Establishing New Venture

Company Formation | Public & Private Company | Hiring People
Raising Finances | Winding Up a Company

Establishing New Ventures - Company Formation - Introduction

Forming a Company in India

The Companies Act of 1956 sets down rules for the establishment of both public and private companies. The most commonly used corporate form is the limited company, unlimited companies being relatively uncommon. A company is formed by registering the memorandum and articles of association with the State Registrar of Companies of the state in which the main office is to be located.

Foreign companies engaged in manufacturing and trading activities abroad are permitted by the Reserve Bank of India to open branch offices in India for the purpose of carrying on the following activities in India:

1. to represent the parent company or other foreign companies in various matters in India, for example, acting as buying/selling agents in India, etc.

2. to conduct the research work in which the parent company is engaged provided the results of the research work are made available to Indian companies;

3. to undertake export and import trading activities;

4. to promote possible technical and financial collaboration between Indian companies and overseas companies.

Application for permission to open a branch, a project office or liason office is made via the Reserve Bank of India by submitting form FNC-5 to the Controller, Foreign Investment and Technology Transfer Section of the Reserve Bank of India. For opening a project or site office, application may be made on Form FNC-10 to the regional offices of the Reserve Bank of India. A foreign investor need not have a local partner, whether or not the foreigner wants to hold full equity of the company. The portion of the equity thus not held by the foreign invest can be offered to then public.

Incorporating a Company

Approval of Name:

The first step in the formation of a company is the approval of the name by the Registrar of Companies (ROC) in the State/Union Territory in which the company will maintain its Registered office. This approval is provided subject to certain conditions: for instance, there should not be an existing company by the same name. Further, the last words in the name are required to be "Private Ltd." in the case of a private company and "Limited" in the case of a Public Company.

Memorandum and Articles, etc.

The memorandum of Association and Articles of Association are the most important document to be submitted to the ROC for the purpose of incorporation of a company.The Memorandum of Association is a document that sets out the constitution of the company. It contains, amongst others, the objects and the scope of activity of the company and also defines the relationship of the company with the outside world.

The Articles of Association contain the rules and regulations of the company for the management of its internal affairs. While the Memorandum specifies the objects and purposes for which the Company has been formed, the Articles lay down the rules and regulations for achieving those objects and purposes.

The ROC will give the certificate of incorporation after the required documents are presented alongwith the requisite registration fee, which is scaled according to the share capital of the company, as stated in its Memorandum. A private company can commence business on receipt of its certificate of incorporation.

A public company has the option of inviting the public for subscription to its share capital. Accordingly, the company has to issue a prospectus, which provides information about the company to potential investors. The Companies Act specifies the information to be contained in the prospectus.

The prospectus has to be filed with the ROC before it can be issued to the public. In case the company decides not to approach the public for the necessary capital and obtains it privately, it can file a "Statement in Lieu of Prospectus" with the ROC.

On fulfilment of these requirements, the ROC issues a Certificate of Commencement of Business to the public company. The company can commence business immediately after it receives this certificate.