Incorporation of Company and Matters Incidental Thereto: formula sheet

Key formulas

Minimum members

Private company: 2 | Public company: 7 | One Person Company: 1

Maximum for a private company is 200, with exclusions such as employees and ex-employees who were members. A public company has no maximum.

Government company

Government holding ≥ 51% of paid-up share capital

Holding can be by the Central Government, State Governments, or partly both. Subsidiaries of a government company are also government companies.

Dormant company (section 455)

Future project / hold asset or IP + no significant accounting transaction → apply to Registrar → certificate

An inactive company can also apply. Inactive means no business or no significant transaction, or no financial statements and annual returns, in the last two financial years.

Significant accounting transaction (section 455)

Any transaction other than: Registrar fees, payments to meet legal requirements, allotment of shares to meet Act requirements, payments for office and records upkeep

These four excluded items do not count as significant, so they do not stop a company from being dormant.

Auto-entry in dormant register (section 455(4))

No financial statements or annual returns for 2 consecutive financial years → Registrar notice → name entered in register of dormant companies

The company need not apply in this case.

Lesser penalty (section 446B)

Penalty ≤ ½ of the penalty stated in the provision, subject to maximum ₹2,00,000 (company) and ₹1,00,000 (officer in default or other person)

Applies to OPC, small company, start-up company and Producer Company.

Directorship limit (section 165)

Total ≤ 20 companies (dormant companies excluded from this count); public companies ≤ 10

Private companies that are holding or subsidiary of a public company count toward the limit of 10 public companies. Only the limit of 20 excludes dormant companies, so a dormant public company would still count toward the limit of 10. Penalty: ₹2,000 per day after the first, maximum ₹2,00,000.

Modes of issuing securities (section 23)

Public company: public offer / private placement / rights or bonus issue. Private company: rights or bonus issue / private placement

A private company cannot make a public offer through a prospectus.

Promoter under section 2(69)

Promoter = (a) named in prospectus or identified in annual return (section 92) OR (b) has control over company's affairs, directly or indirectly OR (c) Board accustomed to act on advice, directions or instructions

Any one limb is enough. Limb (c) does not cover a person acting merely in a professional capacity.

Legal position

Promoter is not an agent or trustee of the company, but stands in a fiduciary position

The company is not yet in existence, so no agency is possible before incorporation.

Core duties

Act in good faith + make full disclosure + no secret profit

Any profit made must be disclosed to the company. If not, the company can claim it or rescind the contract.

Pre-incorporation contracts

Company cannot be bound by or sue on a contract made before it exists; it can adopt the benefit only by a fresh contract after incorporation

Ratification is not possible. The promoter is usually personally liable on such contracts.

Promoter vs director

Promoter = formation stage, tested by section 2(69); Director = Board member, appointed under the Act

A promoter need not be a director, and a director need not be a promoter.

Section 7(1): documents to be filed

Memorandum and articles + professional declaration + subscriber/first director declaration + correspondence address + subscriber particulars + first director particulars (with DIN) + director interests and consent

Filed with the Registrar of the jurisdiction of the proposed registered office.

Section 7(2) and 7(3): certificate and CIN

Registration → certificate of incorporation → CIN allotted from the date in the certificate

The CIN is a distinct identity and is included in the certificate.

Section 7(4): preservation

Company keeps copies of documents as originally filed at its registered office till dissolution

Not just for a few years; the period is till dissolution.

Section 9: effect of registration

Body corporate + perpetual succession + power to hold property, contract, sue and be sued, from the date of incorporation in the certificate

The common seal reference was omitted w.e.f. 29-5-2015.

Section 7(5): false information

False or incorrect particulars or suppression of material information → liable for action under section 447

Applies to any person who furnishes them knowingly.

Section 7(6): after incorporation

Incorporation by false information or fraud → promoters, first directors and professional declarants each liable under section 447

Works without prejudice to section 7(5).

Section 7(7): Tribunal orders

Regulate management, make members' liability unlimited, remove name from register, wind up, or other orders

Before any order, the company gets a hearing and the Tribunal considers transactions entered into, including obligations contracted and payment of liabilities.

Section 399(3): certified copy

Registrar-certified true copy of a registered document is admissible in all legal proceedings as of equal validity with the original

Useful for proving incorporation.

General power to alter

Alteration of memorandum = special resolution + compliance with section 13 procedure

Section 13(1). Applies save as provided in section 61 (share capital alteration).

Name change

Special resolution + written Central Government approval + fresh certificate of incorporation

Section 13(2) and (3). Change is complete and effective only on issue of the fresh certificate. No approval is needed if the only change is deleting or adding the word "Private" on conversion between classes of company.

Registered office shift to another State

Special resolution (section 13(1)) + Central Government approval (section 13(4))

The special resolution comes from the general rule in section 13(1). Section 13(4) separately requires Central Government approval, and without it the alteration has no effect. Under section 13(5) the Central Government disposes of the application within 60 days and may check creditor consent or adequate provision or security for debts.

Filing with Registrar

File special resolution; also the Central Government approval if the name changes

Section 13(6). For a State shift, certified copy of the order is filed with the Registrar of each State, and the new State's Registrar issues a fresh certificate (section 13(7)).

Objects change after prospectus money raised

Special resolution + newspaper publication (one English, one vernacular) + website + exit for dissenting shareholders

Section 13(8). Applies where unutilised money raised through prospectus remains. The justification must be indicated.

Registration of object alteration

Registrar registers and certifies within 30 days of filing the special resolution

Section 13(9).

Section 8 company

Alteration of memorandum or articles: previous Central Government approval. Conversion into another kind of company: only after complying with prescribed conditions

Section 8(4)(i) for alterations of the memorandum or articles. Section 8(4)(ii) for conversion into a company of any other kind.

Producer Company objects

Special resolution, not inconsistent with section 378B; copy of amended memorandum and resolution filed within 30 days

Section 378H(2) and (3). The copy of the resolution is certified by two directors.

Binding effect

Registered MoA + AoA bind company and members, as if signed by each (Section 10)

Money payable by a member under them is a debt due to the company.

Alteration of articles

Special resolution (Section 14(1)), subject to the Act and the memorandum

Includes conversion of private to public company and public to private company.

Private company losing status

Articles drop mandatory private-company restrictions ⇒ ceases to be private from date of alteration

This is the first proviso to Section 14(1).

Public to private conversion

Special resolution + approval by order of the Central Government

Without that approval the alteration is not valid (second proviso).

Filing of alteration

File with Registrar within 15 days: alteration, copy of order (if approval was needed), printed copy of altered articles (Section 14(2))

Once registered, the alteration is valid as if originally in the articles (Section 14(3)).

Noting in copies

Every alteration to be noted in every copy of MoA/AoA (Section 15(1)); penalty ₹1,000 per copy issued without alteration (Section 15(2))

Company and every officer in default are liable.

Table F and Section 467

Change in Table F does not apply to companies registered before the change

Proviso to Section 467(2).

Variation of class rights

Consent in writing of holders of ≥ 3/4 of issued shares of the class, or special resolution at a separate class meeting (Section 48(1))

Dissenting holders of ≥ 10% of the class may apply to the Tribunal within 21 days (Section 48(2)).

Constructive notice

Outsider is deemed to know the MOA and AOA, as public documents

A presumption of knowledge of the contents. It does not presume knowledge of internal irregularities.

Indoor management

Act consistent with MOA and AOA + outsider in good faith ⇒ company is bound

Outsider may assume internal procedures were followed. Source: Royal British Bank v. Turquand.

Commonly cited exception: Knowledge of irregularity

Actual knowledge of the irregularity ⇒ no protection

A person who knew of the defect cannot rely on the doctrine.

Commonly cited exception: Suspicion

Circumstances that put a person on inquiry, and he does not inquire ⇒ no protection

Example: an unusual transaction, or an officer acting far outside his usual authority.

Commonly cited exception: Forgery

Forged document ⇒ company not bound

A forged document is a nullity. Ruben v. Great Fingall Consolidated is the standard case: the secretary forged the directors' signatures on a share certificate and affixed the company's seal.

Commonly cited exception: Insiders

Directors and persons within the company's management are not outsiders

They are expected to know the internal position. This overlaps with the knowledge exception, but exam answers often state it separately.

Commonly cited exception: Acts beyond the MOA or the law

Act ultra vires the MOA or illegal ⇒ doctrine does not apply

Indoor management cures only procedural defects, not lack of power.

Commonly cited exception: No apparent authority

Officer had no authority, actual or apparent, to do the act ⇒ company not bound

The outsider cannot hold the company bound by an act of a person who had no actual or apparent authority to do it, for example a junior employee who purports to sign documents on behalf of the company when nothing in the company's conduct suggests he can.

Meaning of prospectus

Prospectus = any document described or issued as a prospectus + red herring prospectus + shelf prospectus + any notice, circular, advertisement or other document inviting offers from the public for subscription or purchase of securities of a body corporate

Section 2(70). The test is that the document invites the public. Name does not matter.

Abridged prospectus

Abridged prospectus = memorandum containing salient features of a prospectus, as specified by SEBI regulations

Section 2(1). It is a summary, not a separate type of offer.

Private company restriction

Private company: restricts share transfer; limits members to 200 (except One Person Company); prohibits invitation to the public

Section 2(68). Joint holders count as one member. Employees and ex-employee members are not counted. This is a limit on members, not the private placement limit.

Red herring prospectus

Red herring = prospectus without complete particulars of price / quantity; filed with Registrar at least 3 days before the opening of the subscription list and the offer; final particulars filed after closing

Section 32 (outside the section 2 text, so verify against the Act and Rules). Used in book-built issues. Remember the three-day gap.

Shelf prospectus

Shelf prospectus = one prospectus for one or more issues of a class of securities over a period, by such class or classes of companies as SEBI may specify by regulations

Section 31. The issuers are those SEBI specifies. Validity is as prescribed.

Validity of prospectus

Prospectus must be issued within 90 days from the date of its registration

Section 26. After 90 days it cannot be issued.

Private placement limit

Private placement offer to not more than 200 persons in a financial year (excluding qualified institutional buyers and employees under ESOP)

Section 42 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014. Above this limit the offer is treated as a public offer. Money must come through banking channels. Different from the 200-member limit in section 2(68).

Misstatement liability

Untrue statement or omission in prospectus → civil liability (compensation for loss) + criminal liability (punishable as for fraud)

Liable persons include directors, promoters, persons who authorised the issue, and experts for their own statements.

Kinds of share capital (Section 43)

Share capital = Equity (voting, or differential rights) + Preference

Equity means all share capital that is not preference capital. Preference carries preferential dividend and preferential repayment rights.

Minimum subscription and application money (Section 39(1))

No allotment until minimum amount in prospectus is subscribed AND application sums for it are received

Payment must be by cheque or other instrument.

Minimum application money (Section 39(2))

Application money ≥ 5% of nominal amount (or other SEBI-specified percentage or amount)

This is a floor per security.

Refund trigger (Section 39(3))

Minimum not subscribed within 30 days of prospectus issue date → return amount received

The period may be a different one specified by SEBI. Time and manner of return are as prescribed.

Return of allotment (Section 39(4))

Any allotment by a company having share capital → file return with Registrar

Applies to every allotment, not only public issues.

Penalty (Section 39(5))

₹1,000 per day of default, or ₹1,00,000, whichever is less

Applies to default under sub-section (3) or (4), on the company and every officer in default. Each default attracts its own penalty.

Sweat equity conditions (Section 54(1))

Class already issued + special resolution + resolution states number, market price, consideration, class of directors/employees + SEBI regulations (listed) or prescribed rules (unlisted)

Sweat equity shares rank pari passu with other equity shares (Section 54(2)).

Buy-back sources (Section 68(1))

Free reserves, or securities premium account, or proceeds of issue of shares or other specified securities

No buy-back of any kind of shares out of proceeds of an earlier issue of the same kind. Free reserves include securities premium.

Buy-back approval (Section 68(2)(b))

Special resolution at general meeting; Board resolution suffices if buy-back ≤ 10% of total paid-up equity capital and free reserves

The articles must also authorise the buy-back.

Buy-back size limit (Section 68(2)(c))

Buy-back ≤ 25% of (paid-up capital + free reserves)

The proviso changes the base for equity shares. For a buy-back of equity shares in a financial year, the 25% is worked on the total paid-up equity capital in that financial year.

Debt-equity after buy-back (Section 68(2)(d))

(Secured + unsecured debts) after buy-back ≤ 2 × (paid-up capital + free reserves)

Central Government may notify a higher ratio for a class of companies.

Other buy-back conditions

Shares fully paid-up; no fresh offer within 1 year of closure of preceding offer; completion within 1 year of resolution; destroy shares within 7 days of completion; no further issue of the same kind of shares or other securities for 6 months; file return with Registrar and SEBI within 30 days of completion (SEBI filing only for listed companies)

The 6-month bar is on a further issue of the same kind of shares or other securities. Exceptions: bonus issue and discharge of subsisting obligations such as conversion of warrants, stock options, sweat equity, preference shares or debentures into equity.

Buy-back default (Section 68(11))

Company: fine ₹1,00,000 to ₹3,00,000; every officer in default: fine ₹1,00,000 to ₹3,00,000

Imprisonment was omitted by the 2020 amendment.

Quick revision

• Section 7 filings go to the Registrar within whose jurisdiction the registered office is proposed to be situated.
• MOA and AOA must be signed by all subscribers to the memorandum.
• A professional engaged in formation and a named director, manager or secretary give a compliance declaration.
• Subscribers and first directors declare they are not convicted of any offence in connection with promotion, formation or management of any company, and have not been found guilty of fraud, misfeasance or breach of duty during the preceding five years.
• The Registrar issues the certificate of incorporation and allots a CIN, a distinct identity for the company.
• Documents as originally filed must be kept at the registered office till dissolution.
• False or suppressed information attracts section 447.
• If a company was got incorporated by false information, suppression or fraud, the Tribunal may, on application and after hearing the company, regulate management, direct unlimited liability, remove the name or order winding up.
• Producer Company: ten or more individuals, each a producer, or two or more Producer Institutions, or a combination of ten or more individuals and Producer Institutions.
• Producer Company members have limited liability and one vote each irrespective of shareholding.
• Registrar registers a Producer Company within thirty days of receiving the documents.
• Constructive notice protects the company; indoor management protects outsiders dealing in good faith.
• Answer cases as provision, facts, conclusion.

Common mistakes

• Saying a private company can invite the public to subscribe to its shares. Fix: Remember section 23: a private company can issue only by rights issue, bonus issue or private placement. A public offer by prospectus is open only to a public company.
• Stating that a public company must have 7 members as both minimum and maximum, or giving it a maximum limit. Fix: Write: private company 2 to 200 members, public company minimum 7 with no maximum, OPC exactly one member.
• Calling the promoter an agent or trustee of the company. Fix: Write that the promoter is neither agent nor trustee, because the company is not yet in existence, but stands in a fiduciary position.
• Treating a lawyer or chartered accountant who advises on incorporation as a promoter. Fix: Limb (c) does not apply to a person acting merely in a professional capacity. Check this before concluding.
• Saying a common seal is essential for the company under section 9. Fix: Remember that the words 'and a common seal' were omitted in 2015. Section 9 now speaks of perpetual succession and powers only.
• Listing only the memorandum and articles as the documents for incorporation. Fix: Learn the seven items in section 7(1)(a) to (g) as a sequence and write all of them.
• Saying a name change needs only a special resolution. Fix: Add written Central Government approval under section 13(2), and the fresh certificate of incorporation under section 13(3).
• Requiring Central Government approval when a company only drops "Private" on conversion. Fix: Remember the proviso: no approval is needed where the only change is deleting or adding "Private" on conversion to another class.
• Saying that articles can override the memorandum or the Act. Fix: Remember the order: Act, then memorandum, then articles. Articles are subordinate to both.
• Writing that alteration of articles needs an ordinary resolution. Fix: Section 14(1) says special resolution. Write it every time.

Exam tips

• Expect MCQs on the 51% test for government companies, the member numbers (1, 2, 7), and what counts as a significant accounting transaction.
• In written answers on private versus public company, use a two-column style in bullet form: members, share transfer, public invitation, raising capital. Do not draw a table, use paired bullets.
• For section 165 problems, show the subtraction of dormant companies as a separate line. Examiners give a step mark for it. State your assumptions about which companies are public or holding or subsidiary companies of a public company.
• Link the type to its consequence: section 23 for modes of issue, section 446B for lesser penalty, section 455 for dormant status. This shows depth.
• Keep to the Companies Act, 2013 as amended up to the cut-off ICAI states for your exam, and check the current small company limits in your study material.
• Always quote the three limbs of section 2(69) and the professional-capacity exception. Examiners reward this precision.
• In a scenario question, name the limb that applies. Do not just say 'he is a promoter'.
• Remember the order of reasoning for fiduciary status: company not in existence, so no agency, so fiduciary position.