Formation of a Joint Stock Company Questions and Answers AP Inter 1st Year Commerce Chapter 7

Andhra Pradesh BIEAP AP Inter 1st Year Commerce Study Material 7thLesson Formation of a Joint Stock Company Class 11 Questions and Answers.

Formation of a Joint Stock Company Class 11 Questions and Answers AP Inter 1st Year Commerce 7th Lesson

I. Fill in the Blanks (1 Mark)

Question 1.
……………. is the process of organizing and planning the finance of a business enterprise under the corporate form.
Answer:
Promotion

Question 2.
………….. is the constitution of the company.
Answer:
Memorandum of Association

Question 3.
The proposed name of a joint stock company should not be objectionable under the provisions of …………. Act of 1950.
Answer:
Emblems and Names

Question 4.
The rules and regulations framed for the internal management of the company are set out in a document named …………. .
Answer:
Articles of Association

Question 5.
…………… is a substitute for the prospectus.
Answer:
Statement – in – lieu of the prospectus

Question 6.
…………… is to be collected by a public company before it allots shares.
Answer:
Minimum Subscription

Question 7.
A public limited company cannot commence its business without receiving a ………….. of business.
Answer:
Certificate of Commencement

Question 8.
A public company must get a minimum subscription within ……………. days from the date of the Issue of a prospectus.
Answer:
120

Question 9.
……………. is an invitation to the public to subscribe to the shares and debentures of a public company.
Answer:
Prospectus

Question 10.
Every private company must prepare its own …………… .
Answer:
Articles of Association

II. Very Short Answer Type Questions (2 Marks)

Question 1.
Promotion.
Answer:
Promotion is the first stage in the formation of a company. It involves the identification of a business opportunity or idea, analysis of its prospects, gathering the relevant information and taking steps to implement it. Promotion is considered as putting an idea into practice.

Definition:
L.H. Haney “Promotion is the process of organizing and planning the finance of a business enterprise under the corporate form”.

Question 2.
Minimum Subscription
Answer:

The minimum amount of capital to be collected by a public company before its allotment of shares is known as ‘minimum subscription’.
A Public company cannot commence business unless a minimum subscription as stated in the prospectus has been subscribed.

Question 3.
Certificate of Commencement of Business.
Answer:
1. A public limited company cannot commence its business unless it received a certificate of business commencement. This certificate is not compulsory for private limited company. It means private company can commence its business without the certificate of business commencement.

2. The Registrar of Companies issues this certificate only when all the legal doc-uments are submitted. Further, the registrar issues this certificate only on the confirmation of collection minimum subscription.

Question 4.
Statement in lieu of Prospectus
Answer:
If the public company does not raise its capital by the public issue of shares, then . it need not publish a prospectus. In such a company capital may be collected privately and shares may be allotted by the mutual agreement of a few people. Such public company having a share capital, and not issuing prospectus must prepare a statement in lieu of the prospectus and file it with the Registrar of Companies.

Question 5.
Memorandum of Association
Answer:
According to Lord Cairns, “Memorandum of Association of a company is charter and defines the limitation of the powers of a company. It contains the fundamental conditions upon which alone the company is allowed to be incorporated’’. The Memorandum of Association is the constitution of the company. Itis the charter of the company. It provides the foundation on which the company structure is built. It defines the scope of the company’s activities as well as its relation with the outside world.

Question 6.
Articles of Association
Answer:
The rules and regulations framed for the internal management of the company, which are set out in a document are named as Articles of Association. It gives the byelaws which govern the conduct of the company. It also helps in achieving the objectives specified in Memorandum of Association. The Articles play a very important role in the affairs of the company. It is a supplementary document to the Memorandum of Association.

Question 7.
Prospectus
Answer:
Prospectus is an invitation to the public to subscribe to the shares and debentures of a public company. This brings to the notice of the public that a new company has been formed. After incorporation of a company promoters may issue the prospects for raising required finance.

A public company invites people to offer to purchase shares and debentures through an advertisement. Such an advertisement or notice containing detailed information about the company is known as Prospectus.

A private company cannot issue prospectus to secure its capital, because they are strictly prohibited from inviting the public to subscribe to their shares or accepting any deposits.

Question 8.
Incorporation Certificate.
Answer:
If the Registrar is satisfied that all the statutory requirements stated above are complied with under the Act, issues a certificate called “Certificate of Incorpo-ration”.

With the receipt of this certificate, the company gets its recognition as a corporate body. A private company can start its business as soon as it gets the incorporation certificate. However a public company should wait till it gets a Certificate of Commencement of business to start the business.

Question 9.
Object clause
Answer:

This Clause defines the sphere of activities of the company. It also determines the powers of the company.
This clause maybe considered the core of Memorandum of Association because it sets out the objects for which a company is formed. This clause contains
1. Main objects
2. Other objects.
This clause offers protection to the shareholders and creditors by ensuring that the funds are not going to be risked.

Question 10.
Association clause.
Answer:
This clause contains the names of the signatories to the Memorandum of Associ-ation. The full addresses and occupations of subscribers and witnesses are also given. The subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names.

III. Short Answer Type Questions (4 Marks)

Question 1.
What are the differences between a Memorandum of Association and Articles of Association ?
Answer:

Question 2.
What are the different stages in the promotion of Company ?
Answer:
Stages of promotion:
1. Discovery of an idea:
The success of business depends on the selection of a business line. The promoter has to form an idea about the type of business and its prospects. The promoter should analyse the strengths and weaknesses of the proposed idea, and develop the idea with the help of technical experts.

2. Detailed investigation:
At this stage various factors relating to the proposed unit are to be studied from the practical point of view. To find out the strong and weak points of the idea a detailed investigation is conducted. The promoter shall estimate demand for the product, and then thinks of arranging finance.

3. Assembling requirements:
After making sure that proposed business is feasible and profitable the promoters make arrangements to assemble the requirements like directors appointment, selecting the place for unit, contacting the suppliers of raw materials purchasing of plant and machinery, etc.

4. Financing proposition:
The promoter decides about the capital structure of the company. In this process, he determines how much share capital will be issued, type of shares and debentures to be issued, and the nature of loans to be borrowed from financial institutions or banks for a long period.

Question 3.
What are. the different types of promoters ?
Answer:
The following are different types of promoters.

Professional promoters: They are the promoters who specialize in Company promotion. It is their full time occupation.
Accidental promoters : They are the promoters who are not specialists in company formation, but promote their own firms. Such entrepreneurs are known as accidental promoters.
Financial promoters : These are the promoters who float new enterprises during favourable conditions in the securities market. They invert capital and hold a sizable share in the company.
Technical promoters: The promoters who promote new enterprises based on their specialized knowledge and training in technical fields are called technical promoters.
Institutional promoters : These are the promoters who provide technical, managerial, and financial assistance for the promotion of a company.

Question 4.
What are the contents of a prospectus ?
Answer:
Contents of Prospectus: Every prospectus should disclose the matter as specified in Part-I of Schedule-II of the Companies Act. Some of the contents which every prospectus must include are :

Name and full address of the company.
The particulars of the signatories to the Memorandum of Association and the number of shares taken up by them.
Name, addresses, and occupations of members of the Board of Directors.
The minimum subscription amount is fixed by the promoters.
The details of property acquired if any.
The time of opening of the subscription list.
The capital structure of the company and particulars of the issue.
The amount payable on application, allotment, and calls.
Basis for the issue price.
The particulars of preferential treatment given to any person for subscribing shares or debentures.
The addresses of the underwriters if any.
Particulars about reserves and surpluses.
The amount of preliminary expenses.
The name and address of the Auditor.
Particulars regarding voting rights at the meetings of the company.
Management perception of risk factors.
Disclosure of investor’s grievances and redressal system.

Question 5.
What documents are required to obtain certificate of commencement of Business.
Answer:
A Public company has to file the following certificates to get the Certificate of Commencement of Business.

A declaration that a prospectus or statement in lieu of a prospectus has been filed.
A declaration that directors have taken up their qualification shares and paid for them.
A declaration that the minimum subscription amount has been allotted and collected.
A statutory declaration by the Secretary of the company or a Director that all the formalities relating to the commencement of business are duly complied with.

The Registrar scrutinizes all the documents and issues a “Certificate of Com-mencement of Business” if he is satisfied that all the formalities are in order and the legal formalities are completed. The process of company formation comes to an end with the issue of this certificate. i

IV. Essay Type Questions (8 Marks)

Question 1.
Explain the process involved in the Incorporation of a company.
Answer:
A company being an artificial person comes into an existence through incorporation. A Joint Stock Company whether private or public limited must be registered with the Registrar of Companies. It is called incorporation. For that purpose the joint stock companies must file all the necessary documents with the Registrar to obtain the Incorporation Certificate. With this certificate the company gets a status of legal entity.
A number of steps have to be taken up before getting a company registered.

1. Application for approval of name:
For approval, an application is to be submitted to the Registrar of Companies of the state and obtain the approval name. A company may adopt any name which is not prohibited under the Emblems and Names Act, 1950. The Registrar is expected to approve the name within 14 days of the receipt of application.

2. Preparation of Memorandum of Association (MoA):
MoAis the constitution of company which describes its objects, scope and the . relationship with outside world. This main document must be carefully drafted, stamped and signed by seven members in case of a public company and two members in case of a private company. As per the new amendment of the Act, 1950 one member is enough to sign on MoA in case of private company.

3. Preparation of Articles of Association (AoA):
This is the second document which contains rules and regulations relating to the internal management and also the capital structure of the business. A public limited company may not require to file its own Articles of Association. However, it may adopt model clauses prescribed in Table A, Schedule I of the Act. A private company is required to submit its articles and duly signed by the signatories.

4. Preparation of other documents:
At the time of incorporation of a company the following documents are to be prepared and submitted to the Registrar of Companies.

Consent of the first directors
Promoters should execute a power of attorney in favour of one of the promoters or an advocate who is to carry out the formalities required for registration.
When the location of the registered office is finalized, prior to incorporation, the notice of it is to be filed. If not, within 30 days of its registration it is to- be submitted.
When a company by its Articles appoints any person to act as Director, Manager, Secretary their particulars have to be filed within 30 days along with MoA and AoA of the company.

5) Statutory declaration:
A declaration that all the requirement under, the Companies Act, 1950 have been complied with in Form no. 1 is to be filed with the Registrar.

6) Payment of registration fee:
In addition to filing the documents, the prescribed fees has to be paid towards registration of company.

7) Incorporation certificate:
The Registrar is satisfied with all requirements under the Companies Act, 1950, issues a certificate called “Certificate of Incorporation. With the receipt of this certificate, the company gets its recognition as a corporate body.

Question 2.
What is a Memorandum of Association ? Explain its clauses.
Answer:
Meaning: The Memorandum of Association is the constitution of the company. It is the charter of the company. It provides the foundation on which the company structure is built. It defines the scope of the company’s activities as well as its relation with the outside world. The purpose of the memorandum is to enable the shareholders, creditors, and those who deal with the company to know what is the permitted range of activities of the enterprise.

Definition:
Section 2 (56) of the Companies Act, 2013 defines a memorandum as “ The Memorandum of Association of a company as originally framed or as altered from time to time in pursuance of any previous company laws or of this Act”.
The contents of the Memorandum of Association known as clauses are ex-plained below:

Clauses of Memorandum of Association
1. Name Clause:
A company being a separate legal entity must have a name. A company may select any name which does not resemble the name of any other company It should not contain the words like King, Queen and name of the Government bodies. The proposed name should not be objectionable-under the provisions of Emblems and Names Act 1950. The word “Limited” must be used at the end of the name of a public company, and “Private Limited” is used by a private company.

2. Registered Office or Situation Clause:
This clause states the place and address of the registered office of the company This helps to have correspondence with the company If the place is not decided at the time of incorporation, it can be intimated to the Registrar within 30 days from the date of incorporation or commencement of business whichever is earlier.

3. Objects Clause:
This Clause defines the sphere of activities of the company. It also determines the powers of the company. This clause may be considered the core of Mem-orandum of Association because it sets out the objects for which a company is formed. This clause contains (a) Main objects (b) Other objects. This clause offers protection to the shareholders and creditors by ensuring that the funds are not going to be risked.

4. Liability Clause:
This Clause defines the nature of liability of its members. It states that the liability of the members is limited to the value of the shares held by them. This means that the members are liable to pay only the unpaid balance of their shares and nothing further.

5. Capital Clause:
This Clause defines the capital structure (total capital) of the company. The division of capital into equity shares and preference shares, the number of the shares in each category, and their value should be given. It also specifies any special rights and privileges granted to certain types of shareholders.

6. Association Clause:
This clause contains the names of the signatories to the Memorandum of Association. The full addresses and occupations of subscribers and witnesses are also given. The subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names.

Question 3.
What is Articles of Association ? Explain its contents.
Answer:
Meaning: The rules and regulations framed for the internal management of the company, which are set out in a document are named as Articles of Association. It gives the bye-laws which govern the conduct of the company. It also helps in achieving the objectives specified in Memorandum of Association. The Articles play a very important role in the affairs of the company. It is a supplementary document to the Memorandum of Association.

The Articles must be printed, divided into paragraphs, numbered consecutively, stamped adequately, and signed by each subscriber to the Memorandum of Association. It is duly witnessed and filed along with the Memorandum of Association.

Definition :
According to Section 2 (5) of the Companies Act “Articles of Asso-ciation of the company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act”. The articles of a company shall contain the regulations for management of the company.

The Contents of Articles of Association:
The Articles of Association contain the following details.

Procedure of issuing share capital – The amount of share capital issued, types of shares, number of shares, calls on shares, rights and privileges of different categories of shareholders must be mentioned in the Articles of Association.
Procedure for transfer and forfeiture of shares.
Procedure for issue of debentures and stocks.
Powers to alter as well as reduce share capital and its procedure for alteration.
The appointment of the directors, their powers, duties, and remuneration.
The appointment of the managing director.
Provisions regarding conducting the General meetings, special meetings, voting, proxies, resolutions etc.
Provisions relating to dividends and reserves.
Rules for preliminary contracts.
Provisions regarding the use of Common Seal.
Preparation of Accounts and Audit, and method of appropriation of profits .
Maintenance of Bank accounts.
Procedure for winding up the company.
Other rules and regulations of the company.

Question 4.
Discuss the procedure to form a company.
Answer:
A Joint Stock Company requires a number of legal formalities to be complied with before it is brought into existence. Formation means establishment of company by fulfilling all formalities. The important steps to be taken by the company for formation are given below:

1) Promotion:
Promotion is the first stage in the formation of a company. It involves identifi-cation of business opportunity or idea, detailed investigation, assembling the requirements, and financing proposition. Promotion is the process of organ-ization and planning the finance of business enterprise under the corporate firm.

2) Incorporation or Registration:
A company being an artificial person comes into existence only after its regis-tration with the Registrar of Companies. It is the legal process through which an enterprise obtains recognition as a separate legal entity. Private or public limited companies must file all the necessary documents with the Registrar to obtain the Incorporation Certificate. With this certificate the company gets a separate legal entity. For this purpose a number of steps have to be taken for registration.

3) Capital subscription:
After incorporation of a company the next step will be to raise the capital. A public company cannot commence business unless the minimum subscription as stated in the prospectus is subscribed. If a company does not receive 90 percent of the issue amount from the public as subscription within 120 days, it has to refund the amount to the applicant as per the guidelines of Securities Exchange Board of India (SEBI) guidelines within 10 days.

4) Commencement of business:
A public company has to file the following certificates, to get the certificate of commencement.

A declaration that a prospectus or statement in lieu of prospectus has been filed
A declaration that directors have taken up their qualification shares and paid them.
A declaration that minimum subscription amount has been allotted and collected.
A statutory declaration by the Secretary of the company or a Director that all the formalities relating to commencement of business are duly complied with.

A scrutiny is made by the Registrar with all the documents and issues a “Certif-icate of commencement of business”. The process of company formation comes to an end with the issue of this certificate.

Question 5.
Describe various steps involved in promoting a company.
Answer:
Promotion is the first stage in the formation of a company. It involves identification of a business opportunity or idea, analysis of its prospects, gathering the relevant information and taking steps to implement it. Promotion is considered as putting an idea into practice.

Definition:
“Promotion is the process of organizing and planning the finance of a business enterprise under the corporate form.” – L.H. Haney
“Promotion starts with the conception of the idea from which the business is to evolve and continue down to the point at which the business is fully ready to begin operation as a going concern.” – Guthmann and Dougal Stages of promotion:

1. Discovery of an idea: .
The success of business depends on the selection of a business line. The promoter has to form an idea about the type of business and its prospects. The promoter should analyse the strengths and weaknesses of the proposed idea, and develop the idea with the help of technical experts.

4. Financing proposition:
The promoter decides about the capital structure of the company. In this pro-cess, he determines how much share capital will be issued, type of shares and debentures to be issued, and the nature of loans to be borrowed from financial institutions or banks for a long period.

Formation of a Joint Stock Company Class 11 Questions and Answers AP Inter 1st Year Commerce 7th Lesson

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