An almost unanimous yes’ from the mass of ordinary people would probably greet this question. It seems elementary that if the middleman is cut out the “honest’ producer and the consumer must benefit. The producer’s rewards will be greater, and the consumer would get the goods more cheaply.
In fact this does not necessarily follow. As already mentioned, the wholesalers functions have still to be performed and they are now to be performed by a non- specialist. Consider direct selling by manufacturer as distinct from selling through the wholesaler.
The point is that increased social cost, not borne by the producer or the consumer but spread over the whole community will creep in. Bigger traffic jams, bigger road programmes more accidents and hospital treatment, busier funeral parlours many result from a decrease in specialization. Remember that specialisation is the key to increased wealth. If the specialist uses his/her favourable position to reap super profits the tax system usually returns these to the mass of the people anyway.
Joint stock company
The following chart on forms or types of organisation from the point of ownership shows that they are broadly divided into six types: (a) the sole trader, (b) the partnership firm (c) the joint Hindu family firm, (d) the joint stock company (e) the co-operative society and (f) the public utility or state undertaking. Now let us learn about the joint company.
Origin of Joint stock company
Joint Stock Companies originated in England with idea of raising loans for financing Government and securing in return some monopolies or special privileges for themselves. Thus the East India Company was established in 1600, the Hudson Bay Company in 1620, the Bank of England in 1994.
All these companies were established by the grant of a Royal Charter from the sovereign for the time being. It was, however, soon discovered that the growing wants of commerce and business could not be thus answered by special grants from the sovereign by way of privileges, and in the year 1844 the first English Act of Parliament was passed under which companies could be incorporated without the grant from the sovereign, and on the simple basis known to us at present.
This Act was consolidated in 1962 and amended from time to time, the most important being in 1947. In 1948 a codifying Act was passed. In India our present Act governing companies is the Companies Act of 1956.
Types of Companies
Companies are divided into three main types or classes, viz. (i) Public Company, (ii) Government Company, and (iii) Private Company.
(i) Public Companies
A public company is any company which is not a private company. A public company differs from a private company in the following ways:-
(i) If it does not invite the public to subscribe for its shares it must file a document, with the Registrar, known as “statement in lieu of prospectus.”
(ii) It must have at least seven members but there is no maximum limit.
(iii) It is not required to have in its articles any restriction on the right to transfer its shares.
(iv) It may invite members of the public to subscribe for its shares in which case it must issue a prospectus.
(ii) Government Company
A Government Company means any company in which not less than 51% of the paid-up share capital is held by the Central Government of by any state Government or governments, or partly by the Central Government and partly by one or more State Government company/ The Auditor of such a company is appointed or reappointed by the Central government on the advice of the Comptroller and Auditor-General in India.
The Central Government can, by notification in the Official Gazette, direct that certain provision of the Companies Act would not apply to such a company or would apply only with certain modifications, provided a copy of such notification has been laid in draft before both Houses of Parliament for at least 30 days and has not been disapprove by either House.
(iii) Private Companies
A private company must by its Articles of Association:-
(i) Prohibit any invitation to the public to subscribe for any shares, in, or debentures, of, the company,
(ii) Restrict the right to transfer its shares, if any;
(iii) Limit the number of its members to fifty not including,
(a) Persons who are in the employment of the company and
(b) Persons who, having been formerly in the employment of the company, are members of the company while in that employment and have continued to be members after the employment ceased.
A private company must have at least two members but not more than fifty. Shareholders who are in the employment of the company and those who have left the employment of the company since they became members are not to be taken into account when counting the fifty and joint holders of each share are to be treated as a single member.
A private company cannot make a public offer of shares, and the word “Private” must appear before the word limited to be imposed in connection with transfer of shares cannot be provided for the their articles, the following cannot be private companies: –
(i) Associations not for profit,
(ii) Companies limited by guarantee, and
(iii) Unlimited companies which have no share capital
Advantages or Privileges of a Private Company
(i) It is required to have only two directors.
(ii) It can be formed by only two members instead of at least seven in the case of a public company.
(iii) It is not required to hold the statutory meeting or to file the statutory report with the Registrar.
(iv) It is not required to and cannot issue a prospectus or file a statement in lieu of prospectus.
(v) The requirements as to “minimum subscription’ do not apply to it.
(vi) It can commence business and exercise borrowing powers as soon as it obtains the certificate of incorporation and need not comply with the other requirements which are enforced upon public companies before commencing business.
(vii) A further issue of share does not have to be offered to equity shareholders.
A private company in other respects has to comply with the requirements of the Companies Act which apply to companies in general.
A prospectus is defined by the companies Act as, “Any prospectus, notice, circular, advertisement of other invitation offering to the public for subscription or purchase any shares in or debentures of a body corporate.
But it shall not include any trade advertisement which shows on the face of it that a formal prospectus has been prepared and filed.”
The main purpose of a prospectus is to inform the public about the formation of a new company and to get the necessary funds with which to run it. A copy of the prospectus must be filed with the Registrar and the prospectus must be issued within 90 days of the delivery of the copy for filing.
If the company does not wish to approach members of the public to subscribe to its shares, it need not issue a prospectus but it must. Instead of the prospectus, file with the Registrar Statement in lieu of Prospectus” containing similar information and signed by all the directors.
The Companies Act requires certain information to be given in the prospectus in order to enable members of the public to judge whether they should invest their money in that company.
The Companies Act also provides penalties for untrue and misleading statements in the prospectus. The following are some of the more important contents of the prospectus:-
(i) The number of shares, if any, fixed by the articles as the qualification of a director.
(ii) The subscribed capital of the body corporate, if any, which managers the company as managing agent or secretaries and treasurers.
(iii) The main objects of the company.
(iv) The rights of voting conferred on each class of shareholder.
(v) Names of underwriters, if any.
(vi) Names and addresses and particulars about vendors of property which is purchased or to be acquired by the company.
(vii) Names, address, descriptions and occupations of the signatories of the memorandum and the number of shares subscribed by them, except where the prospectus is issued more than two years after the company is entitled to commence business.
(viii) The time of the opening of the subscription lists.
(ix) The amount which was to be paid as purchase money in cash, shares, or debentures for any such property.
(x) The commission, if any, allowed during the two preceding years for securing subscription for shares or debentures in the company.
(xi) Names and addresses of auditors, if any.
(xii) An estimate of preliminary expenditure.
(xiii) Particulars as to all material contract which the company is entering into and the place and time at which they could be inspected.
(xiv) Particulars as to the nature and extent of the directors, interest in the promotion of, or in, property which is to be acquired by the company.
(xv) The number and classes of shares with particulars as to the interest of the holders in the property and profits of the company.
(xvi) Any provision in the Articles as to the remuneration of directors.
(xvii) Particulars of directors or proposed directors, managing directors, managing agent, secretaries and treasurers or managers.
(xviii) The minimum subscription which, in the opinion of the directors of the signatories of the memorandum, should be raised by the public issue in order to provide for:-
(a) Any other expenditure, giving particulars,
(b) The purchase price of property to be defrayed, wholly or partly, out of the proceeds of the issue,
(c) Working capital,
(d) Preliminary expenses, and
(e) Repayment of loans in respect of the above matters.
(xix) The amounts payable on application and allotment of each share.
(xx) Particulars of shares and debenture issued within the last two preceding years.
Difference between a Company and a Partnership
The points of difference between a Joint Stock Company and Partnership may be summed up as follows:
(i) The property of the firm is the property of the partners.
(ii) The maximum number of members in a partnership firms doing banking business it ten members, and in a trading firms twenty members.
The maximum number of members in a partnership firm doing banking business in ten members and in trading firms twenty members.
(iii) The liability of the members of a limited company is limited to the nominal amount of the shares they have agreed to take up.
(iv) Partner cannot transfer his share of the partnership to any one or bring in a new partner without the unanimous consent of all the other partners.
(v) The minimum number of members in the case of partnership is two.
The minimum number of members in a private company is two but in a public company it is seven.
(vi) Each partner is an implied agent of the firm and his other partners for the purpose of entering into contracts in the regular course of business and binding the firm. Members of a company have no authority to bind the company.
(vii) Each partner is entitled to take part in the management of the firm.
(viii) Every partner is liable to his last paisa for the payment of the debts of the firm of which he is a partner, in other words, the liability of partners is unlimited.
(ix) The death, insolvency or insanity of a partner may result in the dissolution of the firm, making continuity uncertain.
A company is not affected by the death, insolvency or insanity of a member as it has permanent existence and a perpetual succession.
(x) The law does not recognise the firm as a legal person or entity distinct from persons who compose it, e.g. if a, B and C carry on business as Shah & Co., this firm will not be recognised as a separate legal entity.
Each partner can be used by the creditors of the firm and his private property may be attached and sold to pay the debts of the firm.
The company on incorporation becomes an artificial person created by law with a perpetual succession and a common seal, which is the official signature of the company.
The private property of members is not liable to be attached and sold by creditors of the company, not liable to be attached and sold by creditors of the company, nor are they liable to be sued personally for the debts of the firm.
A member has no right to manage the company.
(i) Limited by Guarantee
A company may be limited by guarantee with or without a share capital. Here the arrangement is that each member of the company guarantees to pay a certain amount and not more than that, only in the case of the liquidation of the company.
This type of company is generally an association formed for the furtherance of some professional, cultural of charitable cause, or of clubs, libraries, etc., if the income or profits are to be utilized for these purposes only and only and not to be distributed. Here the member pays a certain fee or subscription and undertakes to pay a nominal amount, say Rs. 25, if the company is wound up and its assets are not sufficient to pay its debts.
(ii) Limited by Shares
In the case of companies limited by shares, the shareholder’s liability is limited to the face value of the shares he holds in the company. He is not bound to pay in excess of that face value for example if a company is formed with shares of Rs. 1,000 each and if X has purchased five shares he is bound to pay Rs. 5,000 in all at the rate of Rs. 1,000 per share.
If all this Rs. 5,000 has been called up by the directors of the company and if the company is wound up thereafter, he does not have to pay anything more. If, however, the directors have only called up Rs. 700 per share, and then the company goes into liquidation, the liquidator can call up no more than Rs. 300 per share from him, but only if the assets of the company in the hands of the liquidator are not sufficient to pay off the debtors of the firm and its creditors.
Most joint stock companies are formed under this arrangement. It should be noted that it is the liability of the members that is limited and not that of the company.
(iii) Unlimited Companies
In the early days of joint stock enterprise, when the limited liability system was not in force every joint stock company was formed under what is called the unlimited liability system which meant that if the company went into liquidation in an insolvent condition, each shareholder or member had to contribute such money as was necessary or pay all its liabilities. Though it is still open to form unlimited companies under the present law, it is seldom done.
States in Formation of Public of Joint Stock Company
There are three main stages in the formation of a joint stock company: –
1. Incorporation or Registration, 2. Commencement of Business, and 3. Promotion
1. Incorporation or Registration
Persons applying to the Registrar for the registration of a company must file with the Registrar of joint stock companies for the State in which the registered office of the company is stated by the memorandum to be situate, the following: –
(i) A statutorily declaration by an advocate of the Supreme Court of High Court, an attorney entitled to appear before a High Court or a Chartered Accountant practising in India, who is engaged in the formation of the company, or by a person named in the articles as a director, managing agent, secretaries and treasures, manager or secretary of the company, that all the requirements as to registration have been complied with.
(ii) The memorandum of association.
(iii) The consent in writing of each director appointed or proposed by the company to act as director.
(iv) The articles of association.
(v) The agreement, if any, which the company proposes to enter into with any individual, firm or body corporate to be appointed as its managing agent, or with any firm or body corporate to be appointed as its secretaries and treasures.
Item (4) is not required to be filed by the following: –
(a) A company which was a private company before becoming a public company,
(b) A company not having a share capital; and
(c) A private company.
It the company does not want to register its own articles it should declared that it has adopted Table A of the Companies Act as its own articles of association. This table A is made up of a set of articles of association drafted and annexed to the companies Act. 1956, which where it has not got its own articles formulated. Both the memorandum and the articles of association have to be printed and divided into consecutively numbered paragraphs. After answering these requirements and payment of registration and stamp fees, the Registrar issues a certificate called the Certificate of Incorporation. From the moment this certificate is issued the company comes into regular existence as an artificial person created by law within a perpetual succession and the common seal.
2. Commencement of Business
A private company May commerce business and exercise borrowing powers as soon as it obtains its Certificate of Incorporation. A public company, however, has to wait until it receives another certificate known as the Certificate for the Commencement of Business. This certificate will be issued by the Registrar of companies only if he is satisfied that the following conditions have been fulfilled:
(i) A duly verified declaration has been filed with the Registrar by one of the directors or the secretary that the above condition has been complied with.
Shares and their Transfer
The capital of the company is divided into shares. These shares are themselves divided into “Equity Shares’ and ‘Preference Shares.’ “Preference Shares’ are shares which have preferential right (a) for the payment of a fixed rate of dividend from the profits of the company before the ordinary shares can be given any portion of the profits; and (b) a preferential right all the debts of the company are paid.
Thus six percent preference shares mean that out of the available profit for dividend first the six percent must be paid to the holders of these share and if there is any surplus left it will be divided among the ordinary shareholders. Where there are preference shares, ordinary shareholders will share in the profits after the preference shareholders have been paid their dividends.
Preference Share are sometime made cumulative, i.e. where there is no profit, say, in the year 1966 and no dividend can be paid, whereas in the subsequent year 1967 there is a large profit, then not only will the dividend for 1967 the paid, but the dividend unpaid in 1966 due to insufficiency of profits, will also have to be paid; the surplus only is available for payment of dividends to the ordinary or equity shareholders after payment of these arrears of dividends on cumulative preference shares.
These shares are called ‘cumulative’ because during the years that the dividend cannot be paid owing to want of profits, the claim of such shareholders accumulates until such time as the company is able to pay the entire dividend. Preference shares are presumed to be cumulative unless the articles provide to the contrary.
Besides being privileged as to the payment of dividends preference shareholders, in case of liquidation, also get the right of getting their capital paid in full from the surplus assets of the company, before any division can be made among any other class of shareholders. Equity shareholders can vote on any question at general meetings but preference shareholders can only vote on questions that affect their interests.
The title to the shares in a joint stock company is usually proved by a share certificate, which is issued to every shareholder. Sometimes shares are payable to bearer, in which case they are called ‘Share Warrants.’ Share Warrants pass from hand to hand by delivery, whereas ‘Registered Shares’ pass, or are transfer form signed by the transferee and after the said transfer form is given effect to by the board of directors.
Lien on Shares
The articles may give a company a lien on its shares, i.e., charge on the shares of any of its members for any debt due from such member to the company. Such a lien extends dividends also and can be enforced by a sale.
It should be remembered that whereas a forfeiture or surrender can only be in respect of unpaid calls, a lien can be in respect of any debt.
Forfeiture of Share
The company usually recovers the nominal value of its shares from the shareholders party on application and partly on allotment and the rest by means of calls as and when money is required.
The articles of most companies usually provide that shares will be forfeited if the shareholder fails to pay any calls in which case the procedure stated in the articles must be strictly followed. Share can only be forfeited for non-payment of calls and not for any other debt due from the shareholder. When shares are forfeited, the shareholder ceases to be a member of the company and the company becomes the owner of shares which can then be resold.
Surrender of shares
As a short-cut forfeiture a shareholder may vulnerary give up his shares to the company. A company can accept a surrender only if the conditions would justify a forfeiture.
Debentures are documents stating particulars of the amount borrowed by the company from its holders and stating the terms and conditions on which they are issued, together with particulars as to the rare of interest payable and the repayment of such a loan. How far a company can borrow money depends upon its memorandum and articles of association. Companies like trading companies have implied powers to borrow, which are considered as incidental to the carrying on of their business. Non-trading companies have implied powers to borrow, which are considered as incidental to the carrying on of their business. Non trading companies however cannot borrow, unless their memorandum and articles of association give them the power, unless they apply to the Court, with a view to obtaining such a power, where a company has the power to borrow it can do so either by mortgaging a part or the whole of its property, or by simple loans, i.e. without security. Debentures may be divided into Redeemable and Irredeemable, Simple or Naked Debentures and Mortgage Debentures.
Redeemable Debentures are debentures the amount of which is redeemable i.e. repayable at the end of a specified period. Generally at the time of issue of such debentures, the company agrees that the said debentures will be redeemed at the end of a specified period, say ten years; in some cases the condition is that so many of the debentures be repaid at fixed intervals, say yearly.
Irredeemable Debentures are debentures the interest on which it to be paid regularly, but no condition as to the date on which they are redeemable or to be repaid is laid down.
Simple or Naked Debentures are debenture which do not carry a mortgage or charge on any of the property of the company issuing them.
Mortgage Debentures are debentures which carry with them a charge, either fixed or floating on the assets of the company. In the case of a fixed charge some specified property of the company is actually mortgaged by a regular mortgage deed, which has to be made out between the companies on the one hand and the trustees on behalf of the debenture holders, on the other.
In the case of Floating Debentures, however, the debenture holders have a prior claim to the assets of the company over the ordinary creditors of the company in liquidation.
How will you Distinction between Debenture and Shares
It will thus be noticed that there is a marked distinction between a debenture holder and a shareholder, which may be summarized as follows:-
(i) A shareholder is therefore entitled to his dividend only where the profits are sufficient for division among the share holders, whereas a debenture holder beings a creditor of the company is entitled to his interest at the rate fixed, irrespective of the company’s making a profit or a loss.
In case of failure to pay the interest, the debenture holders have the same right as the creditors of the company to move against the company to recover their interest, and if they hold mortgage debentures, they can ask their trustees to move for the sale of the property mortgaged to them under their debenture mortgage.
(ii) In case of liquidation the debenture holder as the creditor naturally gets the prior right to that of the shareholder to the assets of the company, and if his debenture is a mortgage debenture, he gets a right to be paid first out of the specific property which is mortgaged with him.
(iii) A shareholder, as his name implies, is a holder of shares in the company’s capital and therefore is a part owner of the company whereas a debenture holder is a creditor of the company who has advanced money on loan to the company.
In the case of ‘Stock’ the whole capital of the company is considered to be one stock an d each member holds as much stock of it as he desires and transfers it in such fractional parts as the regulation of the company permits. The difference between stock and share is as follow:-
(i) Share are transferable in bull, whereas stock may be divided into fractional parts and transferred in multiples as may be laid down by the regulations of the company.
(ii) All shares are known by their distinctive numbers, but that regulation does no apply to stock.
(iii) Shares may not necessarily be fully paid, but are generally into fractional parts and transferred in multiples as may be laid down by the regulations of the company.
Memorandum of Association
The Memorandum of Association is the charter of the company, without which no company can be incorporated. The main points or paragraphs deal within the following points: –
1. The State in which its registered office is to be situated.
2. The name of the company within the word “Limited” or ‘Private Limited’ as the last word in such name.
3. (a) In the case of company in existence immediately before the commencement of the companies Act, 1965, the objects of the company;
(b) In the case of companies, with objects not confined to one State, the States to whose territories the objects extend.
(c) In the case of a company of formed after such commencement:-
(i) The main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects;
(ii) Other objects of the company not included in sub clause.
4. If a limited company, it states that the liability of members is limited.
5. The amount of share capital, and own the said share capital is divided.
The memorandum is then signed by at least seven members in the case of public companies, and at least two in the case of private companies. Each member must write against his name minimum beings one.
The signatories need not be the promoters of the company, but any person agreeing to be a number can sign. The signatures have to be attested by at least one witness.
Articles of Association
The Articles of Association are the rules and regulations of the company or its bye-laws which govern the internal management of the company, and lay down the rules as to the powers of directors, etc.
They state how the general meetings are to be held, how the voting is to be done, what is it form a quorum, how the shares are to be transferred, how they are to be forfeited, how the accounts are to be kept and regulated, etc.
The capital of a joint stock company is raised by the subscription of its members. The holders of these shares who are known as shareholders get the right of voting under specific conditions provided for under the companies Act, 1956, as well as in the articles of association of the company concerned.
They also get a share in the division of the profits of the company as declared by the directors to be divisible among the shareholders. The capital is called:-
(a) Authorized Capital, which means the amount of capital which is to be the maximum which the company is authorized to raise.
(b) Issued or Subscribed Capital, which is the capital offered to the public and subscribed for the taken up by allotment to the public.
(c) Unleashed Capital, the actual amount on each share which has may be dealt with at a later date.
(d) Called-up Capital, the actual amount on each share which has been called-up by the directors through the medium of calls or instalments according to the terms of issue.
(e) Paid-up Capital, that amount which has actually been paid by the shareholders and received by the company from the called-up capital.
(f) Working Capital, the capital which is used for the actual carrying out of the company’s business after all the fixed capital purchases are made.
(h) Block Capital, the fixed capital assets of the company which are sunk in fixed assets such as mills, factories, etc.