JOINT STOCK COMPANY

Q.1. Define a joint stock company. (Mar. 96, 98; Oct. 99, 2000)
Ans. Definition and Meaning:
Definition:
H.L. Haney:
“A Joint Stock Company is a voluntary association of individuals for profit,
having its capital divided into transferable shares the ownership of which is
the condition of membership”.
Section 3(1) of Indian Companies Act, 1956
“Company means a company formed and registered under this Act or an
existing company” & Existing company means a company formed and
registered under any of the previous company laws”.
Meaning:
Thus a company is a voluntary association, an incorporated association, an
artificial person created by law, having a common seal and perpetual
succession
Shareholder’s are the owners of the company but management lies in the
hands of Board of Directors. The company conducts its business under the
provision of the Indian Companies ct, 1956.
Q.2. Define a Joint Stock Company. What are its
characteristics / features? (Mar. 98, Oct. 97, 99, 2000 – Long
Answers)
Ans. Definition and Meaning: Same as Ans. 1
Characteristics / Features of a Joint Stock Company:
The characteristics / features of a Joint Stock Company are:
1. Compulsory Incorporation:
A company is a voluntary association of persons formed and
incorporated under the existing Corinne law. Only when it gets
certificate of incorporation it comes into existence as a body corporate.
2. Artificial person:
A company is an artificial person created by law. It is created by legal
process and not by natural birth. Even though it has no natural
personality, it has legal personality. Therefore it can enter into
contracts, sue and can be sued, own property, appoint employees and
borrow money like any other natural person.
3. Common Seal:
Since a company is an artificial person having no physical features like
a natural person, it cannot sign. Hence every company by law must
have a common seal on which its name is engraved. The common seal
 can serve as its signature. The common seal is affixed on all important
documents and contracts which is witnessed by signature of two
directors and countersigned by secretary where ever required. The
common seal is kept under the custody of directors.
4. Perpetual succession:
Since the company has a separate existence from its members,
directors and employees, their death, insolvency or insanity will not
affect its life and existence men may come and men may go but a
company remains forever. It can be wound up only under the provisions
of the act.
5. Limited liability:
Usually the liability of members of a company is limited to the extent of
uncalled or unpaid value of shares held by them. Their personal
property cannot be seized to meet the company’s liability beyond the
above mentioned liability.
6. Share capital:
The capital required by the company is raised by issues shares. A share
is a share in the share capital of the company. The member who holds
the shares of a company can transfer its ownership any other person,
without the company’s permission.
7. Separation of ownership and management:
In company organisation the ownership and management are
separated. The shareholders who are the owners do not take active
part in the everyday affairs of the company. Instead, they elect their
representatives known as Directors, who with the help of managers and
employees manage the company. Thus, there is division of labour and
specialisation.
8. Legal Entity:
Since the company is created by law it has separate legal existence
compared to its members. Therefore the members cannot be
personally held responsible for the acts of the company.
9. Large membership:
The company is owned by a larger number of members – maximum of
50 in the case of private limited company and unlimited number of
members in the case of a public limited company.
Q.3. What re the advantages / merit of a Joint Stock
Company? (Mar. 96, Oct. 98, 2002, 2003)
Ans. Defination and Meaning – Same as Ans. 1
Advantages / Merits of a Joint Stock Company:
The advantages / Merits of a Joint Stock Company are:
1. Large Capital:
A company can collect huge capital for the business through shares and
debentures, public deposits, loans etc. due to huge capital the company
can conduct business on a large scale.
2. Limited Liability:
Shareholder’s liability is limited to the face value of the shares held by
them. The members are liable only to the extent of unpaid value of
share. If the shares are fully paid up then the member is not liable for
any debts of the company.
3. Continuity and Stability:
A company has a long and stable life. its existence is not affected by
death, insolvency or insanity of its members.
4. Professional Management:
The company appoints experienced, competent and experts to manage
the business. Their services lead to managerial and administrative
efficiency and accuracy.
5. Economies of scale:
As the company operates on a large scale it enjoys economies in
production, distribution, management and financing.
6. Bargaining Power:
Compared to other forms of commercial organization a joint stock
company has strong bargaining power in buying as well as in selling of
goods because of its large scale production.
7. Legal Status: Same as features point 16
The company enjoys a distinct legal entity separate from its members.
Being a legal creation it enjoys permanent existence.
8. Large Membership:
A joint stock company (especially a public company) has large number
of members.
Large membership brings in large amount of funds which can be
invested in companies expansion and diversification.
9. Transferability of shares:
Shares of a Joint Stock Company (especially public companies) are
freely transferable
A member who wants to sell his shares can easily do so in the stock
market. This encourages the public and other to invest in shares.
10. Employment:
Joint stock company provides employment to a large number of people
directly and indirectly.
This leads to higher national income for the country and higher
standard of living for the people.
11. Government Revenue:
Joint Stock Companies provides revenue to the government in the form
of taxes charged directly and indirectly.
12. Research and Development:
Joint Stock Companies undertake R & D continuously thus bringing
about new and improved products which benefits people.
13. Economic Development:
Because of Joint Stock Companies there is all round development of
trade, commerce and industry. The society in general gains the benefit
of the industrial development.
 Large capital, government revenue, economic development etc. are the
advantages of a Joint Stock Company.
Q.4. What are the disadvantages / demerits of a Joint Stock
Company? (Mar. 96, Oct. 98, 2002, 2003)
Ans. Definition and Meaning: Same as Ans. 1
Disadvantages / Demerits of a Joint Stock Company:
The disadvantages / demerits of a Joint Stock Company are:
1. Difficult Formation:
Formation of a Joint Stock Company is an expensive and time
consuming process as a number of legal formalities have to be
undertaken in order to register the company.
2. Lacks Flexibility:
The working of a Joint Stock Company is less flexible as compared to
other organizations. For every small thing they either have to follow a
detailed procedure or obtain sanctions from various authorities. This
results in lack of flexibility.
3. No Business secrecy:
This form of organization lacks business secrecy because it is
compulsory for the company to publish accounts and other records.
4. Excessive government regulation:
The company is subject to excessive government control. It has to
follow the numerous provision of the Indian Companies Act. This makes
working difficult.
5. Delay in Decision Making:
Due to excessive government control and a democratic set up all
decisions are taken in meetings and some decisions require
shareholder’s approval. All this leads to delay in decision making.
6. Lack of contact with customers:
Due to large scale operations a company finds it difficult to maintain
direct contact with its customers. This may lead to poor sales
promotion.
7. Lack of contact with employees:
The top management may not have personal contact with their
employees. This may cause friction and disputes amongst the
management and workers which may affect the worker’s morale.
8. Conflicts of Interest:
There may arise a conflict of interest amongst the various parties
(shareholders, management, workers etc.) in a joint stock company.
This conflicting interest undoubtedly harms the company’s interest.
9. Not suitable for all types of business:
This type of an organization is not suitable for business where
personalized services are required.
10. Exploitation of shareholders:
Sometimes the Board of Directors may misappropriate the funds and
mislead the shareholders by window dress report. The directors may
even manipulate the share trading on the stock exchange. Thus
shareholders can be exploited by corrupt directors.
 Difficult formation, no business secrecy, heavy taxation etc. are the
disadvantages of a Joint Stock Company.
Q.5. Discuss the various types of Companies? (Mar. 2000)
Ans. Defination and Meaning: Same as Ans. 1
Types of Companies:
The companies can be classified on the basis of the following:
(A) On the basis of Incorporation:
1. Chartered Companies:
(a) Incorporated under:
Such companies are incorporated under a Royal Character
(order) issued by the King or Queen or Head of the State.
(b) Exclusive rights:
Such companies have exclusive rights, powers and privileges
under the royal charter.
(c) Example:
East India Company, Bank of England.
2. Statutory Companies:
(a) Formed under:
Such companies are formed under the special act passed by
the Parliament or State Legislature.
(b) Powers defined:
The powers which can be exercised by such companies are
defined by the Acts that constitute them. Thus, such
companies do not require a Memorandum of Association.
(c) Example:
Reserve Bank of India, State Bank of India, Life Insurance
Corporation.
3. Registered Companies:
(a) Incorporated under:
A company incorporated under the Indian Companies Act,
1956 is called Registered Company.
(b) Powers defined:
The powers exercised by such companies are defined by the
Companies Act and Memorandum of Association.
(c) Can be:
A registered company can be a Private Ltd. Company or a
Public Ltd. Company.
(B) On the basis of liability of its members:
1. Companies Limited by Shares:
(a) Members liability limited:
 In such companies the liability of the members is limited to the
extent of the unpaid value on shares. In the event of winding
up of the company the members need to pay the unpaid value
of the shares.
(b) Can be:
Such companies may be a Public limited company or a Private
limited company.
2. Companies Limited by Guarantee:
(a) Member promises to pay:
Every member promises or guarantees to pay a fixed sum of
money (specified in the memorandum) at the time of
liquidation of the company for payment of companies
liabilities.
(b) Non – trading Companies:
Such companies are formed without a share capital for non –
trading (non – profit) purpose to promote culture, art, science,
religion, charity, sports etc.
(c) Depend upon:
Such companies depend upon their existence on entrance and
subscription fees as they do not have share capital.
3. Unlimited Companies:
(a) Unlimited liability:
In such companies the liability of the members is unlimited. In
the event of winding up of the company the private property
of the member can be used to pay the debts of the firm.
(b) Not in India:
Due to the high risk involved, such companies are not found in
India.
(C) On the basis of Membership:
1. Private Limited Company:
A private limited company is the one which by its articles
(a) Minimum, Maximum:
Limits the maximum number of its members to 50, minimum
being 2.
(b) Transfer of shares:
Places some restriction on the transfer of its shares.
(c) Prohibits any invitation:
Prohibits any invitation by prospectus or otherwise to the
general public to subscribe to any of its shares or debentures.
(d) Word ‘Private Limited’:
A private company must used the word ‘Private Limited’ after
its name
2. Public Limited Company:
(a) Not a private company:
 According to Companies Act, a public limited company is a
company which is not a private company.
(b) Minimum, Maximum:
Minimum number of members in a private company is 7 and
there is no maximum limit.
(c) Directors:
It must have atleast 3 directors – 1/3 of the directors are
rd

permanent and 2/3 are subject to retirement by rotation out

rd

of which 1/3 retire every year.

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(d) Free transfer of shares:

Shares can be freely transferred in a public company.
(e) Statutory Meeting:
In case of a public company Statutory Meeting is compulsory.
(D) On the basis of Ownership:
1. Government Company:
(a) Means:
A government company means any company in which not less
than 51% of the paid – up share capital is held by the Central
Government and / or by any State Government(s) or partly by
the Central Government and partly by one or more State
Government.
(b) Follows provisions of Companies Act:
Such companies have to follow all provisions of the Indian
Companies Act, 1956. It has to be registered under the Indian
Companies Act, 1956.
(c) Examples:
Hindustan Machine Tools, Oil and Natural Gas Commission etc.
2. Foreign Companies:
(a) Meaning:
It is a company which is registered in one country but carries
out its operations in India.
(E) On the basis of Shareholding:
1. Holding Companies:
(a) Meaning:
It is a company which controls another company by holding a
minimum 51% of shares and thereby controlling the
composition of the board of the company.
2. Subsidiary Companies:
Meaning:
A company which another company holds a minimum of 51% of
share capital i.e. holding company is known as subsidiary
company.
Thus the above given are the various types of companies.
Q.6. What is share? What are the various types of shares. (Mar.
2002)
Ans. Defination – Share
Section 2(46) of the Indian Companies Act 1956 defines share as “a share in
the share capital of a company and includes stock except when a distinction
between stock and shares is expressed and implied”.
Meaning – Share:
Owned capital of a company divided into a large number of equal parts or
units. Each such part having the same face value is called share
Types of shares:
1. Equity Shares:
Meaning:
Equity shares are those shares which do not have, preferential rights
with regards to:
(a) Payment of dividend
(b) Repayment (return) of capital, in case of winding up of the
company.
Equity shares are also known as Ordinary shares.
There are no types of equity shares.
2. Preference Shares:
Meaning:
Preference shares are those shares which have preferential rights over
the equity shares with regards to:
(1) Repayment of capital in the event of liquidation /
winding up of the company.
(2) Payment of dividend.
Types:
(I) On the basis of participation:
(a) Participating Preference Shares:
The rate of dividend on preference shares is decided and fixed
at the time of issue of preference shares. Participating
preference shareholders extra dividend (additional dividend)
after payment of dividend to equity shareholders. Thus
participating preference share get two types of dividend, one
is their normal fixed rate of divided and the other is the extra
dividend which is paid out of the surplus profit left after
payment of dividend on equity shares.
(b) Non – participating Preference Shares:
They get only their normal fixed rate of dividend. They do not
have the right to receive an extra dividend, after the dividend
is paid on equity shares.
(II) On the basis of right to accumulate dividend:
(a) Cumulative Preference Share:
If in any year, the dividend is not paid, it gets accumulated on
cumulative preference shares. If the dividend is not paid in one
or more years due to poor performance of the company then
 such unpaid dividend gets accumulated and is paid. When the
company performs well. It is to be paid before making any
payments of dividend to equity shareholders.
(b) Non – Cumulative Preference Shares:
In non – cumulative preference shares, if in any year, the
dividend is not paid, it does not get accumulated.
(III) On the basis of Redemption:
(a) Redeemable Preference Shares:
They are those preference shares which are redeemed after a
particular period. They are issued for a specific period and
after the completion of the particular period for which they had
been issued, the company redeems / returns the capital of the
redeemable preference shareholders.
(b) Irredeemable / Non – redeemable Preference
Shares:
They are those preference shares which are not redeemed
during the lifetime of the company. Non – redeemable
preference shares are redeemed only on the winding up of the
company. Such shares are not issued for a particular period.
(IV) On the basis of Conversion:
(a) Convertible Preference Shares:
Preference shares which can be converted into equity shares
of the company at a later date are called convertible
preference shares The rate and the date of conversion are
mentioned at the time of issue of convertible preference
shares.
(b) Non – Convertible Preference Shares:
Preference shares which cannot be converted into equity
shares of the company are known as non – convertible
preference shares. They remain as preference shares only.
3. Bonus Shares:
Meaning:
A part of the company’s profit is transferred to reserves. Out of such
reserves a company issues bonus shares. Such shares are issued to the
equity share holders of the company free of charge. Infact bonus shares
are also equity shares.
Conditions for the issue of Bonus Shares:
1. Approval from:
Approval from the Securities and Exchange Board of India (SEBI)
must be obtained for the issue of bonus shares.
2. Twice:
There can be an issue of bonus shares only twice in a period of 5
years.
 3. Articles of Association:
Provision in the Articles of Association of the company for the
bonus issue.
4. Shareholder’s approval:
Shareholders’ approval must be obtained in the shareholders’
meeting by passing a resolution giving approval to the Board’s
decision for the issue of bonus shares.
5. Reserves:
Sufficient amount of accumulated reserves.
6. Shares fully paid up:
Bonus shares can be issued only when the existing shares are fully
paid up.
4. Deferred Shares / Founder Shares / Management Shares:
These shares are issued to the promoters of the company. They rank
last of all shares in respect of payment of dividend and repayment of
capital. Deferred shares are usually of a lower face value. Only private
companies can issue deferred shares.
5. Qualification Shares:
The articles of a company usually require a director to hold certain
number of shares to be eligible as a director. Such shares are called
qualification shares. The directors are entrusted with the management
of the company it is necessary that they have some financial stake or
else they may not take sufficient interest in the efficient management
of the company.
The directors must obtain qualification shares within 6 months from his
appointment as a director. If he does not purchase the qualification
shares within the prescribed period he ceases to be the director of the
company. He can purchase the shares from the company itself or from
the stock market.
Q.7. Explain the various types of company meetings? (Oct. 96,
2003) OR
Short Note on Statutory Meetings. (Mar. 2001)
Ans. Meeting – Defination:
“An official gathering to concerned persons who come together in required
number, in order to discuss and arrive at decisions, required for the
functioning of an organisation.
Meaning:
It is a gathering of 2 or more persons who come together for important
discussion and decision on lawful matters.
Types of Company Meetings:
1. Board of Directors Meeting:
(a) Board to meet once in every three moths:
 For every company, a meeting of its Board of directors shall be
held at least once in every three months and at least four meetings
every year.
(b) Notice of Meetings:
• Notice of every Board meeting shall be given in
writing to every director for the time being in India, and at his
usual address in India.
• Unless the articles of the company provide a definite
period of notice, a reasonable notice will be given of Board
meeting. What is reasonable notice will depend on any
particular case.
• If proper notice is not given, proceedings are
invalid unless all directors are present.
• Normally, agenda is enclosed along with the notice,
although it is not obligatory to send agenda.
(c) Quorum for Meetings:
• The quorum for a meeting of the Board of Directors of a
company shall be one – third of its total strength (any fraction
in that one – third being rounded off as one), or two directors,
whichever is higher.
• The total strength of directors does not include interested
directors.
• If the quorum is not present, the meeting is adjourned
to the next week, at the same day, time and place and if that is a
public holiday, then the next succeeding day which is not a public
holiday.
Matters to be discussed at Board Meetings:
The following some of the matters are discussed at Board Meetings:
• To borrow money.
• To make calls on shares
• To approve transfer & transmission of shares.
• To allot shares and debentures
• To sanction loans
• To forfeit shares.
• To reinstate membership.
• To purchase or sell property.
2. Shareholder Meeting:
(a) Statutory Meeting:
Meaning:
Every public limited company having share capital must convene a
general meeting of shareholders, within a period of not less than
one month and not more than six months from the date at which
the company is entitled to commence business. Such meeting is
called statutory meeting. It is the first meeting of the shareholders
and it is held once in the life time of a company.
Notice of meeting:
The directors are required to send to notice to all members of the
company, at least 21 days in advance. Stating that it is a statutory
meeting.
Objects of the statutory meeting:
(a) The statutory meeting is held to inform the shareholders
in respect of matters relating to:
• Allotment of shares
• Receipts and payments made by the company, etc.
• Incorporation of the company.
• Details of preliminary expenses.
• Details of the contracts concluded by the company
or changes in the existing contract.
• Details of further prospects of the company.
(b) Any special matters which require approval of the
shareholders is placed before them at this meeting.
Statutory Report:
The directors are required to prepare and send a report called
Statutory Report to all members at least 21 days in advance of the
meeting. The report states the affairs of the company since
incorporation.
Effect of non – compliance of:
• If default is made in complying with the provision of
Sec. 165, (i.e. not sending a statutory report and not holding
statutory meeting), every director or other officer who is in
default shall be punishable with fine, which may extend to
Rs.5,000.
• If statutory meeting is not held and statutory report not
filed, the company may be compulsorily wound up under the
orders of the court.
(b) Annual General Meeting:
Meaning:
Every company shall in each year hold (in addition to any other
meetings) a general meeting of its shareholders. The purpose of
holding such meeting is to review the progress and prospects of
the company and to elect directors and auditors, as the case may
be.
When Annual General Meetings must be held?
 • The first annual general meeting of the company is
held within 18 months of its incorporation.
• Subsequent annual general meetings must be held
once in every year.
• There should not be more than 15 months gap between
two annual general meetings. However, the registrar can
extend the time upto a period of three months.
Notice of the meeting:
At least 21 days advance notice from the date of the meeting must
be given to all the members at their registered address in India.
Along with Notice:
The members should be supplied with certified copies of Profit and
Loss Account and Balance sheet, Directors Report and Auditor’s
Report, along with the notice.
Business transacted at the meeting:
The business transacted at this meeting is as follows:
(a) Routine Business:
• Declaration of Dividend
• Appointment of auditors in place of those retiring.
• Adoption of Annual Accounts, Directors Report and
Auditor’s Report.
• Election of Directors in place of those retiring by
rotation.
(b) Special Business:
• To alter the articles of association.
• To increase authorized capital.
• Reduction of share capital, etc.
Effect of non – compliance:
• If default is made in holding an annual general meeting
in accordance with the provisions of the Companies Act, the
Central Govt., on the application of any member of the
company can call, or direct the calling of such meeting.
• If the meeting is not held as per the provisions of the
Companies Act or the directives of the Central Govt., then
every officer who is in default, is punishable with fine which
may extend to Rs.50,000 and in case the default continues,
then with a further fine upto Rs.2,500 every day till such
default continues.
(c) Extra Ordinary General Meeting:
Meaning:
It is general meeting which is held between two annual general
meetings. This meeting is called to discuss important and urgent
 matters which cannot be postpone till the next annual general
meeting.
Purpose of Meeting:
This meeting may be called to discuss such matters as:
1. Reduction of Share Capital.
2. Changes in Articles of Association.
3. Alternation of any clause of Memorandum.
4. Increasing the Authorised Capital, etc.
Who can call such meeting:
(a) The directors can call such meeting after holding
discussion in the Board meeting and as per provisions
in the Articles.
(b) The directors can call such meeting on the requisition
of the members. The members who make a requisition must
hold at least 1/10 of the total paid – up share capital or 1/10
th th

of voting power.
(c) If the board do not call a meeting within 14 days
of a valid requisition, then the meeting can be called by the
requisitionists themselves within 3 months from the date of
submitting their requisition to the company.
(d) The Companies Act empowers the Company Law
Board to call extra – ordinary general meeting.
Notice of the Meeting:
At least 21 days notice must be given to all members giving details
of the matters to be discussed at the meeting.
Resolution at the Meeting:
The resolutions passed at such a meeting are normally special
resolutions and such special resolution have to be filed with the
Registrar within 30 days.
Quorum:
The quorum at all shareholders meetings, (including this meeting)
must be least five members in case of public company and
two members in case of private company.
3. Class Meeting:
The company can have different classes of shareholders. Equity
shareholders preference shareholders etc. The company may be
required to call meeting of a particular class of shareholders. Such
meeting may be called to incorporate changes in the rights and
privileges of the shareholders. For instance, the redeemable shares can
be converted into irredeemable shares.
The procedure for conducting such class meetings is often prescribed in
the articles of the company.
The above given are the various types of meetings of the company.
The above given are the various types of meetings of the company.
Q.8. What is Memorandum of Association? What are its
clauses? (Oct. 99; Mar. 03) (Short Note – Oct. 97)
Ans. Defination and Meaning: Same as Ans. 1
Memorandum of Association:
Meaning:
Memorandum of Association is the most important document of a
company. It is like the constitution of the company. Memorandum speaks
about the aims and objects of the company. It defines the relationship of
the company with the outsiders. Memorandum is treated as an unalterable
charter or document of a company. Changes in the memorandum are
possible but the procedure of bringing such changes in time –
consuming, lengthy and requires the sanction from the government
or, from the court. Memorandum is, therefore, treated as practically
unalterable charter of the company.
The purpose of this document is to inform the outsiders regarding the
permitted range of activities of the company. The company must
work within the limits of Memorandum of Association. Any act of
company beyond the limits should be called ultra – virus and it will not
be binding on the company. This document is prepared by promoters
and filed with the registrar for incorporation certificate. It is divided
into different paragraphs called Clauses. Each such clause deals with
one aspect of company management.
Following are the contents of Memorandum of Association:
1. The Name Clauses:
This clause mentions the name of the company followed by the words
‘Limited’ in case of a public company or ‘Private Limited’, in the case of
a private company. The word ‘Company’ need not be included in the
name of the company. The name should not be similar to that of any
other existing company. It should not contain any word which may
denote the government support or the patronage of the ruling power.
2. The Domicile Clause:
This clause mentions the name of the State in which the registered
office of the company is to be situated. This helps to determine
domicile and nationality of the company and the jurisdiction of the
court under which it comes. All communications and notices are to be
addressed to the registered office. The company has to maintain all its
statutory books at the registered office of the company.
3. The Objects Clause:
This clause states the objects of the company. It contains the list of
business activities which the company can undertake. The objects are
classified as: (1) the main objects and (2) other objects. The list is
usually exhaustive so as to include all those business activities which
the company may undertake in future. While selecting the objects, the
company has to see that they are not illegal or opposed to public policy
or contradictory to the Companies Act or any other law. Any alteration
in this clause requires the sanction of the Company Law Board.
4. The Capital Clause:
 This clause mentions the total share capital which the company is
authorized to raise and its division into different types of shares of fixed
denomination. The total capital mentioned in the Memorandum is called
‘Authorised Capital’ or ‘Nominal Capital’ or ‘Registered Capital’. It also
mentions whether the company is limited by shares or by guarantee.
Any alteration in this clause requires the sanction of the court.
The MOA of a company must be printed and suitably divided into
paragraphs which should be numbered serially. The Memorandum must
be duly dated and stamped as required under the Indian Stamp Act.
5. The Liability Clause:
This clauses states that the liability of the members of the company is
limited to the face value of shares purchased by them. In the case of a
company limited by guarantee, this clause states the amount which
members undertake to contribute to the assets of the company in the
event of its winding up. An unlimited company does not have this
clause in the MOA.
6. The Association or Subscription Clause:
This clause states that the persons who sign the Memorandum are
desirous of forming themselves into a company to achieve the objects
mentioned in the Memorandum and that they agree to subscribe for the
number of shares of the company, mentioned against their names in
the Memorandum. It is necessary to mention the name, description,
occupation and address of each subscriber. The name, address,
description and occupation of the witness are also required to be
mentioned in this clause.
This is Memorandum of Association and these are its clauses
Q.9. Short Note:
(a) Promotion & Meaning (Mar. 99)
Ans. Defination and Meaning: Same as Ans. 1
Formation of a Public Company:
Formation of a public company can be divided into 4 stages
1. Promotion stage
2. Incorporation stage / Registration stage
3. Capital Subscription Stage
4. Trading Certificate Stage / Commencement of Business
Stage
1. Promotion Stage:
Defination:
H.L. Haney:
“Promotion may be defined as the process of organizing and
planning the finances of a business enterprise under the corporate
form”.
Meaning:
 It is the first stage in the formation of the company. The person
who takes initiative in forming a Joint Stock Company is called
‘Promoter’.
(1) Discovery of an idea:
The work of a promoter starts when an idea strikes him
regarding some business which can be profitably undertaken.
When a person understands that there is a possibility of
starting or expanding some business the idea is said to have
been discovered.
(2) Detailed Investigation:
Commercial feasibility of the idea is checked with reference to:
(a) Sources of supply of raw material.
(b) Availability of funds and manpower
(c) Extent of demand
The investigation can be undertaken by the promoter
themselves or by experts
(3) Verification of the idea:
In this stage the findings are verified so that there is a double
guarantee regarding the validity of the report.
(4) Assembling:
In this stage activities like:
(a) Selection of a site for the project
(b) Purchase of land and building
(c) Entering into technical, managerial contracts etc. is
undertaken.
(5) Financial Plan:
In this stage the amount of funds required, sources of funds
etc. is determined.
(6) Presenting the Proposition:
The promoter may ask some more persons to join venture. He
presents the plan to them and they take the proposition.
This is the promotion stage with its stages.
(b) Incorporation Stage: (Oct. 96):
The incorporation stage is also called as registration stage. The
incorporation of a company gives birth to a new company. The
promoters must obtain the registration or incorporation certificate from
the Registrar of Companies. The following steps are to be followed:
1. Name of the Company:
The promoters may give any name for the company but it should
nto resemble with the name of another existing company. The
promoters should get the name allotted or sanctioned. The
application for the allotment of name must be forwarded to the
 Department of Company Law Administration, Government of India
through the Registrar of Companies.
The application form must consist of several alternate names, so
that if one or the other name is rejected then the promoters can
get at least one name allotted to their company.
2. Preparation and Arrangement of Documents:
For getting a company incorporated, the following documents have
to be prepared:
(a) Memorandum of Association:
It defines or states objectives and activities of the company.
(b) Articles of Association:
It is a set of rules and regulations regarding the internal affairs
of the company.
(c) List of Directors:
It contains name, address, occupation and age of the
directors.
(d) Written Consent of Directors:
Every director must give in his own handwriting – name,
address, occupation, age and nationality and should put his
signature declaring that he has given consent to act as
director of the company. It is required in case of public
companies only.
(e) Statutory Declaration:
That all the requirements or provisions of the Companies Act,
1956 with regard to registration have been complied with.
(f) Notice of Address:
At which the registered office of the company will be located.
(g) Declaration of Qualification Shares:
If the Articles provide for qualification shares, then the
directors have to give a declaration stating that they have
agreed to purchase and pay for qualification shares. Such
declaration is required in case of public limited companies
only.
3. Filing of Documents:
All the required documents (as mentioned above) must be filed
with the Registrar of Companies in order to get the company
incorporated.
4. Examination of Documents:
The Registrar of Companies will examine the documents. The
Registrar will check:
(a) Whether all documents are in order
(b) Whether details in the documents are properly filled in
5. Issue of Certificate of Incorporation:
If the Registrar is satisfied with the documents, he issues a
Certificate of Incorporation. The issue of certificate is the
 conclusive evidence of the fact that the company is incorporated
and that the requirements of the Companies Act have been
complied with. The certificate of Incorporation is numbered, dated
and signed by the Registrar of Companies.
(c) Statement in lieu of prospectus: (Mar. 97)
It is not compulsory for a public company to issue a prospectus. If the
promoters are confident of raising the required capital privately from
their friends and relatives then they need not issue a prospectus.
However, in such a case a statement in lieu of prospectus must be filed
with the Registrar of Companies at least three days prior to allotment
of shares.
1. Meaning:
It is a document prepared as an alternative to prospectus when
public subscription is not required.
2. Purpose:
It is required to be filed with the Registrar within 3 days prior to
allotment.
3. Suitability:
This document is suitable for private limited companies where the
directors can collect money from private sources such as friends
and relatives.
4. Use:
It helps the Registrar to know whether the capital issue is as per
the provisions of the companies act. This document is mainly used
for fulfilling the statutory requirements.
5. Contents of statements in lieu of prospectus:
The statement in lieu of prospectus are more or less similar to the
prospectus. It should clearly indicate:
• The date on which it was delivered to the Registrar for
registration.
• Number and type of shares.
• Rights of the shareholders.
• Particulars regarding directors, managing directors etc.
• Details about preliminary expenses paid or payable.
• Details of contracts relating to purchase of property.
• Treatment of Reserves
• Names and addresses of auditors, bankers, legal advisers
etc.
• Full name and address of the registered office
• Main object of the company and other details
• Date and signature of the directors.
Q.10. Distinguish between
1. Partnership and Joint Stock Company. (Oct. 96; March
2000, 2002)
Partnership Joint Stock Company Joint
Stock Company
1. Meaning:
Here 2 or more people comeIt is voluntary association, artificial
together for doing someperson created by law having a
business and making profit common seal and perpetual
succession
It is voluntary association, artificial
person created by law having a
common seal and perpetual
succession
2. Formation:
Relatively easy, less legalFormation difficult, too many legal
formalities involved formalities involved.
Formation difficult, too many legal
formalities involved.
3. Capital:
It can raise limited capital dueIt can raise large capital due to
to limitation on the number oflarge members
members and their capacity It can raise large capital due to
large members
4. Liability:
Liability of partners is unlimitedMembers liability limited to the
joint and several face value of shares
Members liability limited to the
face value of shares
5. Ownership and
Management: There is no difference in ownership
There is no difference inand management
ownership and management There is no difference in ownership
and management
6. Flexibility:
More flexible, compared to JointLess flexible compared to
Stock Companies partnership firm
Less flexible compared to
partnership firm
7. Continuity and 7. Continuity and
Stability: Stability:
Lacks continuity and stability,Joint stock company is continuous
business may come to an endand stable, business does not
with death, insolvency andcome to an end with death
insanity of partners insolvency or insanity of partners
Lacks continuity and stability,
business may come to an end
with death, insolvency and
insanity of partners
8. Business Secrecy: 8. Business Secrecy:
Can be maintained to a certainNo business secrecy
 extent Can be maintained to a certain
extent
9. Government 9. Government
Regulation: Regulation:
Minimum governmentStrict and excessive government
regulation regulation
Minimum government
regulation
10. Taxation: 10. Taxation:
Less compared to joint stockSubject to heavy taxation
companies Less compared to joint stock
companies
11. Decision making: 11. Decision making:
Quick decision making Delay in decision making
Quick decision making
12. Economies of scale: 12. Economies of
Less economies of scale asscale:
compared to Joint StockEnjoys economies of scale as it
Companies undertakes business on a large
scale
Less economies of scale as
compared to Joint Stock
Companies
13. Bargaining Power: Strong bargaining power
Generally weak bargaining13. Bargaining Power:
power Generally weak bargaining
power
14. Contract with 14. Contract with
customers & employees: customers & employees:
Close contact with customersNo contacts with customers and
and employees employees
Close contact with customers
and employees
15. Legal status: 15. Legal status:
No legal status Possesses and a legal status
No legal status
16. Act: 16. Act:
Governed by Partnership Act,Governed by Companies Act, 1956
1932 Governed by Partnership Act,
1932

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

Shares Debentures Debentures
1. Meaning:
 The total capital of theIt is a acknowledgement of debt issued
company is divided intoby the company under its seal.
similar parts and each partIt is a acknowledgement of debt issued
thereof is called a share. by the company under its seal.
2. Security:
The shares are not securedThe debentures are secured as they
as it does not createcreate charge on assets of the company
charge on companiesThe debentures are secured as they
assets. create charge on assets of the company
3. Repayment:
Equity shareholders areThe debentureholders can get the
never repaid during the liferedemption of their debentures during
time of the company the lifetime of the company.
The debentureholders can get the
redemption of their debentures during
the lifetime of the company.
4. Conversion: 4. Conversion:
The shares cannot be converted intoThe debenture can be
debentures converted into shares
The shares cannot be
converted into debentures
5. Nature of Capital: 5. Nature of
Shares represent owned capital Capital:
Debentures represent
borrowed or loaned or owed
capital
Shares represent owned
capital
6. Status of the Owner: 6. Status of the
Shareholder is a part owner of theOwner:
company. Debentureholder is only a
creditor of the company
Shareholder is a part
owner of the company.
7. Income: 7. Income:
Income on shares is called Dividend.Income on debentures is
This dividend on shares is not fixedcalled interest. This interest is
but variable. It varies along with thefixed at the time of issue of
net profit of the company. debentures and is not variable
in due course.
Income on shares is called
Dividend. This dividend on
shares is not fixed but
variable. It varies along
with the net profit of the
company.
8. Right of holders:
Shareholders are theDebentureholders are the
members of the companycreditors of the company and
and are given votingdo not carry voting rights.
rights. They can alsoThey are not concerned with
participate in thethe management of the
management of theircompany.
company.
9. Position on winding
up: The claim of owners of
The claim of owners ofdebentures stands first as
shares stands last i.e. afterthey are creditors of the
the payment to othercompany
creditors
10. Period on
Finance: Debentures are suitable for
Shares are suitable formedium term finance
long term finance
11. Appeal to
Investors: Appeal only to cautious
Appeal to adventurousinvestors who are happy with
investors who are willing tofixed rate of interest.
accept risk.

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

Preference Shares Equity Shares
1. Meaning:
Preference shares areShares which bear the risk
those shares which enjoysand provide permanent
preference regardingfinance are called equity
dividend and repayment ofshares
capital
2. Repayment:
Preference shareholdersEquity capital is not repaid
get back their financeduring the life time of
during life time of thecompany.
company and before the
equity shareholders
3. Nature of Preference:
Preference shares enjoyEquity shares do not carry
preferential rights assuch preferential rights over
regards the payment ofpreference shares
dividend and return of
 capital
4. Rate of
Dividend: Rate of dividend is not fixed
Rate of dividend is fixed atbut flexible. In changes every
the time of issue andyear as per the net profit of
changes are not made inthe company
this rate in due course
5. Voting Rights:
Preference shares do notEquity shares carry normal
carry normal rights, butvoting rights
only under exceptional
circumstances

6. Types:
There are different types ofAll equity shares are of one
preference shares liketype or category. They are
cumulative, redeemable,always irredeemable
irredeemable, participating
and non – participating
7. Appeal to
Investors: Equity shares appeal to
Preference shares appealadventurous investors willing
to relatively lessto take risks in their
adventurous investors,investment.
interested in fixed, but
regular return on
investment
8. Face value:
Relatively higher. UsuallyRelatively less. Usually Rs.10
Rs.100
9. Capital
Appreciation: Capital appreciation is
No capital appreciation ispossible due to prospects of
possible rising dividends.

4. Incorporation Certificate and Trading Certificate /

Commencement Certificate:
Incorporation Certificate Trading Certificate /
Commencement Certificate
1. Meaning:
It is a certificate issued to aIt is a certificate issued to a public
joint stock company by thecompany by the Registrar, giving a
Registrar of companiessignal to commence the business.
signifying the birth of the
 company
2. Documents
Required: To obtain this certificate the
To obtain the certificatefollowing documents are required:
following documents are 1. Declaration of filing
required: prospectus.
1. MOA & AOA 2. Declaration of receiving
2. List of directors. minimum subscription.
3. Declaration of directors 3. Declaration of payment
4. Written consent of towards qualification shares.
directors 4. Statutory declaration
5. Statutory declaration regarding commencement.
regarding incorporation.
3. Stage in Company
Formation: It represents the last stage in the
It represents the first stage incompany formation
the company formation
4. Effect:
A private limited company canA public limited company can start
start its business while a publicits business after obtaining this
company can raise capital forcertificate.
the business.
5. Need:
Both public and privateOnly public companies need such a
companies need suchcertificate.
certificate for formation
6. Other:
This must be obtained beforeThis is obtained after incorporation
trading certificate certificate
7. Implications of not
obtaining: The company cannot commence its
Not obtaining of this documentbusiness without procurement of
is illegal and the company canthis certificate.
be wound up under the
Companies Act.

5. Prospectus and Lieu of Prospectus:

Prospectus Lieu Prospectus
1. Meaning:
Prospectus is a documentStatement in Lieu of
inviting the public toProspectus is a document
subscribe to the shareprepared for filing with the
capital of a company. Registrar. It is an alternative
to the prospectus.
2. Purpose:
It gives wide publicity toIt is prepared only for
the company and alsocompleting the legal formality
provides share capital toand not for capital collection.
the company
3. Filing:
It is meant not only forIt is meant only for filing with
filing with the Registrar butthe Registrar.
also for capital raising.
4. Who Prepares?:
It is normally prepared byIt is normally prepared by
big companies for fulfillingsmall companies just for
legal obligations. fulfilling legal obligation.
5. Contents:
The prospectus givesThe contents are similar to
detailed information aboutthat of prospectus but form in
the company, as per thedetailed.
provisions of Companies
Act.
6. For whom?:
It is meant for public atIt is meant for friends and
large relatives of directors.
6. Private Limited Company and Public Limited Company.
(Oct. 98 2000, 2001)
Private Limited Company Public Limited Company
1. Membership:
Minimum membership 2,Minimum membership 7,
Maximum membership 50 Maximum membership
unlimited
2. Formation
Comparatively simple,Comparatively difficult as the
certificate of incorporationprocedure is lengthy.
is adequate
3. Number of
Directors: It must have at least three
It must have at least twodirectors
directors
4. Transfer of
Shares: Shares are freely transferable.
The shares are not freely
transferable
5. Issue of
Prospectus: It can issue prospectus
It is allowed to issue
prospectus
6. Commencement
of Business:
It can start the businessIt requires trading certificate
after the receipt offor starting business
certificate of incorporation.
7. Suitability:
Suitable for business on aSuitable for large – scale
small scale business.
8. Invitation:
It cannot invite public toIt invites public to purchase
subscribe for securities ofsecurities of the company.
the company
9. Allotment:
It can allot sharesShares cannot be allotted
immediately afterunless minimum subscription
incorporation is collected.
10. Qualification
shares: The directors have to
The directors need not holdpurchase some qualification
qualification shares shares to become the
director.
11. Directorship:
There is no restriction onA director cannot be a
the number of directorship director of more than 20
companies
12. Quorum:
Two members present inFive members present in the
the meeting is a quorum atmeetings is a quorum at
general meeting general meeting.
13. Share Warrant:
It cannot issue bearer shareIt can issue bearer share
warrant warrant

14. Articles of
Association: It need not prepare separate
It must prepare separatearticles of association as it
articles of association ascan adopt Table A
Table A cannot be adopted
15. Statutory
Meeting: It must be held
Not necessary
16. Retirement of
Directors: 1/3 of the directors retire by
rd

Directors need not retire byrotation every year

rotation every year
17. End – words of
the name: The word ‘Limited’ is
The words ‘Private Limited’necessary in the name
are necessary

7. Memorandum of Association and Articles of Association.

(Mar. 99, 02; Oct. 02)
Memorandum of Articles of Association
Association
1. Meaning:
It is a fundamentalIt is a subordinate document
document which lays downwhich provides rules to
company’s objectives achieve the objectives.
2. Regarded as:
It is regarded as theIt is regarded as the rules and
constitution or charter ofregulations for internal
the company working of the company.
3. Purpose:
Purpose is to define thePurpose is to provide direction
scope of companiesfor the internal management
activities of the company
4. Alteration:
It is not so easy to alter –It is easy to alter the articles.
memorandum
5. Ultra Virus Act:
Acts done by the companyAct done by directors against
against the provision ofthe provision of the articles
memorandum cannot bemaybe ratified by the
ratified by shareholders shareholders in general
meetings.
6. Contents:
It contents six clauses andIt contents rules regarding
governs external relationsinternal management of the
of the company company
7. Obligation:
All companies are obligedCompanies limited by shares
to prepare and register itsneed not prepare and register
memorandum withits articles as it can adopt
Registrar of Companies Table A
9. Status:
It is primary, fundamentalIt is secondary, subsidiary,
and supreme document sub – ordinate document to
MOA

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

Director Managing Director
1. Meaning:
Director is an electedManaging Director is the
representative of shareholdersrepresentative of Board of Director.
of the company. He looks afterHe is full time director looking after
company management andplanning and execution of activities
performs “thinking” function of the company.
2. Authority:
He is authorized by theHe is authorized by the directors to
shareholders to frame policieslook after the day to day
of the company and conductadministration of the company as
the business in the bestper the policies decided by the
possible manner. Board of Directors.
3. Period of
Appointment: He is appointed for the period of
He is elected for the period offive years and is not subject to
three years and he retires byretirement by rotation.
rotation
4. Capacity:
A director has to act inA Managing Director has to act in
threefold capacity. He acts astwo – fold capacity. Firstly, as a
the agent, trustee anddirector he has to participate in
managing partner of theframing policies of the company.
company Secondly, as the chief executive he
has to carry out the policies
decided by Board.
5. Remuneration:
A director gets fees forA Managing Director acts as full
attending board meeting andtime director of the company. He
also honorarium. The total feesgets salary for his services as per
paid to the directors should notthe service agreement and also a
exceed 11% of the net profit ofshare in the net profit not
the company. exceeding 5% of the net profit.
6. Sanction:
Central Government’sCentral Government’s permission is
permission is not required forrequired for appoint of Managing
election of a Director. Director.
7. Appointment:
He is elected by theHe is selected by the Directors.
shareholders
8. No. of Directorship:
No person shall hold position ofNo person can be appointed as a
a director in more than 20managing director if he is either a
public limited companies managing director or manager or
CEO of any other company without
the permission of Central
Government.
9. Annual General Meeting and Extra Ordinary General
Meeting. ( Mar. 98)
 Annual General Meeting Extra Ordinary General Meeting
1. Meaning:
It is a meeting held at the endExtra ordinary general meeting is a
of the accounting year tomeeting held between the two
discuss progress and prospectsannual general meeting to discuss
of the company and approveurgent matters of a company
the final accounts
2. Frequency:
It is held once in a calendarIt can be held at any time when
year circumstances so demand
3. Who Calls?:
It is called by the Board ofThis meeting may be called by
Directors of the company Board of Directors or it may be
requisitioned by shareholders
4. Period:
It must be held every year. TheThere is no fixed period as it is held
gap between 2 AGM should notonly under special conditions.
exceed 15 months
5. Documents with
notice: No documents are enclosed with
Along with the notice Annualthe notice.
report, Annual accounts and
Auditors report are sent.
6. Filing:
Copies of annual report,Special resolution passed at the
accounts and resolution are tomeeting are to be filed with the
be filed within 30 days with theRegistrar within 30 days of
Registrar meeting.
7. Penalty:
Every concerned officer may beThere is no such provision for
fined up to Rs.5,000 for notpenalty in the Companies Act
holding meeting on time
8. Business transacted:
Ordinary and special business isOnly special business is transacted
transacted
9. Purpose:
The main purpose is to approveThe main purpose is to transact
annual accounts, approvevery special business.
Annual Report, approve
Auditors Report & declare
dividend and election of
directors and appointment of
auditors.

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

Statutory General Meeting Annual General Meeting
1. Meaning:
It is the first generalIt is a general meeting of a
meeting of the companycompany held at the end of
held in order to inform thethe financial year for
members regardingdiscussing progress and
formation of the companyprospects of the company and
and fulfill legal obligation approve final accounts of the
company
2. When Called:
It is held not earlier than 1The first annual general
month and not later than 6meeting is held within 18
months of obtainingmonths from the date of
trading certificate obtaining certificate of
incorporation. Subsequent
AGMs should be held within
gap of 15 months.
3. Documents with
notice: Along with the notice annual
Statutory Report is sentreport, annual accounts, and
with the notice auditors report is sent.
4. Filing:
Statutory reports is to beAnnual Returns are to be filed
filed to the Registrar beforewithin 30 days of the meeting.
the meeting
5. Business
Transacted: Ordinary and special business
Approval of Statutoryis transacted at this meeting
report, allotment of shares
and modification in
contracts is the nature of
business transacted
6. Frequency:
It is held only once in theIt is held once in a calendar
life time of the company year
7. Statutory
Provision: It is compulsory for both
This meeting must be heldprivate and public companies
by public companies. But it
is not necessary for private
company
8. Penalty:
Every concern officer andEvery concerned officer is
director is liable to fine upliable fine up to Rs.5,000
to Rs.500
9. Purpose:
The main purpose is toMain purpose is approval of
 approve the Statutoryannual accounts, declare
report dividend, appoint, directors,
auditors and review progress.

10. Period:
It must be held not lessIt must be held every year and
than one month and moregap between two Annual
than 6 months from theGeneral Meetings should not
date of receivingbe more than 15 months
commencement certificate
11. Caller:
It is called by promoters It is called by Board of
Directors.

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

Board Meeting Shareholders Meeting
1. Meaning:
It is the meeting of the Board ofIt is a meeting of the members of
Directors the company
2. Purpose:
It is called to discuss companyIt is called to get the approval of
policy matters shareholders on certain matters
3. Quorum:
Minimum 2 directors or 1/3 ofMinimum 5 members in case of
rd

the total strength of directorsPublic Company and minimum 2

whichever is more members in case of Private
Company.
4. Agenda:
Need not be sent to theMust be sent to the members along
directors with notice.
5. Kinds:
There are two types: BoardThere are four types: Statutory
meetings and meetings ofMeeting, Annual General Meeting,
Committees of Directors Extra Ordinary General Meeting
and Class Meeting.
6. Notice:
Reasonable notice must be21 days notice must be given
given
7. Voting:
By show of hands, Yes / No By show of hands or by Poll
8. Proxy:
Directors cannot depute proxies Members can depute proxies
9. Filing:
Filing of reports is notFiling of reports and resolutions is
necessary required
10. Frequency:
At least once in 3 months andDepends upon the type of the
at least 4 meetings in a year meeting.

12. Statutory Meeting and Extraordinary General Meeting.

Statutory Meeting Extraordinary General Meeting
1. Meaning:
Statutory meeting is the firstExtraordinary General Meeting is
General meeting of the publicthe meeting of members which is
company. held under special circumstances
2. Purpose:
The main purpose is to approveThe main purpose is to transact
statutory report special business
3. Frequency:
It is held once in the life time of It can be held any number of times
the company depending on urgency
4. Penalty:
If his meeting is not held withinThere is no such penalty as EGM is
prescribed time limit, everynot to be compulsorily held.
concerned officer of the
company is punishable fine up
to Rs.500
5. Caller:
It is called by promoters This meeting may be called by
Directors or it may be requisitioned
by shareholders
6. Documents with the
Notice: No documents are attached with
Statutory Report is sent withthe Notice
the Notice
7. Statutory Provision:
This meeting must be held byIt is not compulsory for public as
public companies but it is notwell as private company to hold a
necessary for the privatemeeting. It can be held when
company circumstances so demand.