The Formation of a Company


Before a company can be formed the following steps must be taken :

1. The Memo and the Articles must be prepared. These two documents must be filed when application is made for the registration and incorporation of the company. The Companies Act lays down rules regarding the preparation of the memorandum. Schedule I to the Act of 1956 contains four model forms for use in different cases.

2. If it is proposed to have a paid up capital or more than Rs.3 crores sanction of the Central Government must be obtained under the Capital Issues (Control) Act, 1956. Formerly, sanction was required up to Rs. 1 crore or more. The exemption limit was raised to Rs.3 crores by an order of the Central Government on 31st March, 1978. The exemption is not available to monopoly companies subject to the Monopolies and Restrictive Trade Practices Act (MRTPA) of 1969 and companies with foreign shareholding of more than 40%.

3. If the company to be formed intends to participate in an industry which is included in the Schedule annexed to the Industries (Development and Regulation) Act, 1951, a licence must be obtained under that Act.

4. The company must be registered in accordance with the provisions of the Companies Act, 1956 and the Certificate of Incorporation must be obtained.

In the case of a public company, the following further steps are required to be taken before it can commence business.

5. The Prospectus or the Statement in lieu of Prospectus must be issued and registered with the Registrar.

6. The minimum subscription must be raised and thereafter the allotment of shares must be made.

7. The Certificate for the Commencement of Business must be obtained from the Registrar.


For the registration of a company, the following documents, together with the necessary fees, must be submitted to the Registrar of Companies of the State in which the registered office of the company will be situated.-Sec. 33.

l. The Memorandum of Association, prepared in accordance with the provisions of the Companies Act, and signed by at least 7 persons in the case of public companies and 2 persons in the case of private companies.

2. The Articles of Association, in case of unlimited companies, companies limited by guarantee and private companies limited by shares.

3. A declaration by any of the following persons, stating that all the requirements of the Act have been complied with-ar advocate, an attorney, a pleader, a chartered accountant, or person named in the articles as director, manager or secretary of the company.

4. A duly signed list of persons have consented to b( directors of the company, their consent in writing and the signed agreement with every such director to take the number of share; required to qualify as director. These are not required in the case of private companies and companies not having a share capital.

5. The Registration fees of a Company is fixed on ; graduated scale on the amount of nominal capital or the number of members. There is also a filing fee per document.


If the Registrar is satisfied that all the requirements of the Act have been complied with, he will register the company an issue a certificate called the Certificate of Incorporation.The purpose of forming the company must be lawful Example : A company was formed with the object of carrying on unauthorised lotteries. Registration was refused : More, Ex parte.


The certificate issued by the Registrar after a company registered ailed the Certificate of Incorporation.Section 35 of the Act states that the Certificate o1 Incorporation is conclusive evidence about the following matters,

1.All the requirements of the act has been complied with any respect of registration and matters precedent and incidental thereto

2.the association is a company authorised to be registered and duly registered under the Act.

3.The legal existence of the company begins from the date of issue of the certificate.

Once the Certificate is issued, the incorporation cannot be challenged even though there were irregularities prior to registration.

Case Law

Incorporation was upheld in the following cases.

(a) Memo materially altered after signature but before registration. Peel 's case.

(b) Signatories to the memo all infants. Moosa v. Ebrahim.

(c) The shares of the company were, allotted before the issue of certificate of incorporation. jubilee Cotton Mills Lid v. Lewis.

(d)The objects of a company were all found to be illegal. bowman v. Secular Society Ltd.

Effects of registration (Sec. 34)

As. soon as a Company is registered and a certificate of incorporation is issued by the Registrar, three important legal consequences follows

  1. The company acquires a distinct legal entity.
  2. It secures a perpetual succession
  3. its property is not the property of its shareholders.


The term Promoter is not defined  in the Act. Promoter, is a word which is used to describe the ,persons who Initially plan the formation of a company and bring it into existence­ "a person who originates a scheme for the formation of the company, has the memo and the Articles prepared, executed- and i ' registered, and finds the first directors, settles the terms of the  preliminary contracts an4 prospectus (if any) and makes arrangements for advertising, and circulating the prospectus and placing the capital is a Promoter .'Palmer, "Company Precedents'

"A person who has not done all these things but has done a substantial part of them so that he may be regarded as having an effective hand in the formation or floatation of the company is also a promoter".-Sengupta, "Indian Company Manual".

Bowen L.J., in Whaley Bridge Printing Co. v. Green,' stated that the term promoter is not a term of law, but of business "usefully summing up in single word, a number of business operations familiar to the commercial world by which a company is generally brought into existence."

Sometimes company promotion is undertaken by promoting companies or syndicates formed for the purpose. The rights and liabilities of such companies or syndicates are the same as those of individual promoters. The directors of such companies and members of such syndicates are personally responsible if any ~ breach of trust or fraud is committed.

promoter's Remuneration

But for any contract a promoter has no right to get any. remuneration for the services rendered by him in promoting the company. In practice, however,he takes remuneration for his work. The usual methods of taking remuneration are as follow5:

(i)                   selling to the company at a profit some property purchased by the promoter before he became one ;

(ii)                  taking a commission on the shares sold ;

(iii)                 taking a grant of some shares of the company,

(iv)                lump Sum from the company.

The amount of remuneration and the mode of securing it is settled by the promoters themselves and are expressed in the prospectus or the memo or the articles.

Functions of the Promoter.       :

1.The promoter decides the company's name and asserts that it’ll l be accepted by the Registrar of companies.

2.He decides the details of the Company's Memorandum and Articles, the nomination of directors, solicitors, auditors, bankers and the registered office of the company.

3.He makes arrangement for  printing the memorandum and Article         he registration of the company and the issue of prospectus. 4.He is responsible to bring the company into existence.

The Duties and Liabilities of Promoters

1.A promoter cannot be described as an agent of the Company. The contract between the promoter and the so-called agent of the company is not binding upon the company, for the company then had no existence.

2. A company cannot ratify a contract made by a promoter before the incorporation of the company because the ratifier was then not in existence. Re Empress Engineering Co.

3. For the reasons stated in para 1 and 2, a promoter cannot / be a trustee of the company.

4.A promoter stands in a fiduciary position to the company.

5.A promoter cannot make secret profits. If any secret profit or undisclosed financial benefit is made y the promoter, the company can recover it from him.

6. The promoter is not prohibited from making profits. He can do so, provided he discloses all the facts (including the fact that a profit is being made) to the Board of Directors of 'die proposed company. If a person purchases some property and later decides to sell it to a company to be formed for using the property, the sale may be made as a profit. Erlanger Sombrero Phosphate Co.

7.promoter has got certain duties in connection with the 1 prospectus, if any is issued, or the statement in lieu of prospectus these duties are-

(i) he must see that the documents contain the particulars  which, according to Schedule II to the Act, they must contain ; and

(ii) he must see that the documents do not  contain any untrue statement.

8. For failure to perform. these duties the promoter,

(i) is liable to pay compensation to any person who buys shares on basis of the erroneous prospectus, or statement in, lieu of prospectus and suffers damage ; and

(ii) he may be prosecuted w the criminal courts according to the provisions of the Companies Act.


Before a company is formed & registered the promoters of the company have to enter into contracts for drafting the

necessary documents, transfer of goods and property etc. Such contracts may be called preliminary or preincorporation contracts. They are entered into before a company comes into existence  The question arises whether contract by the promoters with a non-existing company are enforceable or not. The rules regarding the subject are summarised below.

1.A company is not bound by any pre incorporation contract '6efore its incorporation even where it enjoys the benefit of the preincorporation contract entered into on its behalf.

The company cannot enforce preliminary contract

2.the other party to the contract is not bound by the preincorporation contract.

3.a company after it  is formed, cannot ratify a preincorporation contract. Because by the Contract Act, a non-existing principal cannot ratify a previous contract.

4.The promoters and the agents who had formed the company may incur personal liability for a preincorporation contract made on behalf of company not yet in existence, such a contract is considered to have been entered into personally by the promoters.

5. Specific Performance : Sections 15 and 19 of the Specific Relief Act, 1872;ptvvide that if the promoters and agents of a company enter into a preincorporation contract and such a contract is .within the terms of incorporation, specific performance may be obtained by or enforced against the company, if the company has accepted contract and has communicated such acceptance to the other parties.

comment: A company can, after its incorporation, enter into a new contract with the other parties. In this case the liability . of the promoters and the agents comes to an end. The obligation and rights of the company and the other parties wall depend on the new contract.Examples :

(a) X. Co., a firm of solicitors, was appointed by Y. a promoter of E. Ltd. (which was to be incorporated later) to prepare the Memorandum and Articles of the company. X & Co: incurred costs of registration of the company. Held that they,-were not entitled to recover these costs from the company. Re English and Colonial Produce Co. Lid.

(b) N made a contract with S. Ltd. for and on behalf of N. Ltd. for selling tinned ham to S. Ltd. The contract was signed by him as "N". The said N. ltd. was not incorporated on the date of the contract but it became so afterwards. Thereafter market price of ham fell and S. Ltd. refused to take delivery of tinned ham. On an action brought by N Ltd.It was held neither this company nor N himself could enforce it on the defendants S. Ltd. on the grounds that contract by a nonexistent company is a nullity. Newborrte v. Sensolid (Great Britain) Ltd.

(c) A, a promoter of X. Co. Ltd. made a -contract in his own name. on behalf of X Co. Ltd. with K for the purchase of wine costing £ 900. The Company was registered afterwards. The company obtained delivery of the wine from K and consumed it. Before payment X Co. Ltd. went into liquidation. It was held that the promoter A was personally liable on the contract. Kelner v. baxtier


The  prospectus is the basis on which the inve4ors at large get an idea about the prospectus of the company


A prospectus has been defined in the Act as. 'any document d(scribed or issued as a prospectus and includes any notice, circular, advertisement, or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any share in, or debentures of a body corporate. Sec. 2(36).The words, "inviting deposits from the public or" were added by the Companies (Amendment) Act, 1974.


The essential characteristics and the features of the prospectus are the following

  1. it is a document described or issued as a prospectus.
  2. It includes any notice, circular, advertisement inviting deposits from the public or other document.
  3. It is an invitation to the members of the public.
  4. The public is invited to subscribe the shares or debenture of the company
  5. The term public does not mean an invitation of very large  number of people. It is enough if the invitation is to a section .of the public. From the examples, stated below, if follows that there must be some degree of publicity even though it may be -" of a small scale.

Examples :

(a) Three thousand copies of prospectus were distributed among the members of this company. Re South of England Natural Gas Co. Ltd.

(b) An invitation to a few friends and relatives or to the customers of the promoter does not institute a prospectus. Shorwel! v.Combined Incandescent Mantles.

6. Prospectus is the document through which the company secures the capital needed for carrying on its business. Any document having this object, comes within the definition of prospectus. But an, advertisement for securing business or trade, is not a prospectus.

Form and Contents of the Prospectus

Schedule II to the Companies Act specifies a list of particulars which must be included in the prospectus. The principal items are the following :

(1) Principal objects of the company and particulars of signatories of the memorandum of the company and shares subscribed by them

(2) number and classes of shares and extent of interest of holders and particulars regarding debentures and redeemable preference shares;

(3) the rights in respect of capital and dividends attached to different classes of shares ;

(4) particulars regarding the directors, managing agents, secretaries and treasurers, etc. and of the contract fixing the remuneration of managing agents, etc ; (Managing Agency, 8 Secretaries and Treasurers have been abolished)

(5) the minimum amount of subscription and amount payable ' on application ;

(6) time of opening of subscription list ;

(7) preliminary expenses incurred;

(8) particulars in regard to the company and other listed a companies under the same management which made any. capital issue during the last 3 years;

(9) details of any premium or under-writing commissions paid ~

(10) particulars of reserves including reserves capitalised ;

(11) nature and extent of interest of every director and promoter ;

(12). names and addresses of the auditors of the company;

(13) in case of existing companies, a report by the auditors showing the profit and loss and assets and liabilities of the company, rates of dividend paid for five years preceding issue of prospectus and particulars regarding subsidiaries ;

(14) whether the prospectus is issued at the time of the formation of the company or subsequently ;

(15) the nature and extent of restrictions upon members at company meetings;

(16) restrictions upon the powers of the directors;

(17) voting rights, capitalisation of reserves and surplus of revaluation ;

(18) inspection of balance sheet and profit and loss account ;

(19) The following reports are to be annexed to the prospectus

(i) report by auditors and

(ii) report by the accountant.



A prospectus is to be issued after the incorporation of the company.

2. Particulars

The prospectus must contain all the particulars listed in schedule II to the Companies Act.

3. Date

The prospectus must be dated and this date will be considered to be the date of publication unless otherwise proved-Sec. 55. . 4.Signature

The prospectus must be signed by every person mentioned therein as director or proposed director or his agent.

5.. Copy of prospectuses

Every application form for shares, issued by the company, must be accompanied by a copy of the prospectus except

(i)application forms issued in connection with a bona fide invitation to a person to enter into an under-writing agreement and (ii) application forms issued to existing members an debenture-holders.-Sec. 56(3).

6. Statement by expert

A statement, relating to the company, by an expert, can b included in the prospectus only if the expert concerned is n engaged or interested in the formation, promotion, or the management of the company. (Sec. 57). The statement of a expert can be included only if he has, in writing, authorised it issue. (Sec. 58). The term expert includes an engineer, value accountant and any other person whose profession gives authority to a statement made by him.

7. Deposits

Deposits are not to be invited without issuing a advertisement. The Central Government may, in consultation wit the Reserve Bank of India prescribe the limits, the manner an the conditions subject to which deposit may be invited o accepted by a company either from the public or the member The advertisement must include a statement showing the company's financial position, issued by the company and in such form, or in such manner, as may be prescribed. The Rules shall prescribe how the deposit is to be continued or repaid.

The company and the officer which contravene the above rules shall be punishable. These rules are not applicable to banking company and such other company as the Cent ' Government after consultation with the Reserve Bank of India specify in this behalf.-Sec. 58A. Companies (Amendment) A 1974. Such rules are valid. D.C & G.M Co Ltd v Union India.

The provisions of this Act relating to prospectus shall, s far as may be, apply to an advertisement referred above. Se S8B, Companies (Amendment) Act, 1974.

Section 58A of the Companies Act has been amended 1988. The amended provision states.

"(3A) Every deposit accepted, by a~Company after tl commencement of the Companies (Amendment) Act, 1988, shall unless renewed in accordance with the rules made under sub­ section (1), be repaid in accordance with the terms and conditions of such deposit".

Section (9) : If a Company has failed to repay any deposit, in accordance with the terms and conditions of such deposit, the Company Law Board may, direct by order, the Company to make repayment of such deposit within such time and subject to such conditions as may be specified in the order.

One who fails to comply with any order made by the Company Law Board under sub-Section (9) shall be punishable with imprisonment and fine.

8. Registration

Before a prospectus is issued, it must be registered with the Registrar of Companies. Copies of relevant documents (e.g., consent of directors and experts to the issue of the prospectus and copies of contracts) have to be filed when application is made for registration. If the relevant documents are not filed or if the prospectus does not comply with, with the provisions of the Act. registration will be refused. No prospectus can be issued more than 90 days after a copy of it is filed for registration.-Sec. 60:

9. Terms of contracts

The terms of any contract, mentioned in the prospectus, cannot be varied after registration of the prospectus except with the approval of the members in a general meeting.-Sec. 61.

10. Prospectus by a foreign company

A prospectus issued by a foreign company, with a view to selling shares in India, must include certain additional particulars. (Sec p.559)

11. Penalty for non-compliance

If the aforesaid rules, relating to the matters to be included in the prospectus, are not complied with, any person who is knowingly a party to the issue thereof, shall be punishable with a fine which may extend to Rs. 5000.-Sec. 59.

12. Defence

A person charged with non-compliance of the aforesaid rules will be excused in the following cases : [Sec. 56(4).)

(a) as regards any matter not disclosed, if he proves that he had no knowledge thereof; or

(b) if he proves that the non-compliance or contravention arose from an honest mistake of fact on his part; or

(c) if the non-compliance or contravention was in respect of matters which, in the opinion of, the Court dealing with the case, was immaterial or was otherwise such as ought (having regard to all the circumstances in the case) reasonably to be excused.


Liability for not stating. particulars

The public invest money in the purchase of shares and debentures of companies on the basis of statements contained in the prospectus. Misstatements and false statements in the prospectus are instruments through which dishonest company promoters may practice fraud on the public. To prevent such practices the law imposes certain duties and liabilities on all persons who are responsible for the issue of the prospectus. One of the duties has already been mentioned viz., the duty of including in the prospectus, the particulars mentioned in Schedule 11 to the Act.

Liability for untrue statement

The authors of the prospectus have to see that the prospectus contains no untrue statement likely to mislead the public. Section 65 of the Companies Act lays down that the term "untrue statement" in connection with a prospectus shall be deemed to include :

(a) a statement which is misleading in the form and context in which it is included, and

(b) an omission (of any matter) which is calculated to mislead.

Thus, the term untrue statement or misstatement, is used in a wide sense. It includes not only false statements but also statements which produce a wrong impression of actual facts. Concealment of a material fact also comes within the category of misstatement.

Example :

Lord Kylsant, the managing director of Royal Mail Steam Packet Company, issued a prospectus inviting subscription to debentures of the company in the prospectus it was stated that the company was in a good position and that dividends were regularly paid. But the prospectus omitted to state that there were large losses in several years and that in "those years dividends were paid out of reserves. It is apparent that the prospectus tried to create a false notion of company's soundness. It was held by the House of Lords that Lord Kylsant willfully issued a false prospectus and he was convicted under the criminal law. Rex v. Kylsant.

Persons liable for untrue statements in the prospectus

Section 62(t) of the Act provides that the following persons are liable (and punishable) for untrue statements in the prospectus :

(a) every person who is a director of the company at the time of the issue of the prospectus ;

(b) every person who has authorised himself to be named and is named in the prospectus either as a director, or as having agreed to become a director, either immediately or after an interval of time ;

(c) every person who is a promoter of the company; and

(d) every person who has authorised the issue of the prospectus.

The extent of the liability for untrue statements

The Companies Act imposes the following liabilities on the persons responsible for untrue statements in the prospectus.

(a) Civil Liability: Section 62(l) provides that such persons are liable to pay compensation for any loss or damage which any person may suffer from the purchase of any share or debenture an the basis of the untrue statement.

A person who has been made to pay compensation under this section can claim contribution from the others who were associated with him in the issue of the prospectus, unless it appears that he was guilty or fraud while the others were not.

(b) Criminal liability; Section 63(1) provides that every person who has authorised the issue of a prospectus containing untrue statements, shall be punishable with imprisonment which may extend to two years or with fine which may extend to Rs. 5000, or both.

(c) Liability under the law of fraud: A Person who has suffered damage by purchasing shares or debentures on the basis of. untrue statements in the prospectus may, instead of proceeding under Section 62('11 of the Companies Act, take action under the general law of fraud. The law relating to fraud provides that when a person is induced to enter into a contract by fraud, he is entitled to rescind the contract and to get compensation for the loss or damage which lie may have suffered. The aggrieved shareholder or debenture holder must prove that

(i) there was fraudulent misstatement

(ii) misrepresentation relating to material facts

(iii) the shareholders had purchased the share on the basis of prospectus, and

(iv) that he had been actually deceived. Derry v. Peek.

(d) Penal l for fraudulently inducing persons to invest money : Any person who, either by knowingly or recklessly making any statement, promise or forecast which is false,deceptive or misleading, or by any dishonest concealment of material facts, induces or attempts to induce another person to enter into, or offer to enter into­

(a) any agreement for, or with a view acquiring, disposing of, ' subscribing for, or underwriting shares or debentures ; or

(b) any agreement the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of shares or debentures, or by reference to fluctuations in the value of shares or debentures ;shall be punishable with imprisonment for a term which may extend to five years, of with fine which may extend to ten thousand rupees, or with both.-Sec. 68.

In Sec. 68 the word 'recklessly' is used. A `reckless' statement or promise is one which is made without any real fact or heedless of its base. R. v. Grunwald

Defences available in an action ©n the prospectus

The parties against whom proceedings have been taken for untrue statement in the prospectus are allowed to use certain pleas in their defence. The defences are summarised in the next page:

A. Defences against the civil liability imposed by .Sec. 62(1) : Sec. 62(2) provides that no decree for damages will be passed if the person charged can prove any of the following facts.

l. Issue without authority: He withdrew his consent to become a director of the company before the issue of the prospectus and it was issued without his authority or consent.

2. Issue without knowledge : The prospectus was issued without his knowledge or consent and on becoming aware of its issue, he forthwith gave reasonable public notice that it was issued without his knowledge or consent.

3. Withdrawal of consent: After the issue of the prospectus and before allotment there under, he, on becoming aware of any untrue statements therein, withdrew his consent to the prospectus

and gave reasonable public notice of the withdrawal and of the reason thereof.

4.Statement by an expert: If the statement alleged to be untrue purports to be a statement of an expert or a copy or extract from such a statement or of a valuation report of an expert, the person charged can escape liability if he can prove the following :

(i) it is a fair and correct copy or representation or extract of the expert's statement ;

(ii) he had reasonable grounds to believe and did believe (up to the time of the issue of the prospectus) that the person making the statement was competent to make it ;

(iii) the expert had given his consent to the issue. of the prospectus ; and

(iv) the expert had not withdrawn his consent before registration of the prospectus or allotment there under.

5. Copy of official statement or document: If the statement alleged to be untrue is one purporting to be from an official statement or a public official document, the person charged can escape liability if he can show that it is a fair and correct representation or copy or extract from the official statement or public official document.

6. True statement: As regards statements other than those of experts or those contained in official documents, the person charged can escape liability if he can prove that he had reasonable grounds to believe, and did, up to the time of the allotment of shares or debentures, believe that the statement was true.

B. Defenses available to an expert: An expert whose opinion was included in the prospectus, can use the following defences.-Sec. 62(4).

I . Withdrawal of consent : Having given his consent to the issue of the prospectus, he withdrew it in writing before delivery of a copy of the prospectus for registration.

2. Knowledge of untrue statement: After delivery of a copy of the prospectus for registration and before allotment there under, he, on becoming aware of the untrue statement, withdrew his consent in writing and gave reasonable public ,notice of the withdrawal, and of the reason thereof.

3. Trite statement: He was competent to make the statement and he had reasonable ground to believe, and did, up to the time of the allotment of the shares or debentures, believe that the statement was true.

C. Defences against criminal liability: A person charged in a criminal court under Section 63(1) will be acquitted if he can prove either of the following :

(a) that the statement was immaterial, or

(b) that he had reasonable ground to believe, and did, up to the time of the issue of the prospectus, believe that the statement was true.

Loss of the right of rescission and damages

There have been a large number of cases in English courts regarding the prospectus and the shareholder's rights thereon. It has been held that the shareholder has no rights, either to damages or to rescission of the contract of purchase, in the following cases :

l. Purchase not on die basis of the prospectus: A person who has not purchased the shares on the basis of the prospectus, is not entitled to any remedy. A person who has purchased shares from an existing shareholder cannot be said to have purchased the shares on the basis of the prospectus, and is not entitled to any relief if there are untrue statements in the prospectus. Peek v. Gurney.

2. Opinion or expectation: The statement complained of must come within the definition of untrue statement. A mere expression of opinion or expectation gives no ground of action. Karberg's case.

3.Confirmation: If the shareholder does any act which amounts to confirmation of the purchase (e.g., if he accepts dividends) the right to rescind the contract or get damages is lost 4. Laches : The shareholder must bring his action without undue delay, otherwise he loses his right.


A public company having a share capital and not issuing a prospectus must at least 3 days before the first allotment o shares or debentures, file with the Registrar for registration i statement in lieu of prospectus. The statement must be in the form prescribed in Schedule Ill to the Act. The prescribed form provides for the disclosure of all material facts relating the  company.-Sec. 70(1)

If the statement in lieu of prospectus contains any untrue statement, the persons responsible for the issue thereof may bi punished by imprisonment which may extend to 2 years or with fine which may extend to Rs. 5,000 or with both.-Sec. 70(5) Statement in lieu of Prospectus like in the Prospectus constitutes the basis of the contract of purchase of shares between the company and the shareholder. Liabilities for misstatement and false statement are the same as in a prospectus.


Section 64 provides that certain documents are to be include, within the term Prospectus by implication of law. Where company allots or agrees to allot any shares in or debenture of the company with a view to all or any of those shares o debentures being offered for sale to the public, any document by which the offer for sale to the public is made, is deemed to be a prospectus issued by the company.

Subject to the modifications stated below; all the rules laid down in the Act, regarding prospectuses, (contents, liability for misstatements etc.) apply also to a prospectus by implication

l. The following additional matters must be stated in it­ the net amount of consideration to be received by the company in respect of the shares or debentures : and the place and time at which the contract (under which the shares or debentures are to be allotted) may be inspected.

2. The persons making _the offer of sale to the public are to be deemed directors of the company for the purpose of registration of the prospectus.

3. Where the person making the offer is a company, the prospectus may be signed by any two directors ; where the offer is made by a firm, it may be signed by not less than one-half of the partners.

Unless the contrary is shown, an allotment or agreement to allot shares or debentures will be deemed to have been made with a view to sale to public, under the following circumstances :

1. When the offer for sale was made within six months after the allotment or agreement to allot.

2. When at the date of the offer for sale, the whole consideration to be received by the company for the shares or debentures had not been received by it.


Where shares are offered to the public for subscription, the prospectus must mention the minimum amount which must be raised by the issue of shares before the company can commence business.-Schedule V, clause S.

The minimum subscription is to be fixed by the directors or by the persons who have signed the memorandum. Its amount is to be determined by taking into account the following expenses :

(1) the purchase price of any necessary property :

(2) the preliminary expenses, including commissions payable for the sale of shares ;

(3) repayment of any moneys borrowed by the company for the above two purposes

(4) working capital ;

(5) any other necessary expenditure.

The information regarding each of the above items must be stated under each head.

The amount stated in the prospectus as minimum subscription, is to be reckoned exclusively of any amount payable otherwise than in money.

Shares cannot be allotted until applications have been received sufficiently to cover the minimum subscription.



"Allotment means the appropriation to ail applicant by a resolution of the directors of a certain number of shares in response to an application. Shares so allotted are not, in general specific shares identified by number; the numbering is left till later."-Palmer's Company Law, 19th ed. p. 104.

Rules regarding allotment

The rules regarding allotment are summarised below.

1. Application Form

The prospectus is an invitation to the public to purchase shares. Persons intending to purchase shares have to apply in a form prescribed in the prospectus for the purpose and called the "application farm." The prospectus also fixes the time when the applications will be opened and the allotment of shares to the applicants will be made. The time is known as "the time of opening of the subscription lists." Applicants to whom shares have been allotted are informed by a letter. This letter is called, "the notice of allotment." As per SEB( guidelines, application money cannot be less than Rs. 2,000 and that issue must be kept open for at least 3 working days.

2. Result of a contract

Membership of a company by purchase of shares is the result of a contract. The application by the intending shareholder is the "offer" for the purchase of shares. Allotment by the directors is the "acceptance of the offer". The notice of allotment is the "communication of the acceptance". Each of these stages in the formation of the contract must conform to the rules laid down in the Contract Act.

3. Conditional offers and acceptance of shares

Conditions are usually printed on the application form. very common condition is that in case of over-subscription, number of shares' allotted to each subscriber will be proportionately less than the' number of shares applied for.

But conditional acceptance is usually invalid. No condition should be attached to the acceptance of the offer to purchase

shares. If the acceptance introduces a new term it will be a new offer by the company and it shall not be effective unless it is accepted. Jackson v. Turquand

4. By the proper authority

The allotment of shares is to be done by the board of directors of the company. Allotment can be delegated to some persons or a Committee, provided there is a provision in the Articles of the company. Allotment made by any other than the proper authority is void.

5. Within a reasonable time

The allotment must be made within a reasonable time, otherwise the applicant is not bound to take the shares. The offer to buy the shares is deemed to be revoked if there is an unreasonable delay in accepting the offer. Ramsgate P71cloria Hotel Co. v. Montefiore.2 ; Indian Co-operative Navigation v. Padamsey. As per SEBI guidelines, if allotment is not made within 30 days from close of issue, interest @15% must be paid. 6. Application in a fictitious name

Any person who

(a) makes in a fictitious name an application to a company for acquiring, or subscribing for, any shares therein, or

(b) otherwise induces a company to allot, or register any transfer of, shares therein to him, or any other person in a fictitious name shall be punishable by imprisonment  up to 5 years. This provision must be printed in every prospectus and application form.-Sec. 68A.


The Companies Act prescribes the following restrictions on the allotment of shares :

1. Opening of subscription list

No allotment can be made until the beginning of the 5th day after the publication of the prospectus or such later time as may be prescribed for the purpose in the prospectus, (Sec- 72).

The 5th day is to be counted from the date when the prospectus was published in a newspaper or was otherwise notified to the public. The object of this rule is to provide sufficient time to tile public to send the applications.

2. Revocation of the application

An application for shares cannot be revoked until after the expiration of the 5th day after the time of opening of the subscription lists, except in one case. If any of the persons responsible for the issue of the prospectus, gives public notice ol' withdrawal of his consent to the issue of the prospectus, any of the applicants can revoke his application, whereupon no shares can be allotted to him.

3. Punishment

An allotment of shares prior to the time prescribed under this rule is not void. But the directors making such allotment ' are liable to punishment.

4.Minimum subscription

No allotment can be made until the amount fixed as the minimum subscription has been received.-Sec. 69(1).

5.Application money

The amount payable on each share, with the application form, %hall not be less than 5 per cent of the nominal value of the share.-Sec. 69(3).

6. Deposit in a Scheduled Bank

All moneys received from the applicants must be kept in deposit in a scheduled bank until the certificate to commence business has been obtained, or, (where such certificate has already been obtained) until the entire amount payable on applications for shares in respect of the minimum subscription has been received by the company.–Sec. 69(4).

7. return of Money

If the minimum subscription is not raised or if, for any other reason, allotment could not be made within 120 days from the date of publication of the prospectus, the directors must forthwith return the moneys received from the applicants. No interest is payable if the money is refunded within 130 days. Thereafter, the directors are, jointly, and severally, liable to pay interest at 6 per cent per annum from the 130th day to the day of repayment. But a director shall not be so liable if he proves that the default in the repayment of the money was not due to misconduct or negligence on his part.-Sec. 69(5).

8. Statement in lieu of Prospectus

A public company which has not issued any prospectus must, at least 3 days before the first allotment of shares, deliver to the Registrar for registration, a Statement in lieu of Prospectus, signed by every director or proposed director or his agent in the form prescribed in Schedule III of the Act.-Sec. 70.

9. Stock Exchange recognition

Where the prospectus states that application has been made or will be made for the shares (or debentures) being dealt with in a stock exchange, the application necessary for securing permission of the authorities of the stock exchange must be made before the 10th day after the first issue of the prospectus. The name of stock exchange must be stated Any allotment, made on an application based on such a prospectus, becomes void if stock exchange permission is not applied for or if such permission is not granted within 10 weeks from the date of the closing of the subscription list. The company must thereupon return all moneys received from the applicants of shares. 1`o interest is payable if the moneys are returned within 8 days. Thereafter, interest is payable at 12%-Sec. 73. Companies (Amendment) Act, 1974.

Section 73 of the Companies Act has been amended and the amended section provides that all pubtic issues of every Company must be listed with recognised stock exchanges.

If a Stock Exchange refuses to list the shares of a public company, the company can appeal to the Central Government.­ Sec. 22 of Securities Contracts (Regulation) Act 1956.

Section 73(2A) provides that where "the moneys received from applications for shares or debentures are in excess of the aggregate of the application moneys relating to the shares or debentures in respect of which allotments have been made , the Company shall repay the moneys to the extent -of such excess' ,within eighth day. The Company and every director of the Company who is an officer in default shall, on and from the expiry of the eighth day, be jointly and severally liable to repay that money with interest at such rate, not less than- four per cent, and not more than fifteen per cent, as may be prescribed;

Effects of an irregular allotment

An allotment made in violation of sections 69, 70 and 73 (summarised in rules 1 to 7 above) has the following consequences:

I. Option: The allotment becomes voidable at the option of the shareholder. The option, to avoid the contract, must be exercised within 2 months of the holding of the statutory meeting or, where no statutory -meeting is required to be held or where the allotment is made after the holding of the statutory meeting, within 2 months after the date of allotment. The option to avoid can be exercised even if the company is in course of liquidation.­Sec. 71(1) and (2).

2. Compensation : Any director knowingly or willfully contravening the rules or authorising the contravention, shall be )iable to pay compensation to the shareholders concerned for any loss or damage suffered. The suit for compensation must be brought within 2 years of the date of allotment.-Sec. 71(3).

3. Fine : "The validity of an allotment shall not be affected by any contravention of the foregoing provisions of this section ; but in the event of any such contravention, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees."—Sec. 72(3).

4. Void: Any allotment made in violation of Section 73 is void. (See para 9 above.)


Whenever a company having a share capital makes any allotment of its share, it must within 30 days thereafter file with. the Registrar a return of the allotment, giving full particulars of the allotment made.-See. 75.

Allotment means appropriation out of the previously unappropriated capital of a company of a certain number of shares to a person. In this sense the re-issue of a forfeited share to a

person is not allotment, within the meaning; of Sec. 75.-Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association '& ors.


A public company, having a share capital and issuing a prospectus, cannot commence business until the Registrar issues a certificate known as the certificate  of Commencement of Business. the certificate is issued after the following formalities have been complied with.-Sec. 149(l):)

(a) The minimum subscription has been raised.

(b) Every director has paid the moneys payable, on application and an allotment, for the shares taken up by him.

(c) No money is repayable for failure to obtain stock exchange recognition for the shares, where such recognition was promised. (d) A duly verified declaration by a director or the secretary has been filed with the Registrar stating that the above requirements have been complied with.

A public company having a share capital but not issuing a prospectus, will get the commencement certificate if the following conditions are satisfied.-Sec. 149(2) filed with

(a) A statement in lieu of prospectus has been the Registrar..

(b) The directors have paid the moneys due from them on { account of shares.      .

(c) A declaration by a director or the secretary has been filed : with the Registrar stating that condition (b) has been satisfied.

The amending Act of 1965. adds a new sub-section (2A) to Section 149 which places certain further restrictions on the commencement of business in certain cases. Section 13 of the Act, as amended by the Act of 1965,  provides that the, Memorandum of Association of a company ; formed after the commencement of the Act of 1965 must state  separately

(a) the main objects of the company together with  objects incidental and ancillary to them and

(b) other objects, if any. (Sec p.567). The new subsection (2A) of Sec. 149' provides that

(1) in the case of such a company, if it starts any  business coming under (b) above, viz., other objects and

(2) in the case of a company already existing at the date of commencement of the amending Act of 1965, if it starts a new business not germane to the business it is carrying on, on that date, the following conditions must first be fulfilled.

1. The company has approved of the commencement of any such business by a special resolution passed on that behalf by it in general meeting.

2. There has been filed with the Registrar a duly verified declaration by one of the directors or the secretary that the above provision or the exception noted below has been complied with.

The new sub-section (2B) provides for one exceptional case. The Central Government may, on an application made to it by the Board of Directors, permit such new business in cases where no special resolution has been passed but where in the general meeting the votes cast in favour of commencing such business is more than the votes cast against it.

Contravention of the provisions relating to commencement of business a punishable by fine which may extend to Rs. 500 per day. The restrictions on the commencement of business, as provided in Sec. 149, apply to all public companies having a share capital, whether-issuing a prospectus or not.

A company may enter into contracts before the date of commencement of business but such contracts remain provisional up to the commencement date and become binding on that date.