Written as per the revised syllabus prescribed by the Maharashtra State Board of Secondary and Higher Secondary Education, Pune.

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2 Written as per the revised syllabus prescribed by the Maharashtra State Board of Secondary and Higher Secondary Education, Pune. STD. XI Commerce Secretarial Practice Salient Features: Exhaustive coverage of syllabus in Question Answer Format. Covers answers to all Textual Questions. Relevant Marking Scheme for Each Question. Includes Additional Important Questions for better preparation. Mnemonics to facilitate easy answer recall. Quick Recap at the end of each chapter to facilitate quick revision. Simple and Lucid language. Includes GG - our very own mascot. Printed at: Print Vision, Navi Mumbai Target Publications Pvt. Ltd. No part of this book may be reproduced or transmitted in any form or by any means, C.D. ROM/Audio Video Cassettes or electronic, mechanical including photocopying; recording or by any information storage and retrieval system without permission in writing from the Publisher. TEID: 12585_JUP P.O. No

3 PREFACE We present to you "Std. XI Commerce: Secretarial Practice" with a revolutionary fresh approach towards content thus laying a platform for an in-depth understanding of the subject. This book has been written according to the revised syllabus and guidelines as per the State Board and covers answers to all textual questions. In addition to this, we have included extra questions in each lesson that not only aim at covering the entire topic but also make students ready to face the competition. The sub-topic wise classified Question and Answer format of this book helps students in easy comprehension. Furthermore, we have provided model answers to each question in the form of pointers which makes it easy for students to memorize and reproduce the answers in their examinations. We have incorporated Mnemonics to facilitate easy answer recall. Every chapter ends with a Quick Recap to facilitate quick revision of the lesson learnt. The model questions are provided with relevant marking schemes so as to highlight the importance of each question. We are sure this study material will turn out to be a powerful resource for students and facilitate them in understanding the concepts of this subject in the most lucid way. The journey to create a complete book is strewn with triumphs, failures and near misses. If you think we've nearly missed something or want to applaud us for our triumphs, we'd love to hear from you. Please write to us on: mail@targetpublications.org Best of luck to all the aspirants! Yours faithfully, Publisher Edition: Second Disclaimer This reference book is transformative work based on textual contents published by Bureau of Textbook. We the publishers are making this reference book which constitutes as fair use of textual contents which are transformed by adding and elaborating, with a view to simplify the same to enable the students to understand, memorize and reproduce the same in examinations. This work is purely inspired upon the course work as prescribed by the Maharashtra State Board of Secondary and Higher Secondary Education, Pune. Every care has been taken in the publication of this reference book by the Authors while creating the contents. The Authors and the Publishers shall not be responsible for any loss or damages caused to any person on account of errors or omissions which might have crept in or disagreement of any third party on the point of view expressed in the reference book. reserved with the Publisher for all the contents created by our Authors. Gyan Guru (GG) We present to you our mascot 'GG', who has been proudly introduced by us. GG is a student-buddy who pops up throughout the book and draws your attention to important bits of knowledge also termed as 'Good to Know'. These 'Good to Know' sections help you understand a concept distinctly with a corresponding example from your immediate environment. This is our initiative in education that helps linking learning to life and we're hopeful that you are going to love it. No copyright is claimed in the textual contents which are presented as part of fair dealing with a view to provide best supplementary study material for the benefit of students.

4 Sr. No. Topic Name Page No. 1. Secretary 1 2. Types of Secretary Joint Stock Company Formation of Joint Stock Company Documents Related to the Formation of Joint Stock Company Machinery Monitoring Joint Stock Companies Structural Organization of a Joint Stock Company Company Meetings I Company Meetings II Business Correspondence Secretarial Correspondence with Directors Secretarial Correspondence with Registrar of Companies Secretarial Correspondence with Banks Secretarial Correspondence with Insurance Companies 220 Note: All Textual questions are represented by * mark.

5 04.Formation of Joint Stock Company Std. XI : Commerce Introduction The discussion in the last chapter gathered steam as soon as the company form of organization was chosen unanimously by one and all. However, they were still confused about the way ahead. Jayant: I am glad to meet the future entrepreneurs of India. Jyoti: We are glad you are here to guide all of us. You will be a perfect fit for an advisory role. Kumar: Jayant, please now tell us about the registration requirements. Jayant: Registration of a company is done as per the provisions of the Companies Act, There are four stages in the formation stage namely Promotion Stage, Incorporation Stage, Capital Raising Stage and Commencement of Business Stage. In this chapter, we will learn about the various stages involved in the process of company formation. What do you mean by Formation of Joint Stock Company? A Joint stock company is an artificial entity created by law. It is an association of individuals who come together to conduct business and earn profits. It comes into existence when it is registered under the Companies Act, Formation of a company means to establish a New Company. The process of formation of a Joint Stock Company is lengthy, complicated and time consuming. Various legal formalities laid down by the Companies Act are required to be fulfilled. There are several stages involved in the process of formation of a company. These stages are as follows: Promotion Stage Incorporation Stage A private company has to pass only through the first two stages, as it raises capital privately. It can commence business once it gets the Certificate of Incorporation. Since the public company invites public to purchase its shares, it has to go through all the four stages. It can commence its business only after it gets the Trading Certificate / Certificate of Commencement of Business. Stage 1 Promotion Stage Capital Raising Stage Commencement of Business Stage Meaning of a Promoter: A promoter is the person who Good to Know: takes steps to establish a In 1996, Sridhar Vembu company. co founded Zoho Corp. Promoter is the Pioneer and formerly known as AdventNet Creator of a company. Inc. He became the CEO of A promoter can be an individual, a Zoho Corp. in Under his firm or an association. There can be more than one promoter for a company. able leadership, AdventNet was transformed from a software company serving network equipment vendors to being a developer The formation of a company starts and provider of the Zoho suite of online with an idea. The promoter is the applications. one who comes up with this idea. He devotes time and undertakes the research and risks involved in setting up a company. 50

6 Chapter 04: Formation of Joint Stock Company Promoters conceive the idea of starting a business, undertake the steps for formation of the company and bring the company into existence. Promoters are paid remuneration for the services provided by them. The payment may be made in cash OR partly in cash and partly in shares. Definitions of a Promoter: According to Guthmann and Dougal, Promoter is a person who prepares the plan for formation of company and brings company into existence, as an artificial person. According to Justice Cookburn, One who undertakes to form a company, with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose. *Q.1. Who is Promoter? Explain the role played by him in the promotion. [5] Ans: A promoter is the person/s who takes steps to establish a company. He conceives the idea of starting a business, undertakes the steps for formation of the company and brings the company into existence. The role played by Promoters in the Promotion of a Company is as follows: Promoters conceive the idea and initiate the scheme of formation of the company. They arrange for the required number of people i.e. 2 in case of private company and 7 in case of public company. Promoters decide the name of the company, amount of capital required, location of registered company etc. The appointment of banker, broker, legal advisors, auditors etc. are done by the promoters. Promoters appoint the first Directors. They get the Memorandum and Articles drafted and printed. They enter into a contract with vendors and underwriters. They arrange for preparation of prospectus, its advertisements and issue of prospectus. They make arrangement for loans and other financial assistance from financial institutions. *Q.2. Define Promotion. What are the steps in Promotion? [5] Ans: Promotion is the first stage in the process of formation of company. This stage lays down the foundation of the company. Promotion of a company begins when a person takes lead to start a company. Prof. Haney defines promotion as, the process of organization and planning finance of business enterprise under corporate form. G.W. Gerstenberg defines Promotion as, the discovery of business opportunity and subsequent organization of funds, property and managerial ability into a business concern for the purpose of making profits there from. Steps in Promotion Stage: The various steps involved in the promotion stage are: i. Discovery of Business Idea / Opportunity: The process of company s formation starts with an idea Good to Know: generated by the promoters. McDonald's turned food When they come across a new preparation into a science idea about a product or service or of food production production process, the through automation. This promoters formulate plans to rendered consistency in convert the idea into reality. food quality and taste. Founder Ray Kroc once said I The promoters also make put the hamburger on the assembly line. estimates about the expenditures McDonald s serves the Big Mac and fries to 70 and revenues. million customers a day in more than 35,000 restaurants located around 120 countries. 51

7 Q.3. Ans: 52 Std. XI : Commerce ii. Investigation of Business Idea / Opportunity: In this stage, the promoters conduct a detailed investigation about the idea. The promoters analyze the idea in order to check the commercial and technical viability of the proposed idea. In order to find out the viability of the project, the promoters consult the experts such as engineers, financial experts, marketing experts etc. After analysis, these experts prepare a Project Report. iii. Verification: In this stage, the promoters verify the project report. A team of independent experts are appointed to study these reports and cross examine the findings of the report. If any defects are located in the reports, they are detected before undertaking business. Thus, safety of the business idea is assured. iv. Assembling of Resources: Various factors of production, such as men, money, material, machinery and market, are required to be assembled before starting a business. The promoters make arrangements for the availability of finance from financial institutions. They enter into contracts for the purchase of property like land, building, machinery etc. Various permissions, licenses, approvals for establishing the business are taken. Legal advisors, company secretary etc. are appointed to assist in the process of formation of the company. Arrangements are also made for procurement of raw materials and marketing of the products. v. Preparation of Financial Plan: Promoters make a plan for the financial requirements of the company; known as the Capital Plan. There are various aspects of financial plans that need to be considered such as: The amount of capital to be collected. The process of collecting the capital. The time of collecting the capital. The promoters make a detailed plan regarding the capital requirement, the amount of capital to be collected, the mode by which capital can be collected such as issue of shares, debentures etc. They also contact various financers and financial institutions for raising additional capital. vi. Preparation and Presentation: Promoters have to prepare the following documents which are important in the formation process viz. Memorandum of Association and Articles of Association. These documents have to be submitted along with the registration form to the Registrar of Companies. Stage 2 Incorporation Stage Explain the various steps taken under the Incorporation Stage of company formation.[5] A company comes into existence only after it is registered under the law. It is compulsory to register the company in India. In the incorporation stage, the promoters have to get the company registered under the Indian Companies Act, The various steps taken under the Incorporation Stage of the company are as follows: i. Selection of Name: The first step in the incorporation of a company is to get the name approved by the Registrar of Companies. The promoters select three names and apply to the Registrar of Companies. Once the Registrar of Companies confirms the availability, the promoters finalize the name of the company.

8 Chapter 04: Formation of Joint Stock Company Along with the name, place of registered office and place of business is also finalized. It is mandatory that the name of the company should contain the words Private Limited in the end in case of a private company and the word Limited in the end in case of public companies. ii. Filing of Documents and Declaration: For registration of the company, the promoters have to submit the following fundamental documents to the Registrar of Companies. Memorandum of Association: Memorandum of Association is the charter of the company which forms the constitution of the company. It governs the relationship between the company and outsiders. It is a document that controls the company s external activities. It sets the aims and objectives of the proposed company. It is a basic and fundamental document of the company. It is duly stamped and signed by 2 persons in case of private company and 7 persons in case of a public company. Articles of Association: Articles of Association is a document that contains rules and regulations regarding the internal management of the company. It serves as an internal rule book for the company. It is also a record of the duties and responsibilities of all the members of the company. It is a part of the constitution of the company. It is duly signed by the signatories to the Memorandum of Association. iii. List of Directors: List of directors is a list of persons who have agreed to act as directors of the proposed company. The names, addresses and other details of the directors are also included in this list. As per Section 252 of the Companies Act, 1956, every private company should have a minimum of two directors and public company should have a minimum of three directors. iv. Consent of Directors: The persons listed as directors of the proposed company should give their consent to act as directors in writing. They have to give an undertaking that they are ready to purchase and pay for the qualification shares. v. Notice of Address: The notice of the address of the registered office of the company is required to be given to the Registrar of Companies. vi. Payment of Necessary Fees: The company seeking registration has to pay the prescribed filing & registration fees and stamp duty in the office of Registrar. The Registrar will examine all the submitted documents and if he is satisfied with it, he will enter the name of the company in the Register of Companies. Thereafter, it will issue the Certificate of Incorporation under his seal. After the receipt of this certificate, the company will come into existence and will be identified as a separate legal entity from the date of incorporation. Upon receipt of this certificate, a private company can start its business. However, a public limited company has to cover two more stages as it has to invite public for capital formation. Q.4. Write a short note on: Certificate of Incorporation. [5] Ans: The Certificate of Incorporation is issued after the company is incorporated. It is a birth certificate of the company. This certificate is required by both public as well as private companies. 53

9 54 Std. XI : Commerce It is a proof of incorporation of the company. It gives the company an independent legal status. The following documents need to be submitted to obtain this certificate: Memorandum of Association Articles of Association List of Directors Notice of Address of Registered Office Consent of Directors The Registrar will examine all the submitted documents and if he is satisfied, he will enter the name of the company in the Register of Companies and will issue the Certificate of Incorporation under his seal. Format of Certificate of Incorporation : CERTIFICATE OF INCORPORATION (No / of ) I hereby certify company/private limited is this day incorporated under the Companies Act, 1956 and the company is limited. Given under my hand at (place) this (date) day of (month) two thousand (year). Fees and Deed Stamp ` Stamp Duty of Capital ` SEAL *Q.5. Explain the stages in the formation of Private Limited Company. [10] Ans: There are several stages involved in the process of formation of a company. These stages are as follows: Promotion Stage. Incorporation Stage. Capital Raising Stage. Commencement of Business Stage. A private company has to pass only through the first two stages, as it raises capital privately. It can commence business once it gets the Certificate of Incorporation. The stages involved in the formation of a Private Company are: i. Promotion Stage: Refer Q.2., Steps in Promotion Stage. ii. Incorporation Stage: Refer Q.3. Stage 3 Capital Raising Stage *Q.6. Explain in brief Capital Raising Stage. [5] Ans: Public company raises capital from the public through the issue of shares. Hence, capital raising stage is considered as the most important stage in the formation of a public company. The company makes arrangements for collection of capital once the registration is done. Post registration, the process of the formation of company is taken over by the directors. Usually, the promoters are appointed as the First Directors of the company. Sd/ Registrar of Companies State

10 Chapter 04: Formation of Joint Stock Company The steps followed in the Capital Raising Stage are as follows: i. First Board Meeting: After the company is incorporated, the Board of Directors will convene the first meeting. Here, the following business is discussed: To confirm the appointment of secretary. To confirm the appointment of banker, broker, solicitors and auditor. To decide minimum subscription amount. Adoption of underwriting contracts to secure minimum subscription amount. To approve the draft of prospectus. Listing of shares on a Stock Exchange. ii. Issue of Prospectus: The public company invites the public to raise capital. For this purpose, it issues a Prospectus. Prospectus is an invitation to the public to subscribe for capital which the secretary gets printed for publicity. The prospectus gives detailed information about the company. It is a public document and is distributed free of charge along with the Application Form. Wide publicity is given to the prospectus through press, brokers, stock exchanges etc. in order to attract more public to invest in the company. A copy of the prospectus has to be filed with the Registrar of Companies. Once it is filed with the Registrar, it has to be issued to the public within 90 days. The public company has to take SEBI s approval if the public offer for sale of shares exceeds ` 3 crore. If a public company collects the capital privately, it is not required to issue prospectus to the public. It has to file a Statement in Lieu of Prospectus which is not a public document but used only for filing purposes. iii. Collection of Application Form: The company invites the public to subscribe to the shares issued through issue of application form and Prospectus. The interested investors submit their application along with the application money to the banker appointed by the company. All the application money is deposited in a Scheduled Bank in a separate account called Escrow Account. The banker forwards all the applications to the company s head office. iv. Allotment of Shares: Once the company collects Minimum Subscription amount as already stated in the prospectus, it can make Allotment of shares. Minimum subscription refers to the minimum amount of capital that the public should subscribe when the company invites the public to subscribe to its shares. As per SEBI guidelines, it should be 90% of the amount of first issue of shares. The company is required to collect the said amount within 60 days from the date of issue of prospectus. If Minimum Subscription is not collected, then the company will not get Trading Certificate and it has to refund the amount to the applicants within 8 days. This situation is known as Under Subscription and to avoid this, Underwriting Agreement is made with Underwriters. 55

11 Std. XI : Commerce To avoid under subscription, Underwriting Agreement is prepared. Here, the underwriters guarantee to buy the shares that are not taken up by the public. Bankers, insurance companies, financial institutions act as underwrites. If the company collects more share capital than they have issued, then it is known as over subscription. It happens when people apply for more number of shares than offered. In such a situation, the company cannot allot shares to all the applicants and hence the shares are allotted on the basis of a formula suggested by Allotment Committee. The company then issues the Letter of Allotment to whom shares are allotted and Letter of Regret to whom shares are not allotted along with the refund amount. Within 30 days of the allotment of shares, the company has to file the Return of Allotment with the Registrar of Companies. v. Issue of Share Certificates: vi. Once the shares are allotted, the company has to issue the share certificates to every allottee within three months from the date of allotment. The share certificate is a registered document of title to shares issued by the company, under its common seal. Register of Members: The company has to maintain a Register of Members which is a statutory book. It contains the name and details of the shareholders. *Q.7. Write a short note on: Commencement of Business Stage. [5] Ans: Stage 4 Commencement of Business Stage This is the final stage in the formation of a public company after which, the company can commence its business. The company has to file certain declarations with the Registrar of Companies after the collection of the capital. These declarations are as follows: A statement of declaration that a copy of prospectus or statement in lieu of prospectus is filed with the Registrar. A statement of declaration that minimum subscription amount has been collected. A declaration that directors have purchased and paid for qualification shares. A statutory declaration that all legal requirements have been complied with. Along with the above documents, the company is also required to pay the necessary filing fees. The Registrar verifies all the documents and once he is satisfied, he issues the Trading Certificate also known as Certificate of Commencement of Business under his seal and signature. On receipt of this certificate, the company can start its business activities. If the company starts its business without the receipt of the Trading Certificate, then every person in default shall be liable to pay a fine of up to ` 5,000 for every day of default as a penalty charge. 56 Also, if the company fails to start its business within one year of incorporation, the company can be wound up by the court.

12 Chapter 04: Formation of Joint Stock Company Format of Certificate of Commencement of Business: CERTIFICATE OF COMMENCEMENT OF BUSINESS (No / of ) (Pursuant to Sec. 149(1) & (2) of Companies Act 1956) I hereby certify that the (name) company limited (address and place) which was incorporated under the Companies Act 1956, on the (day) of (month and year) and which has this day filed a duly verified Statutory Declaration in prescribed form that the conditions under Section 149 (1) have been duly complied with, is entitled to commence business. Given under my hand at (place) this (date) of (month and year). SEAL Multiple Choice Questions I. Select the correct option from the options given below and rewrite the statements: [1 mark each] *1. A is a person, who discovers the business opportunity. (A) Secretary (B) Promoter (C) Shareholder *2. The promoters are of the company. (A) Shareholders (B) Directors (C) Pioneers 3. comes into existence when it is registered under the Companies Act, (A) Partnership firm (B) Sole proprietorship (C) Joint Stock Company 4. is the first stage in the process of formation of company. (A) Incorporation (B) Promotion (C) Commencement of business 5. Minimum person/s is/are required to form a private company. (A) 7 (B) 2 (C) 1 6. Minimum person/s is/are required to form a public company. (A) 7 (B) 2 (C) 1 *7. After receipt of, a private company can start its business. (A) Trading Certificate (B) Certificate of Incorporation (C) Prospectus 8. In the Incorporation Stage, the promoters gets the company registered under the. (A) Indian Companies Act, 1956 (B) Indian Partnership Act, 1932 (C) Industries (Development and Regulation) Act, is a document that speaks about the aims and objectives of the company. (A) Prospectus (B) Articles of Association (C) Memorandum of Association Sd/ Registrar of Companies State 57

13 Std. XI : Commerce 10. is a document that contains rules and regulations regarding the internal management of the company. (A) Prospectus (B) Articles of Association (C) Memorandum of Association 11. Memorandum of Association is duly stamped and signed by persons in case of private company. (A) 2 (B) 8 (C) 7 *12. A company must collect minimum subscription amount within days. (A) 120 (B) 100 (C) 60 *13. Share certificate must be issued within months from the date of allotment of shares. (A) three (B) six (C) nine *14. The applicants who are allotted shares will be sent letter. (A) Regret (B) Allotment (C) Enquiry *15. An gives guarantee to purchase unsold shares. (A) Underwriter (B) Auditor (C) Entrepreneur *16. The public company has to take approval of SEBI, if public offer for shares exceeds crore. (A) two (B) three (C) five 17. The gives detailed information about the company and invites the public to subscribe to the capital. (A) Prospectus (B) Articles of Association (C) Memorandum of Association 18. After filing the prospectus with the Registrar, it has to be issued to the public within. (A) 1 month (B) 90 days (C) 3 months 19. contains the name and details about all the shareholders. (A) Prospectus (B) Register of Members (C) Memorandum of Association 20. The situation when the company fails to get the Minimum Subscription is known as. (A) Over subscription (B) Under subscription (C) Fully subscribed *21. After receipt of, a public company can start its business. (A) Trading Certificate (B) Certificate of Incorporation (C) Prospectus *22. A company must start its business within of its incorporation. (A) one year (B) nine months (C) six months 23. stage is the final stage in the formation of a public company. (A) Incorporation (B) Capital formation (C) Commencement of Business 24. In case, the company starts its business without the receipt of Trading Certificate, then it is liable to pay a fine of per day (A) ` 5,000 (B) ` 8,000 (C) ` 2,000 58

14 Chapter 04: Formation of Joint Stock Company Match the Pairs *II. Match the pairs: [1 mark each pair] III. Ans: Group A Group B i. Promoters a. Certificate of Incorporation ii. Underwriters b. Document of Title to Shares iii. Listing of shares c. Pioneers of Company iv. Share Certificate d. Reserve Bank of India v. Birth Certificate e. Stock Exchange f. Managers of Company g. Guarantee about Sale of Shares h. Document of title to Debentures i. Trading Certificate j. Guarantee about Sale of Goods (i c), (ii g), (iii e), (iv b), (v a). One Word Write a word or phrase or a term which can substitute each of the following statements: [1 mark each] *1. The person who initiates the scheme of formation of company. *2. Name the type of company which can start its business after getting Certificate of Incorporation. *3. Name the company which raises its capital by issuing shares to public. 4. The Creator of the company. 5. The report created by the experts after finding out the viability of the project. *6. A certificate issued after registration of company. 7. The document which acts as a charter of the company. 8. The document that sets out the rules and regulations regarding the internal management of the company. *9. A document issued to public for collection of capital. *10. A person who gives guarantee of raising minimum subscription. *11. A minimum amount of capital to be collected by the company at initial stages. *12. A letter sent to the applicant to whom shares are not allotted. *13. Name the account in which application money is deposited. *14. A letter sent to applicant to whom shares are allotted. 15. The document of title to shares issued by the company under the common seal. 16. When the company collects more than the share capital they have issued. 17. The committee that looks after the allotment procedure. *18. The certificate required by public limited company to start business activities. *19. Name the type of company which can start its business after securing Trading Certificate. Ans: 1. Promoter 2. Private Company 3. Public Limited Company 4. Promoter 5. Project Report 6. Certificate of Incorporation 7. Memorandum of Association 8. Articles of Association 9. Prospectus 10. Underwriter 11. Minimum Subscription 12. Letter of Regret 13. Escrow Account 14. Letter of Allotment 15. Share Certificate 16. Over subscription 17. Allotment Committee 18. Trading Certificate 19. Public Company 59

15 Std. XI : Commerce *IV. Ans: Distinguish Between Distinguish between: Certificate of Incorporation and Certificate of Commencement of Business. [5] Sr. No. Certificate of Incorporation Certificate of Commencement of Business Meaning 1. This certificate is issued after the incorporation of the company. It is a birth certificate of the company. This certificate is issued to public company after the completion of the process of formation of the company. It is a permission given to the public company to start its business. Need 2. This certificate is required by both, This certificate is required only by public public as well as private companies. companies. Purpose 3. It is a proof of incorporation of the company. It gives an independent legal status to the company. It is a document which permits the public company to start its business. Documents Required 4. The following documents need to The following documents need to be be submitted to obtain this submitted to obtain this certificate: certificate: i. Filing of prospectus/statement in lieu of i. Memorandum of Association prospectus ii. Articles of Association iii. List of Directors iv. Notice of address of Registered ii. Declaration of collection of minimum subscription iii. Completion of all legal formalities. Office v. Consent of Directors to act as Directors. Order of Issue 5. It is collected before obtaining Certificate of Commencement of Business. It is collected after collection of Certificate of Incorporation. True or False V. State with reasons, whether the following statements are True or False: [5 marks each] *1. Shareholders take initiative to form a company. Ans: This statement is FALSE. [Promoters take initiative to form a company] Reasons: Promoters take the initiative to form a company. The formation of a company starts with an idea. The promoter is the one who comes up with this idea. Promoter is the Pioneer and Creator of a company. A promoter is the person/s who takes steps to establish the company. On the other hand, shareholders are persons who invest their money by purchasing the shares of the company. Shareholders are the owners of a company. Hence, the above statement is false. 60

16 Chapter 04: Formation of Joint Stock Company *2. Formation of a company is simple and easy. Ans: This statement is FALSE. [Formation of a company is a complicated process] Reasons: Formation of a company means to establish a New Company. A company comes into existence when it is registered under the Companies Act, The process of formation of a Joint Stock Company is lengthy, complicated and time consuming. Various legal formalities laid down by the Companies Act are required to be fulfilled. There are several stages involved in the process of formation of a company. These stages are as follows: Promotion Stage. Incorporation Stage. Capital Raising Stage. Commencement of Business Stage. Hence, the above statement is false. *3. All companies can start business after incorporation. Ans: This statement is FALSE. [Only private companies can start business after incorporation] Reasons: Only a private company can start its business after getting the Certificate of Incorporation. A private company has to pass only through the first two stages, as it raises capital privately and not publicly. It has to complete the first two stages i.e. Promotion Stage and Incorporation Stage. However, a public company has to complete two more stages i.e. Capital Raising Stage and Commencement of Business Stage. Public companies invite the public to subscribe to their share capital and so they need to complete few more formalities and hence, they cannot start their business after the receipt of the Certificate of Incorporation. Thus, the above statement is false. *4. Prospectus is issued by private company. Ans: This statement is FALSE. [Prospectus is issued by public limited company] Reasons: The prospectus is a document which gives detailed information about the company and invites the public to subscribe to the capital. It is a public document which is issued along with the application form. Wide publicity is given to the prospectus through press, brokers, stock exchanges etc. in order to attract more public to invest in the company. A private company, on the other hand, does not invite members of the public in order to raise its capital. It collects its capital through private sources. Hence, Prospectus is not issued by a private company, but by a public company. *5. The Board of Directors gives guarantee of minimum subscription. Ans: This statement is FALSE. [Underwriters give guarantee of minimum subscription] Reasons: A public company has to collect the Minimum Subscription amount in order to proceed with the allotment process. The minimum subscription amount is mentioned in the prospectus. If the company fails to get the minimum subscription amount, it will not get the Trading Certificate and will have to refund the amount collected to the applicants within 8 days. 61

17 Std. XI : Commerce In order to avoid under subscription, the company enters into a contract with Underwriters known as the Underwriting Agreement, where the underwriters guarantee to buy the shares that are not taken up by the public. Bankers, insurance companies, financial institutions act as underwriters. Hence, guarantee of minimum subscription is given by Underwriters and not the Board of Directors. *6. A public company can start business after getting Trading Certificate. Ans: This statement is TRUE. Reasons: A public company has to undergo all the four stages of company formation viz. Promotion Stage, Incorporation Stage, Capital Raising Stage and Commencement of Business Stage. Upon completion of all the formalities and once the Registrar is satisfied with all the documents, he issues the Trading Certificate under his signature and seal. A public limited company can start its business after receiving the Trading Certificate. If the company starts its business without the receipt of trading certificate then every person in default shall be liable to pay a fine of up to ` 5,000 for every day of default. Thus, the above statement is true. *Q.1. Write a short note on: Promoter. [5] Ans: Refer Page No. 50., Meaning of a Promoter. Refer Page No. 51., Definitions of a Promoter. *Q.2. Ans: What are the documents to be submitted to Registrar for getting the company registered? [5] Refer Q.3 Point (ii) *Q.3. Write a short note on: Minimum Subscription. [5] Ans: Refer Q.6 Point (iv) *Q.4. Ans: Q.5. *i. Ans: What is Company Formation? Explain in brief a. Capital Raising Stage and b. Commencement of Business Stage. [10] Company Formation: Refer Page No. 50. What do you mean by Formation of Joint stock company? a. Capital Raising Stage: Refer Q.6. b. Commencement of Business Stage: Refer Q.7. State with reasons, whether the following statements are True or False: [5 marks each] Promoters play significant role in the company s formation. This statement is TRUE. Reasons: Refer Page No. 50. Meaning of a Promoter. *ii. Ans: Additional Questions for Revision Underwriter purchases unsold shares of company. This statement is TRUE. Reasons: Refer Q.6 Point (iv) 62

18 Chapter 04: Formation of Joint Stock Company QUICK RECAP Stages of Formation of Company Promotion Stage Incorporation Stage Capital Raising Stage Commencement of Business Stage Promotion Stage Discovery of Business Idea / Opportunity Investigation of Business Idea/Opportunity Verification Assembling of Resources Preparation of Financial Plan Preparation & Presentation Incorporation Stage Selection of Name Filing of Documents and Declaration Memorandum of Association Articles of Association List of Directors Consent of Directors Notice of Address Payment of Fees Certificate of Incorporation 63

19 Std. XI : Commerce Capital Raising Stage First Board Meeting Issue of Prospectus Collection of Application Forms Allotment of Shares Issue of Share Certificate Register of Members Commencement of Business Stage Final Stage File Declarations Filing of Prospectus/Statement in lieu of Prospectus Declaration of Collection of Minimum Subscription Completion of all Legal Formalities. Filing Fees Trading Certificate 64

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