Important Questions for CBSE Class 11 Business Studies Chapter 7 - Formation of a Company

Very Short Answer Questions (1 or 2 marks)

1. State the three stages in the formation of a company?

Ans: There are three stages in the formation of a business namely:

1. Promotion

2. Incorporation

3. Subscription of capital

2. What do you mean by Formation of the company?

Ans: The formation of a business is a lengthy process that requires the fulfillment of numerous legal formalities and processes. It involves three distinct stages, which are Promotion, Incorporation and Subscription of capital. In contrast to public limited businesses, which are forbidden from raising capital from the public, private corporations are not required to produce a prospectus or complete the formality of a minimum subscription.

3. Who are the first directors of the company?

Ans: The members who will sign the prospective company's Memorandum of Association must be decided by the promoters. The people who sign the memorandum are also the company's first directors.

4. When a company is said to be born?

Ans: A company is legally born on the date printed on the Certificate of Incorporation. It gains the ability to enter into legally binding contracts. On that date, it becomes a legal entity with perpetual succession. The Certificate of Incorporation serves as solid documentation of a company's legal existence.

5. In a public company how many members must sign Memorandum of association?

Ans:  The memorandum of association must be signed by at least seven members in case of a public company.

6. In a private company how many members must sign Memorandum of association?

Ans: Two members' signatures are sufficient for a private business.

7. Explain technical feasibility?

Ans: Technical feasibility refers to the analysis of an idea that may be good but technically not possible to execute. It may so that the required raw material or technology is not easily available.

8. Explain Financial feasibility?

Ans: Every business activity requires funds. The promoters must calculate the amount of money needed to pursue the selected business prospects. If not able to arrange funds, then the project needs to be given up.

9. Explain Economic feasibility?

Ans: The promoters must calculate the amount of money needed to pursue the selected business prospects.

Short Answer Questions (3 or 4 Marks)

10. 'Promoter enjoys a fiduciary position with the company" Explain?

Ans: The reasons are:

• A firm's promoters have a fiduciary relationship with the company, which they must not abuse.

• They can only make a profit if it is publicly acknowledged, and they must not create any hidden gains.

• The corporation can withdraw the contract and recoup the purchase price paid to the promoters if there is a non-disclosure.

• It can also sue for damages for losses incurred as a result of material information not being disclosed.

• Promoters are not legally entitled to reimbursement for expenses incurred in the company's promotion. The company, on the other hand, may choose to reimburse them for their pre-incorporation costs.

• The corporation may also pay the promoters a lump sum payment or a commission on the purchase price of a property obtained through them or on the shares sold as compensation for their efforts.

• The corporation may also provide them stock or debentures, or give them the option to buy the securities at a later date.

11. List down the documents needed for registration for incorporation.

Ans: The documents needed for registration for incorporation.

• Memorandum of Association: The Memorandum of Association is duly stamped, signed, and witnessed. In the case of a public business, it must be signed by at least seven members. For a private business, however, two members' signatures are sufficient.

• Articles of Association: As with the Memorandum, the Articles of Association must be legally stamped and witnessed. This is also a very important document for the company that describes the way through which the objectives of MOA could be achieved.

• Director’s Approval: The prospective directors' written approval to serve as directors, as well as an agreement to purchase qualification shares. The proposed Managing Director, Manager, or whole-time director's agreement, if any also needed.

• List of Directors: The names, addresses and all the details of the persons who have agreed to become and work as directors are provided.

• Registrar's Letter: A copy of the Registrar's letter approving the name of the company.

• Statutory Declaration: A statutory declaration attesting to the fact that all registration requirements have been met. This must be duly signed.

• Documentary Evidence: Documentary evidence of payment of registration fees.

• Prospectus: If a company wants to raise money from the public, prospectus is also needed.

• Registered Office: A notice about the exact address of the registered office may also be submitted along with these documents

12. Define Promoter?

Ans:  A promoter, according to Section 69, is a person 

1. A person who has been named as such in a prospectus or is identified by the company in the annual return in section 92; or

2. A person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

3. A person who is in agreement with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

Long Answer Questions (5 or 6 marks)

13. Explain the process of capital subscription?

Ans: To raise money from the general public, you must take the following steps:

Step 1. Approval by the Securities and Exchange Commission (SEBI):

• SEBI (Securities and Exchange Board of India), our country's regulatory body, has set standards for information disclosure and investor protection.

• A public company inviting funds from the general public must make adequate disclosure of all relevant information and must not conceal any material information from the potential investors.

Step 2. Filing of Prospectus:

• A copy of the prospectus or statement in lieu of the prospectus is filed with the Registrar of Companies.

• A prospectus is defined as "any document described or released as a prospectus, including any notice, circular, advertisement, or other document inviting public deposits or inviting public offers for the subscription or purchase of any securities of a body corporate."

Step 3. Bankers, Brokers, and Underwriters are Appointed:

• Raising money from the general people is a huge undertaking. The money for the application will be received by the company's bankers.

• The brokers try to sell the shares by handing out application forms and pushing people to apply. If the public does not subscribe to the shares, the underwriters agree to buy them.

Step 4. Minimum Subscription:

• To prevent enterprises from coming into business with insufficient finances, the corporation must collect applications for a specific minimum number of shares before proceeding with the allotment of shares. This is referred to as the 'minimum subscription' under the Companies Act.

• Applications received for the shares are for an amount less than 90 percent of the issue size, the allotment cannot be made and the application money received must be returned to the applicants.

Step 5. Application to Stock Exchange:

• At least one stock exchange is approached for approval to trade in its shares or debentures.

• If such permission is not granted before the expiry of ten weeks from the date of closure of the subscription list, All money received from the applicants must be refunded to them within 8 days of the allotment becoming void.

Step 6. Allotment of Shares:

• Till the time shares are allotted, application money received should remain in a separate bank account and must not be used by the company.

• If the number of shares allocated is less than the number applied for, or if no shares are allotted to the applicant, any excess application money must be returned to the applicants or added to the money owed for allocation.

• Allotment letters are issued to the successful allottees. Within 30 days of allotment, a "return of allotment," signed by a director or secretary, is filed with the Registrar of Companies.

14. Distinguish between Memorandum of Association and article of association on the basis of objective, position, relationship, validity and necessity?

Ans: The differences between memorandum and articles of association are as follows:

15. Jindal and his brothers wanted to start a new business of steel. To start up a business what documents are required to be submitted by them to the registrar of companies?

Ans: The documents required are:

1. Memorandum of association

• It defines the objective of the company. No company can legally undertake activities that are not contained in its MoA 

• MoA contains following clauses:

• Name clause: Contains the name of the company which has already been approved by the registrar of companies.

• Registered office clause: Contains the name of the state in which the registered office of the company is proposed to be situated. The exact address is not required but the same must be notified to the register within 30 days of the incorporation of the company.

• Object Clause: It defines the purpose for which the company is formed. A company is not legally entitled to undertake an activity, which is beyond the object stated in this clause.

• Liability clause: This clause limits the liability of the members to the amount unpaid on the share owned by them. 

• Capital clause: This clause specifies the maximum capital which the company will be authorized to raise through the issue of shares. The authorized share capital of the proposed company along with its division into the number of shares having a fixed face value is specified.

• Subscription Clause: In this a group of persons signs the MOA, and express their intention and willingness to establish the company.

2. Articles of association

• They are the rules regarding internal management of a company. It is a very important document after the Memorandum of Association

• These rules are subsidiary to the memorandum of association and hence, should not contradict or exceed anything stated in the memorandum of association.

• According to Section 2(5) of the Companies Act 2013, articles means the article of association of a company as originally framed or as altered from time to time or a blood in pursuance of any previous company law of this act.

3. Consent of proposed directors

• Apart from the memorandum and articles of association, a written consent of each person named as a director is required for confirming that they agree to act in that capacity and undertake to buy and pay for qualification shares.

4. Agreement

• The agreement which the company enters with an individual as director or whole time director or manager is another document which is required to be submitted to the registrar for getting the company registered under the act.

5. Statutory declaration

• A declaration stating that all the legal requirements pertaining to registration have been  complied with is to be submitted to the registrar with the above mentioned documents for getting the companies registered under the law.

6. Receipt of payment of fee

• Necessary fees have to be paid for the registration of the company. 

• The amount of such fees shall depend on the authorized share capital of the company.

16. Mr. Mohan conceived an idea to start a garment business. He consulted a Company secretary to get the details. Company secretary helped list down Mr. Mohan's function in the process of starting up the business. Explain briefly the function of the promoter?

Ans: The functions of the promoter are explained as follows:

1. Identification of business opportunity:

The opportunity could be in the form of developing a new product or service, making a product available through a different channel, or any other investment opportunity. The technical and economic feasibility of the opportunity is then assessed.

2. Feasibility studies: 

Converting all potential business ideas into real enterprises may not be viable or lucrative. The promoters, therefore, undertake detailed feasibility studies. The following feasibility studies could be carried out:

• Technical feasibility: An idea may be good but technically not possible to execute. It may be so because the required raw material or technology is not easily available.

• Financial feasibility: Every business activity requires funds. The promoters must calculate the amount of money needed to pursue the recognized business idea. If money cannot be secured, the project must be abandoned.

• Economic feasibility: The project might be technically and financially possible, but it may have a slim possibility of being profitable. Hence this step focuses on the cost-benefit analysis of the company to find out its future viability.

3. Name approval:

• The promoters must choose a name for it and file an application with the registrar of companies in the state where the company's registered office is located for its approval.

• If the proposed name has been rejected, several substitute names may be adopted.

• In the application to the Registrar of Companies, three names are listed in order of precedence.

4. Assembling the Memorandum of Association Signatories:

• The members who will sign the prospective company's Memorandum of Association must be decided by the promoters.

• The people who sign the memorandum are also the company's first directors.

• It is important to obtain their written approval to serve as Directors and to purchase the company's qualification shares.

5. Appointment of professionals:

• The promoters employ specialists such as mercantile bankers, auditors, and others to assist them in preparing the appropriate documents that must be filed with the Registrar of Companies.

6. Preparation of necessary documents:

• The promoter takes measures to prepare necessary legal documents that must be submitted to the Registrar of Companies in order for the company to be registered under the law.

• Memorandum of Association, Articles of Association, and Consent of Directors are the documents in question.