Formation of a Company Short Answer Type Questions

Question 1.
Explain briefly different types of debentures?
Following are the types of debentures –

  • Registered debentures
  • Unregistered or bearer debentures
  • Unsecured debentures
  • Secured debentures
  • Redeemable debentures
  • Irredeemable debentures
  • Convertible debentures
  • Non convertible debentures

(a) Registered debentures:
In means debenture holders name are entered in the register of debenture holders kept by the company. These registered debenture holders are entitled to receive payment of interest and repayment of debenture amount. These debentures are not. possible to transfer like a negotiable instrument. It can be transferred only in the manner specified in the condition endorsed on them.

(b) Unregistered or bearer debentures:
It is a bearer debentures. These debenture holder name is not recorded in the register of v debenture holders maintained by the company. These debentures are considered as negotiable instrument and it can be transferred by mere deliver.

(c) Unsecured debentures:
It is a simple debenture. These debenture holders do not have any charge on the assets of the company. These debenture holders are like unsecured creditors of the company.

(d) Secured debentures or Mortgage debentures:
These debenture holders are secured by a charge on the assets of the company. These debenture holders amount is used by the company for purchase of some specific immovable property.

(e) Redeemable debentures:
These debenture amount is refunded by the company as per terms and conditions after a specified period of time.

(f) Irredeemable debentures:
These debenture holders amount is not repaid by the company according to the demand of debenture holders. It is repaid by the company whenever it is convenient for repayment and it is repaid during the existence of the company.

(g) Convertible debentures:
These debentures have an option to convert their debt document into equity or preference shares after expiry of certain period. But this option must be exercised with in given period of time only.

(h) Non convertible debentures:
These debentures have no option to convert into equity as preference shares. Therefore they are continued as a debenture holders during the existence of the company.

Question 2.
State the difference between share and debenture?
Difference between shares and debentures Shares:

Shares Debentures
(a) It is issued by the company to start the business. (a) It is issued by the company to expand the business.
(b) It is owner ship capital. (b) It is loan capital.
(c) Share holders have voting rights. (c) Debentures holders donot have voting rights.
(d) Payment of dividend is not fixed and regular. (d) Payment of interest is regular and fixed.
(e) Share holders are not secured by a charge on the assets of the company. (e) Debentures holders are secured by charge on the assets of the company.
(f) Shares can be forfeited. (f) Debentures are not forfeited.
(g) Shares may be fully or partly paid. (g) Debentures are fully paid.
(h) Share amount is not returned by the company during its existence. (h) Debentures amount is returned during the existence of the company.

Question 3.
Explain different types of preference shares.
Types of preference shares:

  • Cumulative preference shares
  • Non-cumulative preference shares
  • Participating preference shares
  • Non-participating preference shares
  • Convertible preference shares
  • Non convertible preference shares
  • Redeemable preference shares
  • Irredeemable preference shares

(a) Cumulative preference shares: These share holders are entitled to receive – i) fixed parentage of dividend before anything is given to other kinds of share holders and ii) arrears of dividend out of future profits.

b) Non-cumulative preference shares: These share holders are entitled to receive only fixed percentage of dividend and they have no right over arrears of dividend.

c) Participating preference shares: These share holders are entitled to receive i) fixed percentage of dividend on their shares and ii) percentage of dividend recommended to the equity share holders.

d) Non-participating preference shares: These share holders are having right to get fixed percentage of dividend declared on their share and are not eligible for participate in the surplus profit of the company:

e) Convertible preference shares: These are all eligible for converting into equity shares after certain period of time.

f) Non convertible preference shares: These shares are not given right to convert into equity shares.

g) Redeemable preference shares: These shares are redeemed and amount is paid back to share holders as per the terms of issue after a stipulated period of time.

h) Irredeemable preference shares: These share holders are continued as preference share holder-until the company is wound up.

Question 4.
State difference between equity shares and preference shares.
Following are the difference between equity shares and preference shares.

Equity shares Preference shares
(a) These share holders do not have priority in payment of dividend and repayment of Capital. (a) These shareholders have priority over the payment of dividend and repayment of capital
(b) Rate of dividend is fixed. (b) Rate of dividend is not fixed.
(c) These shares have full voting rights. (c) These share have restricted voting rights.
(d) It is ownership shares of the company. (d) It is not enjoying such ownership.
(e) It cannot be redeemed during the existence of the company. (e) It can be redeemed during the existence of the company according term and conditions.
(f) It is not possible to convert into other form. (f) It can be convert into ordinary shares.

Question 5.
What are the guidelines issued by SEBI on Book Building?
SEBI guidelines came into operational with effect from sept. 1997. Following are the guidelines issued by SEBI:

  • The option of 100% book building shall be receivable to issuer company which propose to make an issue of capital of more than 100 crores.
  • SEBI registers the name of merchant beakers to carry on activity as the under writer.
  • Issuing company must take permission from SEBI to give advertisement in news paper about the date of opening and closing of the bidding.
  • Issuing company shall appoint category one merchant bankers as book runner. And this name must be mentioned to SEBI.
  • The book runner shall determine the issue price based on the bids received through syndicate members
  • SEBI shall have the right to carryout an inspection of the records books documents relating to book building process.

Question 6.
Discuss briefly the steps in capital Subscription stage of the company.
Capital subscription is the third stage in the formation of a public limited company. Promoters of a company fulfills following steps in this stage:

  • Director are conducting meeting to appoint a secretary of the company.
  • Bankers auditors solicitor, brokers are appointed to mention their name in the prospectus of the company.
  • Pre-incorporation contracts are rectified by the promotrs to give legal touch to all contracts.
  • Resolution is passed by the directors of the company to list their share in recognized stock exchange market.
  • Promoters enters into agreement with underwrites to issue shares to public easily
  • If company’s offer to the public for subscription of shares for more than one crore had to obtain the permission of the controller of capital issues before offering the shares to the public.

Question 7.
Explain the relationship between memorandum and articles of association.
(1) Articles of Association are subsidiary to the Memorandum of: Association. Articles of Association can be made only within the limits as decided by the Memorandum of Association. Articles cannot go beyond the Memorandum of Association.

(2) Supplementary to Each Other : These two documents are not competitors to each other but they are supplementary to each other. Memorandum directs for the limit and power of the company whereas Articles of Association guides for the internal Management of the company.

(3) Articles of Association cannot amend a memorandum of Association, because articles of Association are subsidiary of the Memorandum. They cannot control/amend the memorandum.

(4) Memorandum states objects while articles provide the manner in which objects may be attained.

(5) Memorandum can be explained as constitution or foundation stone where as articles are relating to internal regulations.

Question 8.
Who is a promoter? Explain the various types of promoter.
As per Section 2(69) of Companies Act, 2013 the term Promoters is defined as:
“Promoter” means a person:

  • who has been named as such in a prospectus or is identified by the Company in the annual return referred to in section 92; or
  • who has control over the affairs of the Company, directly or indirectly whether as a shareholder, director or otherwise; or
  • in accordance with whose advice, directions or instructions the Board of Directors of the Company is accustomed to act:

(1) Professional Promoters:
These are the persons who specialise in promotion of companies. They hand over the companies to shareholders when the business starts. In India, there is lack of professional promoters. In many other countries, professional promoters have played an important role and helped the business community to a great extent. In England, Issue Houses; In U.S. A., Investment Banks and in Germany, Joint Stock Banks have played the role of promoters very appreciably.

(2) Occasional Promoters:
These promoters take interest in floating some companies. They are not in promotion work on a regular basis but take up the promotion of some company and then go to their earlier profession. For instance, engineers, lawyers, etc. may float some companies.

(3) Financial Promoters:
Some financial institutions of financiers may take up the promotion of a company. They generally take up this work when financial environment is favourable at the time.

(4) Managing Agents as Promoters:
In India, Managing Agents played ah important role in promoting new companies. These persons used to float new companies and then got their Managing Agency rights.
Managing Agency system has since long been abolished in India.

Question 9.
State the functions of promoter.
Functions of a Promoter:
The Promoter Performs the following main functions:
(1) To conceive an idea of forming a company and explore its possibilities.

(2) To conduct the necessary negotiation for the purchase of business in case it is intended s to purchase as existing business. In this context, the help of experts may be taken, if considered necessary.

(3) To collect the requisite number of persons (i.e. seven in case of a public company and two in case of a private company) who can sign the ‘Memorandum of Association’ and ‘Articles of Association’ of the company and also agree to act as the first directors of the company.

(4) To decide about the following:

  • The name of the Company.
  • The location of its registered office.
  • The amount and form of its share capital.
  • The brokers or underwriters for capital issue, if necessary.
  • The bankers.
  • The auditors.
  • The legal advisers.

(5) To get the Memorandum of Association (M/A) and Articles of Association (A/A) drafted and printed.

(6) To make preliminary contracts with vendors, underwriters, etc.

(7) To make arrangement for the preparation of prospectus, its filing, advertisement and issue of capital.

(8) To arrange for the registration of company and obtain the certificate of incorporation.

(9) To defray preliminary expenses.

(10) To arrange the minimum subscription

Question 10.
State the steps involved in efiling under the companies act 2013.
A) Register Your Self ( Step – I):
Only registered users are allowed to do E-Fling. Registration is a Simple, One time process.

B) Download E-Form ( Step – II):
Go to the Annual filling corner following the link provided at the home page of the MCA portal & download the applicable E-forms following the Link “Downloads E-form”

C) Complete E-Form ( Step – III):
Download e-form MGT-7 & AOC- 4 and fill the complete e-forms and attach respective attachments. Affix DSC of Director and Professional and complete the e-form.

D) Submit E-Form ( STEP – IV ) :
A connection to the internet will be required to carry out- e-filling submission will need to be made at the MCA21 Portal using Specialized Functionality that is provided.

E) Make Payment (Step – V ):
Fees calculation will be done automatically by the system as applicable under the law & the Fee for the services will be displayed to the user. The filling fees will be paid through credit card & internet Banking. The system will generate a receipt that one can retain as a part of your records.

Question 11.
State the documents to be filed at the time of incorporation under the companies act 2013.
Following documents have to be filled at the time of incorporation:

  • Self attested PAN Card (2 Copies) ( attested by gazetted officer or bank manager)
  • Self attested Address Proof – Voter ID/Adhaar Card/ Driving License/Passport (2 Copies) (attested by gazetted officer or bank manager)
  • 5 passport size photographs
  • Self attested Bank Statement/ Electricity Bill/ Mobile Bill/ telephone Bill not older than one month (passbook copy is not accepted)
  • Rental agreement and electricity bill of office address(Electricity bill not older than 1 month) if rented premises
  • NOC (No Objection Certificate)
  • BBMP tax paid receipt and electricity bill of office address (Electricity bill not older than 1 month) if own premises.
  • Nature of Business
  • 6 unique names of company
  • Mail Id and Mobile Number of the Directors/Designated Partners

Question 12.
Give a brief note-on commencement of business under the companies act 2013.
The provisions with regard to Certificate of Commencement of business have been dispensed with under the Companies Bill, 2013. Only declaration and verification is required by the Public Company under the Companies Bill, 2013.

These provisions were as follows:
A company having a share capital shall not commence any business or exercise any borrowing powers unless:
(a) a declaration is filed by a director in such form and verified in such manner as may be prescribed, with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him and the paid-up share capital of the company is not less than five lakh rupees in case of a public company and not less than one lakh rupees in case of a private company on the date of making of this declaration.

(b) the company has filed with the Registrar a verification of its registered office as provided in sub-section (2) of section 12. If any default is made in complying with the requirements of this section, the company shall be liable to a penalty which may extend to five thousand rupees and every officer who is in default shall be punishable with fine which may extend to one thousand rupees for every day during which the default continues.

Where no declaration has been filed with the Registrar under clause (a) of subsection: (1) within a period of one hundred and eighty days of the date of incorporation of the company and the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may, without prejudice to the provisions of sub-section (2), initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.

Question 13.
Explain in detail doctrine of ‘ultra vires’.
‘Ultra’ means beyond and ‘vires’ means powers. The term ultra vires a company means that the doing of the act is beyond the legal power and authority of the company. The doctrine of ultra vires is important in defining the limits of the powers conferred on the company by its Memorandum of Association. According to this doctrine, the vires (power) of a company to enter into a contract or transaction is limited by the ambit of the Objects Clause of the Memorandum and the provisions of the Companies Act.

Whatever is not permitted by the Objects Clause and the Act, is prohibited by the doctrine of ultra vires. If a company engages in any activity or enters into any contract which is ultra vires (outside the power conferred by) the Memorandum or Act, it will be null and void so far as the company is concerned and it cannot be subsequently ratified or validated even if all the shareholders give their consent. Thus under this doctrine, a company has powers to engage in only such activities or enter into such transactions:

  • Which are essential to the attainment of the objects specified in the Memorandum.
  • Which are reasonably and fairly incidental to the main objects.
  • Which are permitted by the provisions of the Companies Act.

Effects of Ultra Vires Transactions:
If a company enters into transactions, which are ultra vires, it will have the following effects:
(1) Injunction: Whenever a company goes beyond the scope of the object clause, any of its members can get an injunction from the court to restrain the company from undertaking the ultra vires act.

(2) Personal Liability of Directors: If the transaction is ultra vires, for instance, if the fundsofthecompany are misapplied, the directors will be held personally liable. ‘

(3) Ultra Vires Contracts: Contracts entered into by a company, which are ultra vires, are void ab initio and unenforceable.

(4) Property Acquired Ultra Vires: If a company acquires any property under an ultra vires transaction, it has the right to hold the property and protect it against damage by other persons.

(5) Ultra Vires Torts: A company is not liable for torts committed by its agents or employees in the course of ultra vires transactions.

Question 14.
Give a brief note on book building.
Book building is a systematic process of generating, capturing, and recording investor demand for shares during an initial public offering (IPO), or other securities during their issuance process, in order to support efficient price discovery. Usually, the issuer appoints a major investment bank to act as a major securities underwriter or book runner. Book Building is an alternative method of making a public issue in which applications are accepted from large buyers such as financial institutions, corporations or high net-worth individual, almost on firm allotment basis, instead of asking them to apply in public offer.

Book building is essentially a process used by companies raising capital through public offerings – both initial public offers (IPOs) and follow-on public offers (FPOs) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process.

Question 15.
State the role of promoters in formation of company.
The role of a promoter is as follows :

  • Discovery a business idea: The promoter identifies the areas of profitable avenues of investment after making preliminary analysis of risk involved, capital required, etc.
  • Detailed investigation: The promoter undertakes detailed investigation of all aspects of the business with the help of experts/specialists, etc. He prepares a project report on its technical, economical and financial feasibility.
  • Assembling of resources: After being satisfied about the project, the promoters make . contacts for the purchase of land,’plant, machines, etc.
  • Preparing preliminary documents: The promoter prepares the essential documents required for the registration of the company.

Question 16.
Discuss the objects of prospectus.
Prospectus refers to any document inviting deposits from the public for the subscription of shares or debentures of a company.
It is the statement which gives all material and essential information about the affairs of the company, indicates the future prospects of the company arouses the interests of the investor in the proposed company and induces them to subscribe to the shares of debentures of the company.

The main objects of issuing a prospectus are:

  • To inform the public about the formation of a new company.
  • To state the prospectus of the company and to induce the public to subscribe to the shares or debentures of the company.
  • To invite offers from the public for the subscription of shares or debentures of the company.
  • To create confidence in the public about the company by providing complete accurate and reliable information and by making the directors responsible for the information given in the prospects.
  • To have an authenticated record of the terms and conditions on which the shares and debentures are issued by the company.