:

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A company can collect huge capital for the business through shares and debentures, public deposits, loans etc. due to huge capital the company can conduct business on a large scale.

2. Limited Liability: Shareholder’s liability is limited to the face value of the shares held by them. The members are liable only to the extent of unpaid value of share. If the shares are fully paid up then the member is not liable for any debts of the company.

3. Continuity and Stability: A company has a long and stable life. its existence is not affected by death, insolvency or insanity of its members.

4. Professional Management: The company appoints experienced, competent and experts to manage the business. Their services lead to managerial and administrative efficiency and accuracy.

5. Economies of scale: As the company operates on a large scale it enjoys economies in production, distribution, management and financing.

6. Bargaining Power: Compared to other forms of commercial organization a joint stock company has strong bargaining power in buying as well as in selling of goods because of its large scale production.

7. Legal Status: Same as features point 16The company enjoys a distinct legal entity separate from its members. Being a legal creation it enjoys permanent existence.

8. Large Membership: A joint stock company (especially a public company) has large number of members. Large membership brings in large amount of funds which can be invested in companies expansion and diversification.

9. Transferability of shares: Shares of a Joint Stock Company (especially public companies) are freely transferableA member who wants to sell his shares can easily do so in the stock market. This encourages the public and other to invest in shares.

10.Employment: Joint stock company provides employment to a large number of people directly and indirectly.This leads to higher national income for the country and higher standard of living for the people.

11.Government Revenue: Joint Stock Companies provides revenue to the government in the form of taxes charged directly and indirectly.

12.Research and Development:

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Joint Stock Companies undertake R & D continuously thus bringing about new and improved products which benefits people.

13.Economic Development: Because of Joint Stock Companies there is all round development of trade, commerce and industry. The society in general gains the benefit of the industrial development.

Large capital, government revenue, economic development etc. are the advantages of a Joint Stock Company.

Q.4. What are the disadvantages / demerits of a Joint Stock Company? (Mar. 96, Oct. 98, 2002, 2003)

Ans. Definition and Meaning: Same as Ans. 1Disadvantages / Demerits of a Joint Stock Company:The disadvantages / demerits of a Joint Stock Company are:1. Difficult Formation:

Formation of a Joint Stock Company is an expensive and time consuming process as a number of legal formalities have to be undertaken in order to register the company.

2. Lacks Flexibility: The working of a Joint Stock Company is less flexible as compared to other organizations. For every small thing they either have to follow a detailed procedure or obtain sanctions from various authorities. This results in lack of flexibility.

3. No Business secrecy: This form of organization lacks business secrecy because it is compulsory for the company to publish accounts and other records.

4. Excessive government regulation: The company is subject to excessive government control. It has to follow the numerous provision of the Indian Companies Act. This makes working difficult.

5. Delay in Decision Making: Due to excessive government control and a democratic set up all decisions are taken in meetings and some decisions require shareholder’s approval. All this leads to delay in decision making.

6. Lack of contact with customers: Due to large scale operations a company finds it difficult to maintain direct contact with its customers. This may lead to poor sales promotion.

7. Lack of contact with employees: The top management may not have personal contact with their employees. This may cause friction and disputes amongst the management and workers which may affect the worker’s morale.

8. Conflicts of Interest:

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There may arise a conflict of interest amongst the various parties (shareholders, management, workers etc.) in a joint stock company. This conflicting interest undoubtedly harms the company’s interest.

9. Not suitable for all types of business: This type of an organization is not suitable for business where personalized services are required.

10.Exploitation of shareholders: Sometimes the Board of Directors may misappropriate the funds and mislead the shareholders by window dress report. The directors may even manipulate the share trading on the stock exchange. Thus shareholders can be exploited by corrupt directors.

Difficult formation, no business secrecy, heavy taxation etc. are the disadvantages of a Joint Stock Company.

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Q.5. Discuss the various types of Companies? (Mar. 2000)Ans. Defination and Meaning: Same as Ans. 1

Types of Companies:The companies can be classified on the basis of the following:(A) On the basis of Incorporation:

1. Chartered Companies: (a) Incorporated under:

Such companies are incorporated under a Royal Character (order) issued by the King or Queen or Head of the State.

(b) Exclusive rights: Such companies have exclusive rights, powers and privileges under the royal charter.

(c) Example: East India Company, Bank of England.

2. Statutory Companies: (a) Formed under:

Such companies are formed under the special act passed by the Parliament or State Legislature.

(b) Powers defined: The powers which can be exercised by such companies are defined by the Acts that constitute them. Thus, such companies do not require a Memorandum of Association.

(c) Example: Reserve Bank of India, State Bank of India, Life Insurance Corporation.

3. Registered Companies: (a) Incorporated under:

A company incorporated under the Indian Companies Act, 1956 is called Registered Company.

(b) Powers defined: The powers exercised by such companies are defined by the Companies Act and Memorandum of Association.

(c) Can be: A registered company can be a Private Ltd. Company or a Public Ltd. Company.

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(B) On the basis of liability of its members: 1. Companies Limited by Shares:

(a) Members liability limited: In such companies the liability of the members is limited to the extent of the unpaid value on shares. In the event of winding up of the company the members need to pay the unpaid value of the shares.

(b) Can be: Such companies may be a Public limited company or a Private limited company.

2. Companies Limited by Guarantee: (a) Member promises to pay:

Every member promises or guarantees to pay a fixed sum of money (specified in the memorandum) at the time of liquidation of the company for payment of companies liabilities.

(b) Non – trading Companies: Such companies are formed without a share capital for non – trading (non – profit) purpose to promote culture, art, science, religion, charity, sports etc.

(c) Depend upon: Such companies depend upon their existence on entrance and subscription fees as they do not have share capital.

3. Unlimited Companies: (a) Unlimited liability:

In such companies the liability of the members is unlimited. In the event of winding up of the company the private property of the member can be used to pay the debts of the firm.

(b) Not in India : Due to the high risk involved, such companies are not found in India.

(C) On the basis of Membership: 1. Private Limited Company:

A private limited company is the one which by its articles(a) Minimum, Maximum:

Limits the maximum number of its members to 50, minimum being 2.

(b) Transfer of shares: Places some restriction on the transfer of its shares.

(c) Prohibits any invitation:

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Prohibits any invitation by prospectus or otherwise to the general public to subscribe to any of its shares or debentures.

(d) Word ‘Private Limited’: A private company must used the word ‘Private Limited’ after its name

2. Public Limited Company: (a) Not a private company:

According to Companies Act, a public limited company is a company which is not a private company.

(b) Minimum, Maximum: Minimum number of members in a private company is 7 and there is no maximum limit.

(c) Directors: It must have atleast 3 directors – 1/3rd of the directors are permanent and 2/3rd are subject to retirement by rotation out of which 1/3rd retire every year.

(d) Free transfer of shares: Shares can be freely transferred in a public company.

(e) Statutory Meeting: In case of a public company Statutory Meeting is compulsory.

(D) On the basis of Ownership: 1. Government Company:

(a) Means: A government company means any company in which not less than 51% of the paid – up share capital is held by the Central Government and / or by any State Government(s) or partly by the Central Government and partly by one or more State Government.

(b) Follows provisions of Companies Act: Such companies have to follow all provisions of the Indian Companies Act, 1956. It has to be registered under the Indian Companies Act, 1956.

(c) Examples: Hindustan Machine Tools, Oil and Natural Gas Commission etc.

2. Foreign Companies: (a) Meaning:

It is a company which is registered in one country but carries out its operations in India.

(E) On the basis of Shareholding: 1. Holding Companies:

(a) Meaning:

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It is a company which controls another company by holding a minimum 51% of shares and thereby controlling the composition of the board of the company.

2. Subsidiary Companies: Meaning: A company which another company holds a minimum of 51% of share capital i.e. holding company is known as subsidiary company.

Thus the above given are the various types of companies.Q.6. What is share? What are the various types of shares. (Mar. 2002)Ans. Defination – Share

Section 2(46) of the Indian Companies Act 1956 defines share as “a share in the share capital of a company and includes stock except when a distinction between stock and shares is expressed and implied”.Meaning – Share:Owned capital of a company divided into a large number of equal parts or units. Each such part having the same face value is called shareTypes of shares:1. Equity Shares:

Meaning:Equity shares are those shares which do not have, preferential rights with regards to:(a) Payment of dividend(b) Repayment (return) of capital, in case of winding up of the company.Equity shares are also known as Ordinary shares.There are no types of equity shares.

2. Preference Shares: Meaning:Preference shares are those shares which have preferential rights over the equity shares with regards to:(1) Repayment of capital in the event of liquidation / winding

up of the company.(2) Payment of dividend.Types:(I) On the basis of participation:

(a) Participating Preference Shares:

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The rate of dividend on preference shares is decided and fixed at the time of issue of preference shares. Participating preference shareholders extra dividend (additional dividend) after payment of dividend to equity shareholders. Thus participating preference share get two types of dividend, one is their normal fixed rate of divided and the other is the extra dividend which is paid out of the surplus profit left after payment of dividend on equity shares.

(b) Non – participating Preference Shares:They get only their normal fixed rate of dividend. They do not have the right to receive an extra dividend, after the dividend is paid on equity shares.

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(II) On the basis of right to accumulate dividend:(a) Cumulative Preference Share:

If in any year, the dividend is not paid, it gets accumulated on cumulative preference shares. If the dividend is not paid in one or more years due to poor performance of the company then such unpaid dividend gets accumulated and is paid. When the company performs well. It is to be paid before making any payments of dividend to equity shareholders.

(b) Non – Cumulative Preference Shares:In non – cumulative preference shares, if in any year, the dividend is not paid, it does not get accumulated.

(III) On the basis of Redemption:(a) Redeemable Preference Shares:

They are those preference shares which are redeemed after a particular period. They are issued for a specific period and after the completion of the particular period for which they had been issued, the company redeems / returns the capital of the redeemable preference shareholders.

(b) Irredeemable / Non – redeemable Preference Shares:

They are those preference shares which are not redeemed during the lifetime of the company. Non – redeemable preference shares are redeemed only on the winding up of the company. Such shares are not issued for a particular period.

(IV) On the basis of Conversion:(a) Convertible Preference Shares:

Preference shares which can be converted into equity shares of the company at a later date are called convertible preference shares The rate and the date of conversion are mentioned at the time of issue of convertible preference shares.

(b) Non – Convertible Preference Shares:Preference shares which cannot be converted into equity shares of the company are known as non – convertible preference shares. They remain as preference shares only.

3. Bonus Shares: Meaning:A part of the company’s profit is transferred to reserves. Out of such reserves a company issues bonus shares. Such shares are

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issued to the equity share holders of the company free of charge. Infact bonus shares are also equity shares.

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Conditions for the issue of Bonus Shares:1. Approval from:

Approval from the Securities and Exchange Board of India (SEBI) must be obtained for the issue of bonus shares.

2. Twice: There can be an issue of bonus shares only twice in a period of 5 years.

3. Articles of Association:Provision in the Articles of Association of the company for the bonus issue.

4. Shareholder’s approval:Shareholders’ approval must be obtained in the shareholders’ meeting by passing a resolution giving approval to the Board’s decision for the issue of bonus shares.

5. Reserves: Sufficient amount of accumulated reserves.

6. Shares fully paid up: Bonus shares can be issued only when the existing shares are fully paid up.

4. Deferred Shares / Founder Shares / Management Shares: These shares are issued to the promoters of the company. They rank last of all shares in respect of payment of dividend and repayment of capital. Deferred shares are usually of a lower face value. Only private companies can issue deferred shares.

5. Qualification Shares: The articles of a company usually require a director to hold certain number of shares to be eligible as a director. Such shares are called qualification shares. The directors are entrusted with the management of the company it is necessary that they have some financial stake or else they may not take sufficient interest in the efficient management of the company.The directors must obtain qualification shares within 6 months from his appointment as a director. If he does not purchase the qualification shares within the prescribed period he ceases to be the director of the company. He can purchase the shares from the company itself or from the stock market.

Q.7. Explain the various types of company meetings? (Oct. 96, 2003) OR

Short Note on Statutory Meetings. (Mar. 2001)Ans. Meeting – Defination:

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“An official gathering to concerned persons who come together in required number, in order to discuss and arrive at decisions, required for the functioning of an organisation.Meaning:It is a gathering of 2 or more persons who come together for important discussion and decision on lawful matters.Types of Company Meetings:1. Board of Directors Meeting:

(a) Board to meet once in every three moths:For every company, a meeting of its Board of directors shall be held at least once in every three months and at least four meetings every year.

(b) Notice of Meetings:• Notice of every Board meeting shall be given in

writing to every director for the time being in India, and at his usual address in India.

• Unless the articles of the company provide a definite period of notice, a reasonable notice will be given of Board meeting. What is reasonable notice will depend on any particular case.

• If proper notice is not given, proceedings are invalid unless all directors are present.

• Normally, agenda is enclosed along with the notice, although it is not obligatory to send agenda.

(c) Quorum for Meetings:

• The quorum for a meeting of the Board of Directors of a company shall be one – third of its total strength (any fraction in that one – third being rounded off as one), or two directors, whichever is higher.

• The total strength of directors does not include interested directors.

• If the quorum is not present, the meeting is adjourned to the next week, at the same day, time and place and if that is a public holiday, then the next succeeding day which is not a public holiday.

Matters to be discussed at Board Meetings:The following some of the matters are discussed at Board Meetings:

• To borrow money.

• To make calls on shares

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• To approve transfer & transmission of shares.

• To allot shares and debentures

• To sanction loans

• To forfeit shares.

• To reinstate membership.

• To purchase or sell property.

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2. Shareholder Meeting: (a) Statutory Meeting:

Meaning:Every public limited company having share capital must convene a general meeting of shareholders, within a period of not less than one month and not more than six months from the date at which the company is entitled to commence business. Such meeting is called statutory meeting. It is the first meeting of the shareholders and it is held once in the life time of a company.Notice of meeting:The directors are required to send to notice to all members of the company, at least 21 days in advance. Stating that it is a statutory meeting.Objects of the statutory meeting:(a) The statutory meeting is held to inform the

shareholders in respect of matters relating to:• Allotment of shares• Receipts and payments made by the company, etc.• Incorporation of the company.• Details of preliminary expenses.

• Details of the contracts concluded by the company or changes in the existing contract.

• Details of further prospects of the company. (b) Any special matters which require approval of the

shareholders is placed before them at this meeting.Statutory Report:The directors are required to prepare and send a report called Statutory Report to all members at least 21 days in advance of the meeting. The report states the affairs of the company since incorporation.Effect of non – compliance of:

• If default is made in complying with the provision of Sec. 165, (i.e. not sending a statutory report and not holding statutory meeting), every director or other officer who is in default shall be punishable with fine, which may extend to Rs.5,000.

• If statutory meeting is not held and statutory report not filed, the company may be compulsorily wound up under the orders of the court.

(b) Annual General Meeting:

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Meaning:Every company shall in each year hold (in addition to any other meetings) a general meeting of its shareholders. The purpose of holding such meeting is to review the progress and prospects of the company and to elect directors and auditors, as the case may be.When Annual General Meetings must be held?

• The first annual general meeting of the company is held within 18 months of its incorporation.

• Subsequent annual general meetings must be held once in every year.

• There should not be more than 15 months gap between two annual general meetings. However, the registrar can extend the time upto a period of three months.

Notice of the meeting:At least 21 days advance notice from the date of the meeting must be given to all the members at their registered address in India. Along with Notice:The members should be supplied with certified copies of Profit and Loss Account and Balance sheet, Directors Report and Auditor’s Report, along with the notice.Business transacted at the meeting:The business transacted at this meeting is as follows:(a) Routine Business:

• Declaration of Dividend

• Appointment of auditors in place of those retiring.

• Adoption of Annual Accounts, Directors Report and Auditor’s Report.

• Election of Directors in place of those retiring by rotation.(b) Special Business:

• To alter the articles of association.

• To increase authorized capital.

• Reduction of share capital, etc.

Effect of non – compliance:

• If default is made in holding an annual general meeting in accordance with the provisions of the Companies Act, the Central Govt., on the application of

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any member of the company can call, or direct the calling of such meeting.

• If the meeting is not held as per the provisions of the Companies Act or the directives of the Central Govt., then every officer who is in default, is punishable with fine which may extend to Rs.50,000 and in case the default continues, then with a further fine upto Rs.2,500 every day till such default continues.

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(c) Extra Ordinary General Meeting: Meaning:It is general meeting which is held between two annual general meetings. This meeting is called to discuss important and urgent matters which cannot be postpone till the next annual general meeting.Purpose of Meeting:This meeting may be called to discuss such matters as:1. Reduction of Share Capital.2. Changes in Articles of Association.3. Alternation of any clause of Memorandum.4. Increasing the Authorised Capital, etc.Who can call such meeting:(a) The directors can call such meeting after holding

discussion in the Board meeting and as per provisions in the Articles.

(b) The directors can call such meeting on the requisition of the members. The members who make a requisition must hold at least 1/10th of the total paid – up share capital or 1/10th of voting power.

(c) If the board do not call a meeting within 14 days of a valid requisition, then the meeting can be called by the requisitionists themselves within 3 months from the date of submitting their requisition to the company.

(d) The Companies Act empowers the Company Law Board to call extra – ordinary general meeting.

Notice of the Meeting:At least 21 days notice must be given to all members giving details of the matters to be discussed at the meeting.Resolution at the Meeting:The resolutions passed at such a meeting are normally special resolutions and such special resolution have to be filed with the Registrar within 30 days.Quorum:The quorum at all shareholders meetings, (including this meeting) must be least five members in case of public company and two members in case of private company.

3. Class Meeting: The company can have different classes of shareholders. Equity shareholders preference shareholders etc. The company may be required to call meeting of a particular class of shareholders. Such meeting may be called to incorporate changes in the

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rights and privileges of the shareholders. For instance, the redeemable shares can be converted into irredeemable shares.The procedure for conducting such class meetings is often prescribed in the articles of the company.The above given are the various types of meetings of the company.

The above given are the various types of meetings of the company.Q.8. What is Memorandum of Association? What are its clauses?

(Oct. 99; Mar. 03) (Short Note – Oct. 97)Ans. Defination and Meaning: Same as Ans. 1

Memorandum of Association: Meaning:Memorandum of Association is the most important document of a company. It is like the constitution of the company. Memorandum speaks about the aims and objects of the company. It defines the relationship of the company with the outsiders. Memorandum is treated as an unalterable charter or document of a company. Changes in the memorandum are possible but the procedure of bringing such changes in time – consuming, lengthy and requires the sanction from the government or, from the court. Memorandum is, therefore, treated as practically unalterable charter of the company.The purpose of this document is to inform the outsiders regarding the permitted range of activities of the company. The company must work within the limits of Memorandum of Association. Any act of company beyond the limits should be called ultra – virus and it will not be binding on the company. This document is prepared by promoters and filed with the registrar for incorporation certificate. It is divided into different paragraphs called Clauses. Each such clause deals with one aspect of company management.Following are the contents of Memorandum of Association:1. The Name Clauses:

This clause mentions the name of the company followed by the words ‘Limited’ in case of a public company or ‘Private Limited’, in the case of a private company. The word ‘Company’ need not be included in the name of the company. The name should not be similar to that of any other existing company. It should not contain any word which may denote the government support or the patronage of the ruling power.

2. The Domicile Clause: This clause mentions the name of the State in which the registered office of the company is to be situated. This helps to determine domicile and nationality of the company and the

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jurisdiction of the court under which it comes. All communications and notices are to be addressed to the registered office. The company has to maintain all its statutory books at the registered office of the company.

3. The Objects Clause: This clause states the objects of the company. It contains the list of business activities which the company can undertake. The objects are classified as: (1) the main objects and (2) other objects. The list is usually exhaustive so as to include all those business activities which the company may undertake in future. While selecting the objects, the company has to see that they are not illegal or opposed to public policy or contradictory to the Companies Act or any other law. Any alteration in this clause requires the sanction of the Company Law Board.

4. The Capital Clause: This clause mentions the total share capital which the company is authorized to raise and its division into different types of shares of fixed denomination. The total capital mentioned in the Memorandum is called ‘Authorised Capital’ or ‘Nominal Capital’ or ‘Registered Capital’. It also mentions whether the company is limited by shares or by guarantee. Any alteration in this clause requires the sanction of the court.The MOA of a company must be printed and suitably divided into paragraphs which should be numbered serially. The Memorandum must be duly dated and stamped as required under the Indian Stamp Act.

5. The Liability Clause: This clauses states that the liability of the members of the company is limited to the face value of shares purchased by them. In the case of a company limited by guarantee, this clause states the amount which members undertake to contribute to the assets of the company in the event of its winding up. An unlimited company does not have this clause in the MOA.

6. The Association or Subscription Clause: This clause states that the persons who sign the Memorandum are desirous of forming themselves into a company to achieve the objects mentioned in the Memorandum and that they agree to subscribe for the number of shares of the company, mentioned against their names in the Memorandum. It is necessary to mention the name, description, occupation and address of each subscriber. The name, address, description and occupation of the witness are also required to be mentioned in this clause.

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This is Memorandum of Association and these are its clausesQ.9. Short Note:

(a) Promotion & Meaning (Mar. 99)Ans. Defination and Meaning: Same as Ans. 1

Formation of a Public Company:Formation of a public company can be divided into 4 stages1. Promotion stage2. Incorporation stage / Registration stage3. Capital Subscription Stage4. Trading Certificate Stage / Commencement of Business

Stage1. Promotion Stage:

Defination:H.L. Haney:“Promotion may be defined as the process of organizing and planning the finances of a business enterprise under the corporate form”.Meaning:It is the first stage in the formation of the company. The person who takes initiative in forming a Joint Stock Company is called ‘Promoter’.(1) Discovery of an idea:

The work of a promoter starts when an idea strikes him regarding some business which can be profitably undertaken. When a person understands that there is a possibility of starting or expanding some business the idea is said to have been discovered.

(2) Detailed Investigation:Commercial feasibility of the idea is checked with reference to:(a) Sources of supply of raw material.(b) Availability of funds and manpower(c) Extent of demandThe investigation can be undertaken by the promoter themselves or by experts

(3) Verification of the idea:In this stage the findings are verified so that there is a double guarantee regarding the validity of the report.

(4) Assembling:In this stage activities like:(a) Selection of a site for the project

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(b) Purchase of land and building(c) Entering into technical, managerial contracts etc.

is undertaken.(5) Financial Plan:

In this stage the amount of funds required, sources of funds etc. is determined.

(6) Presenting the Proposition:The promoter may ask some more persons to join venture. He presents the plan to them and they take the proposition.

This is the promotion stage with its stages.(b) Incorporation Stage: (Oct. 96):

The incorporation stage is also called as registration stage. The incorporation of a company gives birth to a new company. The promoters must obtain the registration or incorporation certificate from the Registrar of Companies. The following steps are to be followed:

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1. Name of the Company: The promoters may give any name for the company but it should nto resemble with the name of another existing company. The promoters should get the name allotted or sanctioned. The application for the allotment of name must be forwarded to the Department of Company Law Administration, Government of India through the Registrar of Companies.The application form must consist of several alternate names, so that if one or the other name is rejected then the promoters can get at least one name allotted to their company.

2. Preparation and Arrangement of Documents: For getting a company incorporated, the following documents have to be prepared:(a) Memorandum of Association:

It defines or states objectives and activities of the company.

(b) Articles of Association: It is a set of rules and regulations regarding the internal affairs of the company.

(c) List of Directors: It contains name, address, occupation and age of the directors.

(d) Written Consent of Directors: Every director must give in his own handwriting – name, address, occupation, age and nationality and should put his signature declaring that he has given consent to act as director of the company. It is required in case of public companies only.

(e) Statutory Declaration: That all the requirements or provisions of the Companies Act, 1956 with regard to registration have been complied with.

(f) Notice of Address: At which the registered office of the company will be located.

(g) Declaration of Qualification Shares: If the Articles provide for qualification shares, then the directors have to give a declaration stating that they have agreed to purchase and pay for qualification shares. Such declaration is required in case of public limited companies only.

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3. Filing of Documents: All the required documents (as mentioned above) must be filed with the Registrar of Companies in order to get the company incorporated.

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4. Examination of Documents: The Registrar of Companies will examine the documents. The Registrar will check:(a) Whether all documents are in order(b) Whether details in the documents are properly filled in

5. Issue of Certificate of Incorporation: If the Registrar is satisfied with the documents, he issues a Certificate of Incorporation. The issue of certificate is the conclusive evidence of the fact that the company is incorporated and that the requirements of the Companies Act have been complied with. The certificate of Incorporation is numbered, dated and signed by the Registrar of Companies.

(c) Statement in lieu of prospectus: (Mar. 97)It is not compulsory for a public company to issue a prospectus. If the promoters are confident of raising the required capital privately from their friends and relatives then they need not issue a prospectus. However, in such a case a statement in lieu of prospectus must be filed with the Registrar of Companies at least three days prior to allotment of shares.1. Meaning:

It is a document prepared as an alternative to prospectus when public subscription is not required.

2. Purpose: It is required to be filed with the Registrar within 3 days prior to allotment.

3. Suitability: This document is suitable for private limited companies where the directors can collect money from private sources such as friends and relatives.

4. Use: It helps the Registrar to know whether the capital issue is as per the provisions of the companies act. This document is mainly used for fulfilling the statutory requirements.

5. Contents of statements in lieu of prospectus: The statement in lieu of prospectus are more or less similar to the prospectus. It should clearly indicate:

• The date on which it was delivered to the Registrar for registration.• Number and type of shares.• Rights of the shareholders.• Particulars regarding directors, managing directors etc.• Details about preliminary expenses paid or payable.

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• Details of contracts relating to purchase of property.• Treatment of Reserves• Names and addresses of auditors, bankers, legal advisers etc.• Full name and address of the registered office• Main object of the company and other details• Date and signature of the directors.

Q.10. Distinguish between

1. Partnership and Joint Stock Company. (Oct. 96; March 2000, 2002)

Partnership Joint Stock Company1. Meaning:

Here 2 or more people come together for doing some business and making profit

It is voluntary association, artificial person created by law having a common seal and perpetual succession

2. Formation:Relatively easy, less legal formalities involved

Formation difficult, too many legal formalities involved.

3. Capital:It can raise limited capital due to limitation on the number of members and their capacity

It can raise large capital due to large members

4. Liability:Liability of partners is unlimited joint and several

Members liability limited to the face value of shares

5. Ownership and Management:

There is no difference in ownership and management

There is no difference in ownership and management

6. Flexibility:More flexible, compared to Joint Stock Companies

Less flexible compared to partnership firm

7. Continuity and Stability:Lacks continuity and stability, business may come to an end with death, insolvency and insanity of

Joint stock company is continuous and stable, business does not come to an end with death

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partners insolvency or insanity of partners

8. Business Secrecy:Can be maintained to a certain extent

No business secrecy

9. Government Regulation:Minimum government regulation

Strict and excessive government regulation

10.Taxation:Less compared to joint stock companies

Subject to heavy taxation

11.Decision making:Quick decision making Delay in decision making

12.Economies of scale:Less economies of scale as compared to Joint Stock Companies

Enjoys economies of scale as it undertakes business on a large scale

13.Bargaining Power:Generally weak bargaining power

Strong bargaining power

14.Contract with customers & employees:Close contact with customers and employees

No contacts with customers and employees

15.Legal status:No legal status Possesses and a legal status

16.Act:Governed by Partnership Act, 1932

Governed by Companies Act, 1956

2. Shares and Debentures (Mar. 96, 97, 2003)

Shares Debentures1. Meaning:

The total capital of the company is divided into similar parts and each part thereof is called a share.

It is a acknowledgement of debt issued by the company under its seal.

2. Security:The shares are not secured as it does not create charge on companies assets.

The debentures are secured as they create charge on assets of the company

3. Repayment:

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Equity shareholders are never repaid during the life time of the company

The debentureholders can get the redemption of their debentures during the lifetime of the company.

4. Conversion:The shares cannot be converted into debentures

The debenture can be converted into shares

5. Nature of Capital:Shares represent owned capital

Debentures represent borrowed or loaned or owed capital

6. Status of the Owner:Shareholder is a part owner of the company.

Debentureholder is only a creditor of the company

7. Income:Income on shares is called Dividend. This dividend on shares is not fixed but variable. It varies along with the net profit of the company.

Income on debentures is called interest. This interest is fixed at the time of issue of debentures and is not variable in due course.

8. Right of holders:Shareholders are the members of the company and are given voting rights. They can also participate in the management of their company.

Debentureholders are the creditors of the company and do not carry voting rights. They are not concerned with the management of the company.

9. Position on winding up:

The claim of owners of shares stands last i.e. after the payment to other creditors

The claim of owners of debentures stands first as they are creditors of the company

10.Period on Finance:Shares are suitable for long term finance

Debentures are suitable for medium term finance

11.Appeal to Investors:Appeal to adventurous investors who are willing to accept risk.

Appeal only to cautious investors who are happy with fixed rate of interest.

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3. Preference Shares and Equity Shares: (Oct. 99)

Preference Shares Equity Shares1. Meaning:

Preference shares are those shares which enjoys preference regarding dividend and repayment of capital

Shares which bear the risk and provide permanent finance are called equity shares

2. Repayment:Preference shareholders get back their finance during life time of the company and before the equity shareholders

Equity capital is not repaid during the life time of company.

3. Nature of Preference:

Preference shares enjoy preferential rights as regards the payment of dividend and return of capital

Equity shares do not carry such preferential rights over preference shares

4. Rate of Dividend:Rate of dividend is fixed at the time of issue and changes are not made in this rate in due course

Rate of dividend is not fixed but flexible. In changes every year as per the net profit of the company

5. Voting Rights:Preference shares do not carry normal rights, but only under exceptional circumstances

Equity shares carry normal voting rights

6. Types:There are different types of preference shares like cumulative, redeemable, irredeemable, participating and non – participating

All equity shares are of one type or category. They are always irredeemable

7. Appeal to Investors:Preference shares appeal to relatively less adventurous investors,

Equity shares appeal to adventurous investors willing to take risks in their

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interested in fixed, but regular return on investment

investment.

8. Face value:Relatively higher. Usually Rs.100

Relatively less. Usually Rs.10

9. Capital Appreciation:No capital appreciation is possible

Capital appreciation is possible due to prospects of rising dividends.

4. Incorporation Certificate and Trading Certificate / Commencement Certificate:

Incorporation Certificate Trading Certificate / Commencement Certificate

1. Meaning:It is a certificate issued to a joint stock company by the Registrar of companies signifying the birth of the company

It is a certificate issued to a public company by the Registrar, giving a signal to commence the business.

2. Documents Required:To obtain the certificate following documents are required:1. MOA & AOA2. List of directors.3. Declaration of directors4. Written consent of

directors5. Statutory declaration

regarding incorporation.

To obtain this certificate the following documents are required:

1. Declaration of filing prospectus.

2. Declaration of receiving minimum subscription.

3. Declaration of payment towards qualification shares.

4. Statutory declaration regarding commencement.

3. Stage in Company Formation:

It represents the first stage in the company formation

It represents the last stage in the company formation

4. Effect:A private limited company can start its business while a public company can raise capital for the business.

A public limited company can start its business after obtaining this certificate.

5. Need:

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Both public and private companies need such certificate for formation

Only public companies need such a certificate.

6. Other:This must be obtained before trading certificate

This is obtained after incorporation certificate

7. Implications of not obtaining:

Not obtaining of this document is illegal and the company can be wound up under the Companies Act.

The company cannot commence its business without procurement of this certificate.

5. Prospectus and Lieu of Prospectus:

Prospectus Lieu Prospectus

1. Meaning:Prospectus is a document inviting the public to subscribe to the share capital of a company.

Statement in Lieu of Prospectus is a document prepared for filing with the Registrar. It is an alternative to the prospectus.

2. Purpose:It gives wide publicity to the company and also provides share capital to the company

It is prepared only for completing the legal formality and not for capital collection.

3. Filing:It is meant not only for filing with the Registrar but also for capital raising.

It is meant only for filing with the Registrar.

4. Who Prepares?:It is normally prepared by big companies for fulfilling legal obligations.

It is normally prepared by small companies just for fulfilling legal obligation.

5. Contents:The prospectus gives detailed information about the company, as per the provisions of Companies Act.

The contents are similar to that of prospectus but form in detailed.

6. For whom?:It is meant for public at large

It is meant for friends and relatives of directors.

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6. Private Limited Company and Public Limited Company. (Oct. 98 2000, 2001)

Private Limited Company Public Limited Company

1. Membership:Minimum membership 2, Maximum membership 50

Minimum membership 7, Maximum membership unlimited

2. FormationComparatively simple, certificate of incorporation is adequate

Comparatively difficult as the procedure is lengthy.

3. Number of Directors:It must have at least two directors

It must have at least three directors

4. Transfer of Shares:The shares are not freely transferable

Shares are freely transferable.

5. Issue of Prospectus:It is allowed to issue prospectus

It can issue prospectus

6. Commencement of Business:

It can start the business after the receipt of certificate of incorporation.

It requires trading certificate for starting business

7. Suitability:Suitable for business on a small scale

Suitable for large – scale business.

8. Invitation:It cannot invite public to subscribe for securities of the company

It invites public to purchase securities of the company.

9. Allotment:It can allot shares immediately after incorporation

Shares cannot be allotted unless minimum subscription is collected.

10.Qualification shares:The directors need not hold qualification shares

The directors have to purchase some qualification shares to become the director.

11.Directorship:There is no restriction on the number of

A director cannot be a director of more than 20

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directorship companies12.Quorum:

Two members present in the meeting is a quorum at general meeting

Five members present in the meetings is a quorum at general meeting.

13.Share Warrant:It cannot issue bearer share warrant

It can issue bearer share warrant

14.Articles of Association:It must prepare separate articles of association as Table A cannot be adopted

It need not prepare separate articles of association as it can adopt Table A

15.Statutory Meeting:Not necessary It must be held

16.Retirement of Directors:

Directors need not retire by rotation every year

1/3rd of the directors retire by rotation every year

17.End – words of the name:

The words ‘Private Limited’ are necessary

The word ‘Limited’ is necessary in the name

7. Memorandum of Association and Articles of Association. (Mar. 99, 02; Oct. 02)

Memorandum of Association

Articles of Association

1. Meaning:It is a fundamental document which lays down company’s objectives

It is a subordinate document which provides rules to achieve the objectives.

2. Regarded as:It is regarded as the constitution or charter of the company

It is regarded as the rules and regulations for internal working of the company.

3. Purpose:Purpose is to define the scope of companies activities

Purpose is to provide direction for the internal management of the company

4. Alteration:

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It is not so easy to alter – memorandum

It is easy to alter the articles.

5. Ultra Virus Act:Acts done by the company against the provision of memorandum cannot be ratified by shareholders

Act done by directors against the provision of the articles maybe ratified by the shareholders in general meetings.

6. Contents:It contents six clauses and governs external relations of the company

It contents rules regarding internal management of the company

7. Obligation:All companies are obliged to prepare and register its memorandum with Registrar of Companies

Companies limited by shares need not prepare and register its articles as it can adopt Table A

9. Status:It is primary, fundamental and supreme document

It is secondary, subsidiary, sub – ordinate document to MOA

8. Director and Managing Director. (Oct. 96, 2000)

Director Managing Director1. Meaning:

Director is an elected representative of shareholders of the company. He looks after company management and performs “thinking” function

Managing Director is the representative of Board of Director. He is full time director looking after planning and execution of activities of the company.

2. Authority:He is authorized by the shareholders to frame policies of the company and conduct the business in the best possible manner.

He is authorized by the directors to look after the day to day administration of the company as per the policies decided by the Board of Directors.

3. Period of Appointment:He is elected for the period of three years and he retires by rotation

He is appointed for the period of five years and is not subject to retirement by rotation.

4. Capacity:A director has to act in A Managing Director has to

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threefold capacity. He acts as the agent, trustee and managing partner of the company

act in two – fold capacity. Firstly, as a director he has to participate in framing policies of the company. Secondly, as the chief executive he has to carry out the policies decided by Board.

5. Remuneration:A director gets fees for attending board meeting and also honorarium. The total fees paid to the directors should not exceed 11% of the net profit of the company.

A Managing Director acts as full time director of the company. He gets salary for his services as per the service agreement and also a share in the net profit not exceeding 5% of the net profit.

6. Sanction:Central Government’s permission is not required for election of a Director.

Central Government’s permission is required for appoint of Managing Director.

7. Appointment:He is elected by the shareholders

He is selected by the Directors.

8. No. of Directorship:No person shall hold position of a director in more than 20 public limited companies

No person can be appointed as a managing director if he is either a managing director or manager or CEO of any other company without the permission of Central Government.

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9. Annual General Meeting and Extra Ordinary General Meeting. ( Mar. 98)

Annual General Meeting Extra Ordinary General Meeting

1. Meaning:It is a meeting held at the end of the accounting year to discuss progress and prospects of the company and approve the final accounts

Extra ordinary general meeting is a meeting held between the two annual general meeting to discuss urgent matters of a company

2. Frequency:It is held once in a calendar year

It can be held at any time when circumstances so demand

3. Who Calls?:It is called by the Board of Directors of the company

This meeting may be called by Board of Directors or it may be requisitioned by shareholders

4. Period:It must be held every year. The gap between 2 AGM should not exceed 15 months

There is no fixed period as it is held only under special conditions.

5. Documents with notice:Along with the notice Annual report, Annual accounts and Auditors report are sent.

No documents are enclosed with the notice.

6. Filing:Copies of annual report, accounts and resolution are to be filed within 30 days with the Registrar

Special resolution passed at the meeting are to be filed with the Registrar within 30 days of meeting.

7. Penalty:Every concerned officer may be fined up to Rs.5,000 for not holding meeting on time

There is no such provision for penalty in the Companies Act

8. Business transacted:Ordinary and special business is transacted

Only special business is transacted

9. Purpose:

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The main purpose is to approve annual accounts, approve Annual Report, approve Auditors Report & declare dividend and election of directors and appointment of auditors.

The main purpose is to transact very special business.

10. Statutory and Annual General Meeting. (Oct. 97, 2002)

Statutory General Meeting

Annual General Meeting

1. Meaning:It is the first general meeting of the company held in order to inform the members regarding formation of the company and fulfill legal obligation

It is a general meeting of a company held at the end of the financial year for discussing progress and prospects of the company and approve final accounts of the company

2. When Called:It is held not earlier than 1 month and not later than 6 months of obtaining trading certificate

The first annual general meeting is held within 18 months from the date of obtaining certificate of incorporation. Subsequent AGMs should be held within gap of 15 months.

3. Documents with notice:

Statutory Report is sent with the notice

Along with the notice annual report, annual accounts, and auditors report is sent.

4. Filing:Statutory reports is to be filed to the Registrar before the meeting

Annual Returns are to be filed within 30 days of the meeting.

5. Business Transacted:Approval of Statutory report, allotment of shares and modification in contracts is the nature of business transacted

Ordinary and special business is transacted at this meeting

6. Frequency:It is held only once in the life time of the company

It is held once in a calendar year

7. Statutory Provision:

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This meeting must be held by public companies. But it is not necessary for private company

It is compulsory for both private and public companies

8. Penalty:Every concern officer and director is liable to fine up to Rs.500

Every concerned officer is liable fine up to Rs.5,000

9. Purpose:The main purpose is to approve the Statutory report

Main purpose is approval of annual accounts, declare dividend, appoint, directors, auditors and review progress.

10.Period:It must be held not less than one month and more than 6 months from the date of receiving commencement certificate

It must be held every year and gap between two Annual General Meetings should not be more than 15 months

11.Caller:It is called by promoters It is called by Board of

Directors.

11. Board Meeting and Shareholders Meetings. (Mar. 99)

Board Meeting Shareholders Meeting

1. Meaning:It is the meeting of the Board of Directors

It is a meeting of the members of the company

2. Purpose:It is called to discuss company policy matters

It is called to get the approval of shareholders on certain matters

3. Quorum:Minimum 2 directors or 1/3rd of the total strength of directors whichever is more

Minimum 5 members in case of Public Company and minimum 2 members in case of Private Company.

4. Agenda:Need not be sent to the directors

Must be sent to the members along with notice.

5. Kinds:

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There are two types: Board meetings and meetings of Committees of Directors

There are four types: Statutory Meeting, Annual General Meeting, Extra Ordinary General Meeting and Class Meeting.

6. Notice:Reasonable notice must be given

21 days notice must be given

7. Voting:By show of hands, Yes / No By show of hands or by Poll

8. Proxy:Directors cannot depute proxies

Members can depute proxies

9. Filing:Filing of reports is not necessary

Filing of reports and resolutions is required

10.Frequency:At least once in 3 months and at least 4 meetings in a year

Depends upon the type of the meeting.

12. Statutory Meeting and Extraordinary General Meeting.

Statutory Meeting Extraordinary General Meeting

1. Meaning:Statutory meeting is the first General meeting of the public company.

Extraordinary General Meeting is the meeting of members which is held under special circumstances

2. Purpose:The main purpose is to approve statutory report

The main purpose is to transact special business

3. Frequency:It is held once in the life time of the company

It can be held any number of times depending on urgency

4. Penalty:If his meeting is not held within prescribed time limit, every concerned officer of the company is punishable fine up to Rs.500

There is no such penalty as EGM is not to be compulsorily held.

5. Caller:

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It is called by promoters This meeting may be called by Directors or it may be requisitioned by shareholders

6. Documents with the Notice:

Statutory Report is sent with the Notice

No documents are attached with the Notice

7. Statutory Provision:This meeting must be held by public companies but it is not necessary for the private company

It is not compulsory for public as well as private company to hold a meeting. It can be held when circumstances so demand.