1. Memorandum of Association
The Memorandum of Association is the principal document for incorporation of a is company. It is the charter or constitution of the company. It lays down the powers and is objects of the company and the scope of its operation. It is a public document and every ion person who deals with the company is supposed to have sufficient knowledge of its contents. If the company does anything beyond the powers as mentioned in the Memorandum of Association, such acts are regarded ultra vires and not binding upon the company.
The purpose of the Memorandum is to enable the shareholders, creditors and those who deal with the company, to know what is its permitted range of activities. It enables the shareholders and creditors to know the purpose of their investment.
2. Articles of Association
Articles of Association is the second important document required for the formation of a company. It contains the rules, regulations and bye-laws for the internal management of the company. It is subordinate to the Memorandum of Association. The rules and regulations contained in the Articles of Association cannot supersede the powers of the company conferred by the Memorandum of Association. Further, these must not be contrary to the provisions of the Companies Act.
Private companies, companies limited by guarantee and unlimited companies must file their own Articles of Association at the time of registration. However, a public company limited by shares may either prepare its own Articles or adopt model Articles contained in Table A of Schedule I of the Companies Act partly or fully. The Articles of Association must be printed, divided into paragraphs and serially numbered. It must be signed by the signatories to the Memorandum of Association in the presence of at least one witness.
Contents of Articles of Association:
Articles of Association generally contains rules, regulations and bye-laws relating to the following matters :
1. Different classes of shares and the rights of shareholders.
2. Amount of share capital, number of shares and nominal value of each type of share.
3. Procedure of issue and allotment of shares.
4. Procedure of forfeiture, reissue, transfer and transmission of shares.
5. Procedure for issuing share certificate.
6. Provision for conversion of shares into stock.
7. Procedure of alteration and reduction of share capital.
8. Manner of transfer of debentures.
9. Rules regarding appointment of Directors, Managing Directors, Secretary, Accountants and other managerial staff.
10. Number of Directors and Managers and their qualifications, remunerations, powers, duties and liabilities.
11. Borrowing power of Directors.
12. Procedure for holding meetings of shareholders and Board of Directors.
13. Voting right of members, proxies and polls.
14. Payment of dividend and creation of reserves.
15. Keeping of books and accounts and the process of their auditing.
16. Rules of passing resolutions in the meeting.
17. Use of the common seal of the company.
18. Process of winding up or liquidation of the company etc.
After incorporation of the company, it is required to arrange the necessary finance. The company can raise substantial amount of finance by issue of shares and debentures. A private company or a public company without share capital can arrange the sell of shares and debentures through private contracts. But a public company with share capital invites the general public to invest in the shares or debentures by issuing a document known as ‘Prospectus’.
According to Section 2 (36) of the Companies Act, “Prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from public or inviting offers from public for the subscription or purchase of any shares in, or debentures of a body corporate.” Simply speaking prospectus is a document which invites deposits from the public or invites offers from the public to purchase shares or debentures of a company.
Prospectus is the document through which the company tries to induce the public to avail the investment opportunity extended by the company. Since the public on the basis of the informations contained in the prospectus invests in the company, the prospectus should not contain any untrue or misleading statement. Otherwise, the directors, promoters and any person who have authorized the issue of prospectus shall be liable. The criminal liability for the issue of misleading facts and figures in the prospectus is imprisonment upto two years or a fine upto Rs. 50,000 or both (as per the Companies (Amendment) Act, 2000).
4. Statement in Lieu of Prospectus
A public company having a share capital issues prospectus inviting the public to subscribe to the shares or debentures. But it can raise the capital from private sources. Further, the company after issuing prospectus may fail to allot shares because the issue has been undersubscribed. In that case, the company is required to file with the Registrar a ‘statement in lieu of prospectus.’ The format of the statement is contained in Schedule-Ill of the Companies Act. The information is almost same as contained in a prospectus. It must be signed by every person who is named as director or proposed director and filed with the Registrar at least three days before the first allotment of shares or debentures.
Capital of a Company
Finance or capital is the lifeblood of a business undertaking. It is required for investment in assets and to finance the day-to-day operation of the business. After incorporation of the company, the required amount of^capital is raised. The company can raise the capital by issuing shares and debentures, accepting public deposits or borrowing from banks and financial institutions.
When a company raises its capital by way of issue of shares to the public, it is known as share capital. This is also called owner’s capital. The word ‘Capital’ is used in different senses. Therefore, it can be divided into the following categories :
i. Authorised or Nominal Capital:
This is the maximum amount of capital which can be raised by the company by issuing shares. This is also known as registered capital. This amount is stated in the Memorandum of Association under capital clause. The company cannot raise capital more than the authorised capital unless capital clause in the Memorandum is altered. The authorised capital is divided into shares of fixed amount. For example, the authorised capital of Rs. 1,00,00,000 may be divided into 7,00,000 equity shares of Rs. 10 each and 3,00,000 preference shares of Rs. 10 each.
ii. Issued Capital:
It is that part of the authorised capital which is offered to the public for subscription. It is not necessary for the company to issue all its shares at once, A part of the authorised capital may not be issued and this is called as unissued capital. For example, in above case if the company issues 5,00,000 equity shares and 2,00,000 preference shares the issued capital shall be Rs. 70,00,000 and unissued capital shall be Rs. 30,00,000.
iii. Subscribed Capital:
It is that portion of the issued capital which is subscribed by the public. When a company issues the shares,the public may or may not apply for the whole issue. Sometimes, the public applied for more than the issued capital and in other cases it is less than the shares offered for public. Similarly the subscribed capital and issued capital may be same if the public actually subscribes the entire issue of the company. When the applications for shares exceed the number of shares issued, it is a case of over-subscription and if the case is reverse one, it is termed as under-subscription. Taking the aforementioned example, if the public applies for 4,00,000 equity shares and 2,00,000 preference shares, the subscribed capital shall be Rs. 60,00,000.
iv. Called-up Capital:
It is that part of the subscribed capital which is called-up or demanded by the company to be paid on the shares. It may be mentioned here that the nominal value of the shares is divided into different parts such as application money, allotment money and call money. The company may call such part of the value of the shares as is required by it. The part of the subscribed capital which is not called by the company is termed as uncalled capital. This may be called by the company any time subject to the provisions of the Articles of Association and the terms of issue. In the above example, if the shareholders are called upon to pay Rs. 8 per share (up to first call money), the called-up capital shall be Rs. 48,00,000 (4,00,000 equity shares + 2,00,000 preference shares = 6,00,000 shares x Rs. 8) and uncalled capital shall be Rs. 12,00,000, [(4,00,000 + 2,00,000) x Rs. 2)].
v. Paid-up capital:
The part of the called-up capital which has been actually paid by the shareholders is called paid up capital. The unpaid portion of the called-up capital is called calls-in-arrear. Referring the above example, if the called-up portion on each share is paid by the shareholders excepting one shareholder holding 1,000 equity shares failing to pay first call money of Rs. 3, then the paid up capital and calls- in-arrear shall fee Rs. 47,92,00C (Rs. 8 x 5,99,000) and Rs. 3,000 (1,000 x Rs. 3) respectively.
vi. Reserve capital:
Reserve capital is that part of the uncalled capital which can be called up only in the event of winding up of the company. It cannot be converted into uncalled capital without the permission of court. A limited company through a capital resolution may determine that a portion of its uncalled capital shall not be called up except in the event of its winding up. Generally, it is available for the creditors on winding up.
Apart from the issue of shares, a company can raise the finance by borrowing. Issue of debentures, accepting public deposits and obtaining loans from banks and financial institutions are the methods of borrowings adopted by companies. Issue of debenture is the most usual form of borrowing by a company. It is a certificate of loan issued by the company under its common seal acknowledging an indebtedness of the company.
According to Justice Chitty, “Debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of these conditions is a debenture”. The Indian Companies Act has not defined debenture but states that debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. Like shares, debentures are issued to the public by issuing prospectus.The amount may be paid to the company in installments like shares or paid in lump sum.
Features of Debentures:
The features of debenture are as follows:
i. It is an acknowledgment of indebtedness of the company.
ii. It is usually in the form of a certificate issued under the seal of the company.
iii. It usually provides for the repayment of original sum at a specified date or conversion into shares.
iv. It usually provides for the payment of interest on specified dates.
v. It is one of a series issued to a number of lenders.
vi. It is issued with or without a charge on the assets of the company.
vii. It carries no voting right.