CH1 BS,TRADE AND COMMERCE

What is Business – The Concept

Business is an economic activity, which is related with continuous and regular production and distribution of goods and
services for satisfying human wants. It is aimed at earning profits through the satisfaction of human needs.
Characteristics of Business Activities
1. An economic activity: Business is considered as an economic activity as it is undertaken with the objective of
earning money.
2. Production or procurement of goods and services: Every business enterprise must either manufacture the goods
or procure them from producers.
3. Sale or exchange of goods and services: Directly or indirectly, all business activities involve transfer or exchange
of goods and services for value.
4. Dealing in goods and services on a regular basis: One-time sale or purchase does not constitute business.
5. Profit earning: One of the main objectives of business is to earn income by way of profit.
6. Uncertainty of return: There is always a possibility of less or no profit or even loss in business.
7. Element of risk: Risk is the uncertainty associated with an exposure to loss.
Classification of Business Activities
1. Industry
Industry refers to economic activities, which are connected with conversion of resources into useful goods.
Primary Industry
Primary industries include all those activities, which are connected with the extraction and production of natural resources.
Extractive Industries
These industries extract or draw out products from natural sources such as soil, water, air, etc. Examples: mining, fishing,
forestry.
Genetic Industries
These industries remain engaged in breeding plants and animals for their use in further reproduction. Examples: plant
nurseries, poultry farms.
Secondary Industry
These are concerned with using the materials which have already been extracted by the primary sector to produce goods for
final consumption or for further processing.
Manufacturing Industries
These industries are engaged in producing goods through processing of raw materials and thus creating form utilities.
Construction Industries
These industries are involved in the construction of buildings, dams, bridges, roads as well as tunnels and canals.
Tertiary Industry
These are concerned with providing support services to primary and secondary industries as well as activities relating to
trade.
Commerce
Commerce includes all those activities which are necessary for facilitating the exchange of goods and services. It includes
trade and auxiliaries to trade.
Trade and Auxiliaries to Trade
Trade
Trade is an essential part of commerce. It refers to sale, transfer or exchange of goods.
Auxiliaries to Trade
These include all those services which help in removing various hindrances in the process of exchange.
 Transport and Communication: Removes the hindrance of place.
 Banking and Finance: Removes the hindrance of finance.
 Insurance: Removes the hindrance of risk.
 Warehousing: Removes the hindrance of time.
 Advertising: Removes the hindrance of information.
Objectives of Business
Business is essentially an economic activity. It is aimed at earning profits. However, earning profit cannot be the sole
objective of business. The following are the objectives:
 Market Standing: It refers to the position of an enterprise in relation to its competitors.
 Innovation: It includes introduction of new products, new techniques of production, etc.
 Productivity: As a business enterprise has to make the best possible use of available resources.
 Physical and Financial Resources: The success of a business lies in the proper utilization of physical and
financial resources.
 Earning Profits: One of the most important objectives of business is to earn profits.
 Manager Performance and Development: Business needs managers to conduct and coordinate business activity.
 Worker Performance and Attitude: The success of a business depends to a great extent on the employees.
 Social Responsibility: It is the obligation of business enterprises to contribute to the welfare of society.
Business Risk – Definition
Business risk refers to the possibility of inadequate profits or even losses due to uncertainties or unexpected events.
Nature of Business Risks
Nature of business risks can be understood in terms of their peculiar characteristics:
 (i) Risk is an essential part of every business:
Every business has some risk. No business can avoid risk, although the amount of risk may vary from
business to business. Risk can be minimised, but cannot be eliminated.
(ii) Business risks arise due to uncertainties:
Uncertainty refers to the lack of knowledge about what is going to happen in future. Natural calamities,
change in demand and prices, changes in government policies and prices, improvement in technology, etc.,
are some of the examples of uncertainty which create risks for business because the outcomes of these future
events are not known.
(iii) Degree of risk depends mainly upon the nature and size of business:
Nature of business (i.e., type of goods and services produced and sold) and size of business (i.e., volume of production
and sale) are the main factors which determine the amount of risk in a business. For example, a business dealing in
fashionable items has a high degree of risk. Similarly, a large-scale business generally has a higher risk than what a
small scale has.
(iii) Profit is the reward for risk taking:
‘No risk, no gain’ is an age-old principle which applies to all types of business. Greater the risk involved in a
business, higher is the chance of profit. An entrepreneur undertakes risks under the expectation of higher
profit. Profit is thus the reward for risk taking.
Causes of Business Risks
Business risks arise due to a variety of causes, which are classified as follows:
(i) Natural causes:
Human beings have little control over natural calamities, like flood, earthquake, lightning, heavy rains, famine, etc., property
and income in business.
(ii) Human causes:
Human causes include such unexpected events, like dishonesty, carelessness or negligence of employees, stoppage of work
due to power failure, strikes, riots, management inefficiency, etc.
(iii) Economic causes:
These include uncertainties relating to demand for goods, competition, price, collection of dues from customers, change of
technology or method of production, etc. Financial problems, like rise in interest rate for borrowing, levy of higher taxes,
etc., also come under these type of causes as they result in higher unexpected cost of operation or business.
(iv) Other causes:
These are unforeseen events, like political disturbances, mechanical failures, such as the bursting of boiler, fluctuations in
exchange rates, etc., which lead to the possibility of business risks.
CH2-FORMS OF BUSINESS
Sole Proprietorship
Meaning:
A sole proprietorship is a business owned, managed, and controlled by a single individual who receives all profits and bears
all risks.
Features:
1. Easy to form and close: Minimal legal formalities are required, making it simple to start or close quickly.
2. Liability: The owner has unlimited personal liability for all business debts and obligations.
3. Only bearer of profit and loss: The sole proprietor keeps all profits but also bears any losses.
4. Control: Complete control is exercised by the sole owner without external interference.
5. No separate entity: Legally, the owner and the business are considered the same.
6. Lack of business continuity: The business depends on the proprietor’s existence; events like death or insanity can
end the business.
Merits:
 Quick decisions due to single ownership.
 Personal satisfaction from owning the entire business.
 Confidentiality of business information.
 Direct incentive as the owner keeps all profits.
 Easy and low-cost to start and close.
Limitations:
 Limited capital and resources.
 Business ends on owner’s death or incapacity.
 Unlimited personal liability risks personal assets.
 Owner may lack managerial skills for all business functions.
Joint Hindu Family Business
Meaning:
This business form is governed by Hindu Law and involves family members managing ancestral property business. The
eldest male member, the Karta, controls the business, and other members are coparceners with shared ownership rights.
Features:
1. Formation: Automatically formed by birth in a Hindu family with ancestral property, no formal agreement
needed.
2. Liability: Karta has unlimited liability; others are liable only to their share.
3. Control: Absolute control lies with the Karta.
4. Continuity: Continues across generations with the next eldest male as Karta if the current one cannot continue.
5. Minor members: Minors are automatic members by birth.
Merits:
 Effective and centralized control prevents conflicts.
 Business continues despite Karta’s death.
 Limited liability for coparceners.
 Strong loyalty and cooperation due to family ties.
Limitations:
 Limited capital resources.
 Karta’s unlimited liability is risky.
 Karta’s dominance can cause disputes.
 Managerial skills may be limited.
Partnership
Partnership is a relationship where two or more persons agree to share profits of a business carried on by all or any
of them on behalf of all, governed by the Indian Partnership Act, 1932.
Features:
1. Formation: Formed by agreement for lawful profit-making business.
2. Liability: Partners have unlimited joint and several liability.
3. Risk bearing: Sharing profits and losses in agreed ratio.
4. Decision making: Partners manage and make decisions jointly.
5. Continuity: Partnership dissolves on partner’s death or retirement but can continue by new agreement.
6. Number of partners: Minimum 2, maximum 100 under Companies Act 2013.
Merits:
 Easy to form and dissolve.
 Greater capital availability than sole proprietorship.
 Partners bring varied skills improving decisions.
 Risks and losses shared among partners.
 Confidential business operations.
Limitations:
 Unlimited personal liability.
 Conflicts can arise due to shared control.
 Partnership ends on partner changes.
 Limited capital raising ability.
 Lack of public confidence due to no mandatory financial disclosure.
Types of Partners
1. Active Partner: Participates in management, contributes capital, shares profits and losses, unlimited liability.
2. Sleeping Partner: Contributes capital but does not participate in management, shares profits and losses, unlimited
liability.
3. Secret Partner: Actively participates but keeps association secret, shares profits and losses, unlimited liability.
4. Nominal Partner: Lends name to firm without capital or management role, unlimited liability but no share in
profits.
5. Partner by Estoppel: Person who behaves as partner, causing others to believe so, no capital or management role,
unlimited liability.
6. Partner by Holding Out: Allows being represented as partner knowingly, no capital or management role,
unlimited liability.
Partnership Deed
A written or oral agreement that outlines terms such as the firm’s name, nature and location of business, capital contribution,
profit sharing, duties, salaries, retirement, and dispute resolution.
Registration of Partnership
Registration is optional but beneficial. An unregistered firm cannot sue third parties or partners, reducing legal protection.
Cooperative Society
A voluntary association of individuals to protect common economic interests and provide mutual help, registered
under the Cooperative Societies Act, 1912.
Features:
 Voluntary membership open to all.
 Separate legal identity after registration.
 Democratic control (one member, one vote).
 Limited liability for members.
 Continuous existence.
 Service motive over profit.
Merits:
 Equal voting rights and democratic management.
 Financial help and government support.
 Low cost operations.
 Easy to start.
 Limited liability.
Limitations:
 Limited capital resources.
  Inefficient management due to lack of professionals.
 No secrecy in operations.
 Subject to government control.
 Potential internal conflicts.
Types of Cooperative Societies
 Consumer Cooperatives: Buy goods in bulk for members.
 Producers’ Cooperatives: Supply raw materials to small producers.
 Marketing Cooperatives: Help small producers sell goods.
 Farmer Cooperatives: Provide inputs and modern farming aid.
 Credit Cooperatives: Offer low-interest loans.
 Housing Cooperatives: Help build affordable houses.
Joint Stock Company
A company is a legal entity separate from its owners formed under the Companies Act, 2013, with perpetual existence
and limited liability for shareholders.
Features of a Joint Stock Company:
1. Artificial Legal Person:
A company is an artificial person created by law. It can own property, enter into contracts, and sue or be sued.
However, unlike a human, it cannot eat, sleep, or feel emotions. It functions through its directors and employees.
2. Separate Legal Entity:
It is separate from its shareholders. The company can own property in its own name, and the shareholders are not
personally liable for the company’s debts.
3. Incorporation is Compulsory:
It must be registered under the Companies Act to come into existence. The formation involves several legal
formalities, documents, and approvals, making it a complex and time-consuming process.
4. Perpetual Succession:
A company continues to exist even if its members change. Its life is not affected by the death, insanity, insolvency,
or retirement of any shareholder or director.
5. Limited Liability:
Shareholders are liable only up to the amount unpaid on their shares. Personal assets of shareholders are not at risk
in case the company suffers losses.
6. Common Seal:
The company has a common seal which acts as its official signature. It must be affixed on legal documents, and
without it, those documents are not valid.
7. Management by Board of Directors:
The company is managed by a Board of Directors, elected by shareholders. They are responsible for making
policy decisions and running the business.
8. Transferability of Shares:
In a public company, shares can be freely bought and sold in the stock market. This feature ensures liquidity and
attracts investors.
Merits of a Joint Stock Company:
1. Limited Liability:
The liability of shareholders is limited, which encourages more people to invest without fear of losing personal
property.
2. Large Capital Raising Capacity:
Since a company can invite the public to buy shares and debentures, it can raise large amounts of capital, which
helps in expansion and growth.
3. Perpetual Existence:
The company continues to exist regardless of any changes in membership, ensuring stability and long-term
business planning.
4. Professional Management:
Companies hire qualified professionals and experts to manage operations, leading to better decisions and higher
efficiency.
5. Free Transfer of Shares (in Public Companies):
Shareholders can easily transfer their ownership by selling shares, which provides liquidity and flexibility to
investors.
6. Public Confidence:
Due to strict regulations and disclosure norms, companies enjoy greater credibility and trust among the public and
financial institutions.
Limitations of a Joint Stock Company:
1. Complex and Expensive Formation:
Starting a company involves many legal procedures such as registration, documentation, and regulatory approvals.
This makes formation slow, difficult, and costly.
2. Lack of Secrecy:
Public companies have to publish their financial statements and reports. This makes it hard to keep business
strategies and operations confidential.
 3. Impersonal Management:
Due to separation of ownership and control, shareholders have little say in day-to-day decisions. The personal
touch is often missing compared to sole proprietorships.
4. Excessive Government Regulations:
Companies must follow many rules regarding audits, meetings, disclosures, and compliance, which increases
paperwork and reduces freedom in decision-making.
5. Possibility of Oligarchic Control:
Although shareholders elect the Board, real control may rest with a few directors or major shareholders. Small
investors may have no real say in how the company is run.
Types of Companies
Companies are mainly classified into two types based on their membership, share transferability, and ability to invite the
public to buy shares:
Private Company
Features:
1. Members:
A private company must have at least 2 members and can have a maximum of 50 members. This limits its size and
keeps it relatively small.
2. Number of Directors:
It requires a minimum of 2 directors to manage the company’s affairs.
3. Paid-up Capital:
The minimum paid-up capital required to start a private company is ₹1 lakh.
4. Index of Members:
Maintaining an index (a register) of members is not compulsory for a private company, offering some operational
simplicity.
5. Transfer of Shares:
Shares in a private company cannot be freely transferred to the public. The transfer is usually restricted, often
needing approval from other members.
6. Invitation to Public:
A private company is prohibited from inviting the general public to purchase its shares or debentures. This protects
it from public scrutiny and fundraising via the stock market.
Public Company
Features:
1. Members:
A public company requires a minimum of 7 members but can have an unlimited maximum number of members,
allowing large-scale ownership.
2. Number of Directors:
At least 3 directors are needed to run the company.
3. Paid-up Capital:
The minimum paid-up capital is ₹5 lakhs, a higher threshold reflecting the larger scale of operations.
4. Index of Members:
Maintaining an index of members is compulsory, ensuring transparency and record-keeping.
5. Transfer of Shares:
Shares in a public company are freely transferable, allowing easy sale and purchase of shares on the stock market.
6. Invitation to Public:
A public company can invite the public to buy its shares and debentures, enabling it to raise large amounts of
capital from the general public.
Chapter 3 – Private, Public and Global Enterprise
Private Sector
 Owned, managed, and controlled by individuals or groups.
 Aim: Profit-making and growth.
 Includes: Sole proprietorship, partnership, joint Hindu family, cooperative societies, companies (private & public).
1.Departmental Undertaking: Oldest & traditional form. Direct part of a government ministry. Not a separate
legal entity. Run by government employees like IAS officers.
Features:
1. Government Funding:
All funds come from the government’s annual budget. Any money earned by the undertaking goes straight to
the treasury.
2. Government Employees:
Workers are civil servants, just like any other government staff. Their recruitment, pay, and rules are the same
as regular government jobs.
3. No Separate Identity:
It is not a separate legal entity, so it cannot sign contracts or own property in its own name. Everything is done
in the name of the government.
4. Under Ministry Control:
It is fully controlled by a specific ministry. The minister and senior officials make all major decisions.
5. Government Accounting & Audit:
Subject to strict government financial rules, auditing, and reporting, just like other departments.
Merits (Advantages):
1. Strong Government Control:
Because it’s directly under a ministry, the Parliament can easily monitor and control what it does.
2. High Public Accountability:
These undertakings are answerable to the public through Parliament, so there’s transparency.
3. Revenue to Government:
All income earned goes into the Government Treasury, which can be used for public welfare.
4. Best for National Security:
Since these undertakings are closely monitored, they’re ideal for sectors like defense, railways, and
communications, where security and control are critical.
Limitations (Disadvantages):
1. Lack of Flexibility:
Every small decision must go through government channels. This makes operations slow and rigid.
2. Slow Decision-Making:
Managers cannot take decisions on their own; they need ministry approval. This causes delays.
3. Missed Opportunities:
Because of over-cautious bureaucracy, they often miss out on business opportunities that require quick or
risky decisions.
4. Red Tapism:
Too many formalities, paperwork, and levels of approval create inefficiency.
5. Political Interference:
Politicians sometimes interfere for personal or political gain, which harms the business.
6. Poor Customer Service:
These organizations often become careless towards customers, because they know they won’t be shut down
easily.
3.3.2 Statutory Corporations
 Public enterprise created by Special Act of Parliament.
 Has legal status, operates independently under the powers given by the Act.
📌 Features:
1. Created by law, powers defined in the Act.
2. Wholly owned by the state.
3. Has legal personality – can sue/be sued, own property.
4. Independent financing – earns through sales or borrows.
5. Not bound by central budget or audit rules.
6. Employees follow corporation-specific rules, not civil service rules.
✅ Merits:
 High operational flexibility and autonomy.
 Less government interference in day-to-day work.
 Independent financial decisions.
 Combination of government power + private initiative.
❌ Limitations:
 Still faces rules and delays despite flexibility.
 Political interference in major decisions.
 Corruption in dealing with the public.
 Government-appointed advisors often restrict decisions.
Government Companies
📌 Meaning:
 A company with at least 51% capital held by government (central/state or both).
 Formed under Companies Act, 2013.
 May function as private limited or public limited company.
📌 Features:
1. Registered under Companies Act.
2. Has separate legal entity – can sue, enter contracts.
3. Governed by its own Articles of Association.
4. Employees are not civil servants.
5. Auditor appointed by the Central Government.
6. Can raise funds from market.
✅ Merits:
 Quick formation – no special Act needed.
 Separate identity and autonomy.
 Freedom in management.
 Helps regulate market prices and services.
❌ Limitations:
 Government dominance makes Companies Act provisions less effective.
 Lack of constitutional accountability.
 Sometimes becomes a government department in disguise.
🔹 Government Policy Towards Public Sector Since 1991
(a) Reduction in Reserved Industries
 1956 Industrial Policy: 17 industries reserved for public sector.
 1991: Reduced to 8 industries (e.g. atomic energy, arms, communication, mining, railways).
 2001: Further reduced to 3 industries – atomic energy, arms, rail transport.
 Result: Private sector allowed in all other areas → competition increased.
 Public and private sectors are now seen as complementary, not competitive.
(b) Disinvestment
 Disinvestment = Selling equity shares of PSUs to private sector/public.
 Objective:
▪ Raise resources
▪ Encourage public & worker ownership
▪ Improve performance
▪ Reduce government equity in non-strategic PSUs
 Reasons for privatisation:
▪ Free resources for priority sectors (health, education)
▪ Reduce public debt
▪ Shift risk to private sector
▪ Introduce corporate governance
▪ Improve consumer choices (e.g. telecom)
(c) Policy Regarding Sick Units
 Sick PSUs referred to BIFR – to restructure or shut down.
 National Renewal Fund created for:
▪ Retraining/redeploying labour
▪ Voluntary retirement compensation
 Many sick units couldn’t be revived due to heavy losses.
 Government can't keep funding non-performing units → closure becomes necessary.
 Fund shortage for Voluntary Retirement Scheme (VRS) is a problem.
(d) Memorandum of Understanding (MoU)
 MoU = Agreement between PSU & ministry.
 PSU gets:
▪ Operational autonomy
▪ Defined targets
 Purpose: Improve PSU performance, accountability with freedom.
Global Enterprises (MNCs)
 Large industrial firms with global operations, branches in many countries.
 Also called Multinational Corporations (MNCs).
Features:
1. Huge capital resources – raise funds from public, banks, financial institutions.
2. Foreign collaboration – tie-ups with Indian companies for tech, brand, production.
3. Advanced technology – use of modern, efficient methods, boosts industrial progress.
4. Product innovation – strong R&D, develop new/improved products.
5. Effective marketing – strong branding, aggressive sales strategies.
6. Wide market reach – operate across countries, create international image.
7. Centralised control – head office in home country, broad policies set centrally.
🔹 3.6 Joint Venture:
 Two or more businesses agree to work together for common goals.
 Share resources, risks, rewards, and may be domestic or international.
 Used for expansion, new products, new markets, etc.
Types of Joint Ventures
1. Contractual Joint Venture (CJV): No new entity formed; agreement only.
 No shared ownership, but shared control and long-term cooperation.
 Example: Franchisee relationship.
 Key features:
▪ Common intent
▪ Inputs from both
▪ Shared control
▪ Ongoing relationship
2. Equity-based Joint Venture (EJV)
 New jointly owned entity formed.
 Shared:
▪ Ownership
▪ Management
▪ Capital
▪ Profits/losses
 Can take forms like: company, LLP, trust, etc.
Requirements for a Joint Venture: Based on Memorandum of Understanding (MoU).
 Should include:
▪ Clear terms
▪ Legal/cultural understanding
▪ Approvals and licenses
▪ Conflict avoidance measures
Public Private Partnership (PPP)
PPP is a collaboration between public and private sectors to develop and manage infrastructure and services by sharing tasks,
risks, and responsibilities.
Public Partners:Government ministries, departments, municipalities, state enterprises
Private Partners:Local/foreign businesses, investors, NGOs, community groups
Government’s Role:Provides capital, assets, ensures social obligations and reforms
Private Sector’s Role:Brings expertise, innovation, and efficient management
Key Features:Focus on infrastructure and essential services&Partnership aims for efficiency and public welfare
Examples: Power, water, sanitation, waste disposal, hospitals, schools, roads, IT systems
CH7 Formation ofa Company
Formation of a Company
 Formation of a company involves completing legal formalities and procedures.
 It has three main stages:1.Promotion 2Incorporation3.Subscription of Capital
 Private companies cannot raise funds from the public and don’t need to issue a prospectus or complete minimum
subscription.
7.2.1 Promotion of a Company
 Promotion is the first stage, where a business idea is conceived and action is taken to form a company.
 Promoters are individuals or groups who take initiative to form the company by analyzing prospects and
assembling resources like men, materials, machinery, finance, and management.
 According to Section 69, a promoter is someone:
o Named in prospectus or annual return, or
o Who controls company affairs directly or indirectly, or
o Whose advice the Board usually follows (except professionals).
 Promoters prepare documents, give the company a name, and perform necessary activities for registration and
commencement of business.
Documents Required for Company Registration
A. Memorandum of Association (MOA):
 Defines the company’s objectives.
 Contains important clauses:
1. Name Clause – Approved company name.
2. Registered Office Clause – State where office will be situated (exact address notified within 30 days).
3. Objects Clause – Purpose of company, limits activities to stated objects.
4. Liability Clause – Limits members’ liability to unpaid share amount.
5. Capital Clause – Specifies authorised share capital and division into shares.
 Must be signed by at least 7 persons (public company) or 2 persons (private company).
B. Articles of Association (AOA):
 Rules for internal management.
 Must not contradict MOA.
 Companies may adopt their own articles differing from standard forms.
C. Consent of Proposed Directors:
 Written consent from each director agreeing to act and buy qualification shares.
D. Agreement:
 Any contract for appointment of Managing Director, Whole-time Director or Manager.
E. Statutory Declaration:
 Declaration confirming all legal requirements have been met.
 Signed by an advocate, Chartered Accountant, Cost Accountant, Company Secretary, or a company officer.
F. Payment of Fees:
 Registration fees depend on the authorised share capital.
Qualification Shares
 Directors must buy a certain number of shares called qualification shares before the company starts business.
Common Matters Covered in Articles of Association
 Exclusion or modification of Table F (standard articles)
 Adoption of preliminary contracts
 Number, value, and allotment of shares
 Calls on shares and lien on shares
 Transfer, transmission, nomination, forfeiture of shares
 Alteration of capital and buyback of shares
 Share certificates, dematerialization, conversion into stock
 Voting rights, proxies, meetings, committees
 Appointment and powers of directors
  Nominee directors
 Issue of debentures and stocks
 Audit committee
 Managing Director, Whole-time Director, Manager, Secretary
 Additional directors and company seal
 Remuneration of directors
 Dividends and reserves
 Accounts, audits, winding up
 Indemnity and capitalization of reserves
7.2.2 Incorporation of a Company
 After completing promotion, promoters apply to the Registrar of Companies (ROC) for incorporation.
 Application is filed in the state where the registered office will be.
 Required documents include:
1. Memorandum of Association (MOA) – signed and stamped by members.
2. Articles of Association (AOA) – signed and stamped or a statement in lieu of AOA if adopting Table A.
3. Written consent of proposed directors to act and buy qualification shares.
4. Agreement with Managing Director or Manager (if any).
5. Registrar’s approval letter for company name.
6. Statutory declaration confirming legal compliance.
7. Notice of registered office address (can be submitted within 30 days after incorporation).
8. Proof of payment of registration fees.
 Registrar verifies documents and issues Certificate of Incorporation once satisfied.
 This certificate is the company’s birth certificate and grants legal status.
 Company gets a Corporate Identity Number (CIN) after Nov 1, 2000.
 Company becomes a legal entity with perpetual succession on incorporation date.
 Certificate of Incorporation is conclusive proof of company’s existence, even if defects in registration exist.
 Both public and private companies must obtain a Certificate of Commencement of Business within 180 days to
start operations.
7.2.3 Capital Subscription
 Public companies raise funds by issuing securities (shares, debentures) through the public.
 Key steps:
1. SEBI Approval: Required for investor protection and disclosure before raising funds.
2. Filing Prospectus: A document inviting public to subscribe shares; must disclose all material facts
truthfully.
3. Appoint Bankers, Brokers, Underwriters:
 Bankers receive application money.
 Brokers sell shares to public.
 Underwriters buy unsubscribed shares (optional, get commission).
4. Minimum Subscription:
 Company must receive at least 90% of the issue size in applications before allotment.
 If less, money returned and allotment is cancelled.
5. Application to Stock Exchange: Permission to list shares must be obtained within 10 weeks of
subscription closing or allotment becomes void.
6. Allotment of Shares:
 Application money kept in separate account till allotment.
 Excess money refunded or adjusted if less shares allotted.
 Allotment letters issued; Return of allotment filed with ROC within 30 days.
 Private companies raise funds privately; no prospectus needed but file a “Statement in Lieu of Prospectus”.
Difference Between Memorandum of Association (MOA) and Articles of Association (AOA)
Basis Memorandum of Association (MOA) Articles of Association (AOA)
Objective Defines the company’s objectives and scope. Contains rules for internal management.
Position Main document; subordinate to Companies Act. Subsidiary document; subordinate to MOA & Act.
Relationship Defines company’s relation with outsiders. Defines relations between members & company.
Acts beyond MOA are invalid and cannot be
Validity Acts beyond AOA can be ratified if not against MOA.
ratified.
Not compulsory for public companies; can adopt Table F
Necessity Must be filed by every company.
instead.