7

JOINT STOCK
COMPANY (II)

“A company is formed to reduce the financial responsibility

of the business’ owners.”
148 INTRODUCTION TO BUSINESS

Students’ Learning Outcomes

Kinds of Company
Difference between Public & Private Company
Conversion of Private Company into Public
Company
Promoters of Company
Formation of a Company
Important Documents of Company
Difference between Memorandum & Articles of
Company
Sources of Company’s Capital
Kinds of Company’s Capital

KINDS OF COMPANY

Companies having distinguished features can be classified as under.

Kinds of Company

(1) (3)
According According to Liability
to Incorportion

Limited Limited by Unlimited

by Shares Guarantee Company
Chartered Statutory Registered
Company Company Company (4)
Modaraba
Company

(2) (5)
According to Ownership According to
Nationality

Public Private Govt. Holding Subsidiary

Company Company Company Company Company Pakistani Foreign
Company Company
[CHAPTER-7] JOINT STOCK COMPANY (II) 149

1. ACCORDING TO INCORPORATION
(i) Chartered Company:
❏ These companies are formed by the royal order or charter.
❏ The word "limited" is not used with the name of company.
❏ The management of company is run according to the provisions
of charter.
❏ The members are not liable for the debts of company.
(e.g) Chartered Bank of England, Royal Bank of Scotland and
East India Company etc.
(ii) Statutory Company:
❏ These companies are formed by the order of president or by the
special act of parliament.
❏ The main purpose of these companies is the welfare of public
and profit is not so important.
❏ It is not essential for these companies to use word "limited".
❏ These companies have monopoly in their respective fields.
❏ The liability of shareholders is limited to the value of shares
purchased.
(e.g) State Bank of Pakistan (SBP), Zarai Taraqiati Bank
Limited (ZTBL) and WAPDA etc.
(iii) Registered Company:
❏ Registered company is formed under Companies Act 2017. It
also includes an existing company defined in section 2(17) of
said Act.
❏ These companies are allowed to do various industrial,
agricultural and trading businesses.
❏ The rules regarding company's formation, management and
winding up are stated in Companies Ordinance.
(e.g) Adam Ji Industries, Wazir Ali Industries and Subhan
Textile Mill etc.
2. ACCORDING TO OWNERSHIP
(i) Public Company:
❏ In listed company, minimum number of members is seven but
there is no restriction for maximum.
❏ The word limited is used after the name of company.
❏ The minimum number of directors is seven.
❏ Shares of the company can easily be sold and transferred.
150 INTRODUCTION TO BUSINESS

❏ The liability of the shareholders is limited to the value of shares

purchased.
❏ It is essential for the company to issue prospectus.
❏ The audit of company's accounts is compulsory every year.
❏ It is necessary for the company to call statutory meeting within
three to six months of its commencement.
❏ The minimum number of promoters is seven.
❏ For example PTCL, PEL and SNGPL etc.
(ii) Private Company:
The private company may be of following two types:
(a) Single Member Private Company
The Securities and Exchange Commission of Pakistan (SECP)
introduced the concept of Single Member Company (SMC) through
amended Ordinance 2002 (SMC Rules 2003) in Pakistan. The objective of
the concept of single member company is to provide an opportunity to
single or sole owner to enjoy the benefits of limited liability. The main
characteristics of SMC are as under:
❏ There is only one member or shareholder in this company.
❏ The company uses the words (S.M.C Private Ltd.) after its name.
❏ The sole or single member is responsible for the management
of the company.
❏ The shares of the company are non-transferable.
❏ The liability of the owner of company is limited.
❏ The issuance of prospectus is not necessary for the company.
❏ The company has a separate legal entity apart from its single
member.
❏ The business life of company is long or durable because the
heirs of single or sole owner can continue the business in case
of his death.
❏ The promoter of SMC is its single owner.
❏ For example, Pearl Consultancy (SMC-Pvt Ltd.), Islamabad.
(b) Multi Members Private Company
❏ In this company, minimum number of members is two and
maximum is fifty.
❏ The company uses the word "Private" with its name.
[CHAPTER-7] JOINT STOCK COMPANY (II) 151

❏ Minimum number of directors is two.

❏ The shares of the company are not transferable.
❏ The liability of the shareholders is limited.
❏ It is not essential for the company to issue prospectus.
❏ The audit of the company is not compulsory.
❏ This company can start its business after getting the certificate
of incorporation.
❏ There is no restriction on the company to call statutory meeting.
❏ Minimum number of promoters is two.
❏ For example, Tapal (Pvt.) Ltd. and HKB (Pvt.) Ltd. etc.
(iii) Govt. Company:
❏ These companies are owned by Federal or Provincial Government.
❏ The company's all or more than 50% shares are held by the
government or the government has power to nominate more
than 50% of its directors.
❏ This company may be registered as public or private.
❏ The Govt. is also responsible for the profit & loss of the company.
❏ Punjab Seed Corporation etc.
❏ For example, Punjab Seed Corporation and Pakistan Television
Cooperation etc.
(iv) Holding Company:
❏ It is a company which holds more than 50% shares of another
company.
❏ The company may have the powers to appoint more than 50%
of directors of another company.
❏ For example, Nishat Mills Limited is the holding company of
Nishat Power Limited and PSO is the holding company of
PICIC growth fund in Pakistan.
(v) Subsidiary Company:
❏ It is company whose more than 50% shares are held by another
company (Holding Company).
❏ Its more than 50% directors may be selected by the holding
company.
❏ For example, Nishat Power Limited is the subsidiary company
of Nishat Mills Limited and PICIC growth fund is the
subsidiary of PSO in Pakistan.
152 INTRODUCTION TO BUSINESS

3. ACCORDING TO LIABILITY
(i) Limited by Shares:
❏ It is a company which collects its capital by selling shares.
❏ The liability of shareholders is limited up to the value of
purchased shares.
❏ It may be public or private limited.
❏ It is essential for such company to use the word ‘limited’ at the
end of its name.
❏ Packages Limited, Lahore etc.
(ii) Limited by Guarantee:
❏ In this company, every member gives guarantee to contribute a
specified amount of money at the time of winding up of
company.
❏ The liability of members is limited up to the guaranteed
amount.
❏ It may be formed with or without share capital.
❏ The main object of the company is not to earn profit.
❏ The company uses the word “Guarantee Limited” with its
name.
❏ For example, The Pakistan Mutual Insurance Company
(Guarantee Limited) etc.
(iii) Unlimited Company:
❏ In this company, the liability of shareholders is unlimited.
❏ The private property of the members is also liable to pay
company's debts.
❏ This company is established under section 15(2)(c) of
companies Act.
❏ The shares of this company can be transferred.
❏ For example, American Express Company USA etc.
(iv) Association Not for Profit (U/S 42):
❏ In this organization, the word limited is not used with its name.
❏ It enjoys all the privileges of a limited company.
[CHAPTER-7] JOINT STOCK COMPANY (II) 153

❏ It requires license from Federal Government for its formation

as a company.
❏ It is established to promote commerce, art, science or religious
activities.
❏ For example, Pakistan Institute of Corporate Governance,
MKRF and Khushal Pakistan Fund etc.
4. MODARABA COMPANY
❏ This company is formed under Modaraba Companies
Ordinance 1980 (Applicable w.e.f 26-06-1980).
❏ In this company, one party contributes capital whereas other
party participates with his skill and experience.
❏ The contributor of capital is called "Rab-ul-Mal" and the
person who manages the business affairs is called "Modarib".
❏ The certificates of Modaraba company are transferable.
❏ A Modaraba company may be for definite or indefinite period
of time.
❏ The Modaraba may be multipurpose or specific.
❏ For example, NBP Modarba and ABL Modaraba etc.
5. ACCORDING TO NATIONALITY
(i) Pakistani Company:
❏ It is a company which is formed and registered in Pakistan.
❏ It may be public or private limited.
❏ The people of Pakistan have right to receive all the benefits of
the company.
❏ For example, Haleeb Food (Lhr.) and Kohinoor (Kchi.) etc.
(ii) Foreign Company:
❏ It is company which is formed and registered outside the
Pakistan.
❏ The company's registered office is outside the Pakistan whereas
its branches are situated in our country.
❏ The foreign owners of the company receive all the profits of
company.
❏ It is essential for the company to submit its accounts and
reports to Pakistani registrar.
❏ For example, Uniliver and Nestle etc.
154 INTRODUCTION TO BUSINESS

COMPARISON OF PUBLIC & PRIVATE COMPANY

Public Limited Company:
According to section 2(52) of the Companies Act 2017, the company
in which liability of the shareholders is limited and its shares can be easily
sold and transferred. Moreover, there is no restriction on the maximum
number of shareholders. For example, PTCL and SNGPL etc.
Private Limited Company:
According to Section 2(49) of Company’s Act 2017, the company,
which is prohibited to invite public for the subscription of shares and its
shares, are not transferable. Moreover, the maximum number of its
shareholders is fifty. For example, Tapal (Pvt.) Ltd. and HKB (Pvt.) Ltd. etc.
Public Company Private Company
1. Number of Members:
There must be at least 7 There must be at least two
members in case of listed members to form a multi
company and 3 in case of members private company and the
unlisted company for the maximum limit of members is 50.
formation of a public
company. There is no
maximum limit over the
number of members.
2. Sale of Shares:
Public limited company can Private Limited Company cannot
sell its shares to public. sell its shares to public.
3. Transfer of Shares:
The shares of public limited The shares of private limited
company can be transferred company are not transferable.
easily.
4. Allotment of Shares:
In a public company, there is In case of private company, there
a restriction of minimum is no restriction for allotment of
subscription for allotment of shares.
shares.
[CHAPTER-7] JOINT STOCK COMPANY (II) 155

5. Prospectus:
It is compulsory for public There is no restriction on private
company to issue prospectus company for issuing prospectus.
after obtaining certificate of
incorporation.
6. Publication of Reports:
Public company must There is no restriction for
publish its annual publication of annual report.
performance report.
7. Directors:
There must be at least seven There must be at least two
directors to manage business directors in multi-members
affairs. private company.
8. Statutory Meeting:
It is compulsory for public There is no compulsion for
company to hold statutory private company to call statutory
meeting. meeting.
9. Written consent of
directors: The directors of private company
In public company, directors are not required to give their
have to give written consent consent for directorship.
that they are ready to act as
the directors of the company.
10. Title:
Every public company has to Private company has to mention
use the word "Limited" after word “Private Limited” with its
its name. name.
11. Promoters:
In public company, there There must be at least two
must be at least seven promoters in case of multi-
promoters. members private company.
12. Tax Relief / Rebate:
The govt. gives relief or The govt. does not give relief or
rebate in tax to taxpayer for rebate in tax to taxpayer for
making investment in public making investment in private
companies shares. companies shares.
156 INTRODUCTION TO BUSINESS

13. Commencement of Business:

Public company has to get Private company can start its
certificate of commencement business after obtaining certificate
to start its business. of incorporation.
14. Dissolution:
Public company can be A private company can be wound
wound up in three ways: up:
(i) Compulsory by court. (i) With consent of members.
(ii) Voluntary winding up. (ii) Through court.
(iii) Under the supervision
of court.
15. Management:
In public company, In private company, owners are
shareholders elect the the member of management.
management by voting.
16. Size:
Public company is suitable Private company is only suitable
for both medium and large for medium scale business.
scale business.
17. Loan:
Public company cannot Private company can obtain loan
obtain loan after its after its incorporation.
incorporation.
18. Legal Restrictions:
Public company has to Private company follows less
follow strict legal legal restrictions as compared to
restrictions. public company.
19. List of Stock Exchange:
Public limited company can Private limited company cannot
be listed in stock exchange. be listed in stock exchange.
20. Quorum:
In directors meeting, the In multi-members private
minimum number of company’s directors meeting, the
directors is four or one-third minimum number of directors is
which ever is greater. two.
[CHAPTER-7] JOINT STOCK COMPANY (II) 157

21. Minimum Subscription:

It cannot obtain the certificate There is no need to fulfill the
of commencement of business requirement of minimum
without fulfilling of the subscription.
condition of minimum
subscription.
22. Submission of Reports:
There is compulsion to There are no strict rules for the
submit the various reports submission of reports to the
i.e., auditor’s reports, profit registrar’s office.
and loss account and balance
sheet to registrar’s office.

CONVERSION OF PRIVATE COMPANY

INTO PUBLIC COMPANY
The process of conversion of private company into public company
is as under:
(1) The private company should alter the following provisions in
its articles of association.
(i) Share-holders may transfer their shares.
(ii) They may invite the public for subscription of shares and
debentures.
(iii) Restriction on maximum number of shareholders should
be removed.
(2) Following necessary documents must be filed to the Registrar’s
office within 15 days along with altered articles of association.
(i) List of persons containing their names, addresses and
other particulars who have agreed to act as directors of
the company.
(ii) Consent of the directors.
(iii) Declaration of the directors, to take up their qualification
shares.
(iv) Declaration of the directors that they have paid for their
qualification shares.
(v) Prospectus or statement in lieu of prospectus.
(vi) Declaration from the directors or secretary or advocate
that all the provisions of the Companies Act have been
fulfilled.
158 INTRODUCTION TO BUSINESS

(3) The number of numbers must be increased to seven (7) incase

listed company if they are less than seven (7).
After the submission of above documents to the registrar’s office, a
private company may be converted into public company.
On application for change in status of a company, if the commission
is satisfied that the company is entitled for conversion then such
conversion shall be allowed by an order in writing. A copy of order, duly
certified by an authorized officer of the commission, shall be forwarded to
the company and to the registrar within seven days from the date of such
order.

PROMOTERS
The promoter is a business term. It is used to describe the person or
persons who initially take all necessary steps to form a company with
reference to a given object and set it going. So, the promoters give birth to
a business unit and nourish it until it stands on its own feet. Therefore, a
promoter serves both as a mother and mid-wife.
DEFINITION:
Promoters are persons engaged in the formation of a company.
They take the initiative of starting a business and bring a business
enterprise into existence.
Main Points of Definition
• The persons.
• Take initiative to start a business.
• In form a company.
• Help to set it going.
[FUNCTIONS OF PROMOTERS]
The promoters play an indispensable role in business by performing
following functions:
1. Conceive a business opportunity or the idea of starting a new
business;
2. Conduct a preliminary analysis of the idea to determine its
profitability and feasibility;
3. Carry out a detailed investigation in order to determine the
nature, scope and requirements of the propositions;
4. Consult various persons and persuade them to join in the
proposed business as directors;
[CHAPTER-7] JOINT STOCK COMPANY (II) 159

5. Appoint brokers, underwriters, solicitors and bankers for the

company;
6. Get the necessary documents prepared and filed for incorporation;
7. Get the prospectus prepared, issued and filed;
8. Make contracts for the purchase of assets;
9. Make negotiations for purchase of existing business; and
10. Make allotment of securities (shares).
[LIABILITIES OF THE PROMOTERS]
The detail of the liabilities of promoters is given below:
1. To disclose full details of the nature and extent of money taken
by them in the process of promotion;
2. To deposit all money received on the behalf of company in the
company’s bank account;
3. To refrain from selling their own property to the company at
unreasonably high prices;
4. To exercise due care and intelligence in the work of promotion;
5. To act without deceit, misfeasance or breach of trust towards
the company;
6. To surrender any secret profits made to the company;
7. To be personally liable for preliminary contracts till the
company approves these contracts;
8. To pay compensation to those who have invested money in the
company on the basis of untrue statements or misrepresentation
in the prospectus;
9. To be liable for failure to comply with the legal formalities; and
10. To make good any loss caused to the company on account of
negligence or breach of trust.
[TYPES OF PROMOTERS]
Promoters can be of the following types:
1. Entrepreneurs:
An entrepreneur conceives the idea of a new business and performs
all the work for establishing it as a going concern. He continues to manage
and control the business promoted by him. Entrepreneurs promote small-
scale enterprises such as sole proprietorships and partnerships.
160 INTRODUCTION TO BUSINESS

2. Professional Promoters:
Large-scale enterprises are generally promoted by experts. These
experts possess the necessary skills and knowledge in promotion. They
promote a business as a going concern and then hand over its management
and control to others. These promoters are interested only in looking out
for business opportunities and converting them into business units in
return for handsome remuneration.
3. Occasional Promoters:
This type of promoters promotes a business once in a while rather
than on a regular basis. Promotion is not their main job and after
promoting a company they go back to their original occupation. For
example, an engineer or technical expert may promote a business to
commercially exploit a patent or invention discovered by him.
4. Financial Promoters:
Banks and other financial institutions also perform the work of
promotion. Investment banks become active in the field of promotion
when the securities market is able to absorb new issues of equity shares. In
Pakistan, the Industrial Development Bank of Pakistan and other financial
institutions carry out the work of promoting industrial concerns.

FORMATION OF JOINT STOCK COMPANY

Formation means organizing and developing something.
Following are the important stages or steps for the formation of company:
Formation of Joint Stock Company

Promotion Incorporation Certificate of

Stage Stage Commencement
(i) Idea (i) Filing of Documents (i) Arrangement of Capital
(ii) Preliminary Investigation (ii) Payment of Registration (ii) Issuance of Prospectus
(iii) Assembling of Resources Fee (iii) Minimum Subscription
(iv) Estimation of Preliminary (iii) Certificate of (iv) Allotment of Shares
Expenses Incorporation
(v) Financial Sources
(vi) Name of the Company
(vii) Sanction for Capital issue
(viii) Preparation of Essential
Documents
[CHAPTER-7] JOINT STOCK COMPANY (II) 161

1. PROMOTION STAGE
It is a stage when concerned people (promoters) take following steps
to form a company
(i) Idea:
Before starting the business, promoters have to think about the nature
of company's business.
(ii) Preliminary Investigation:
After deciding the nature of business, promoters conduct preliminary
investigation and make out plans as regard to the availability of capital,
means of transportation, labour, electricity, gas and water etc.
(iii) Assembling of Resources:
If the promoters find preliminary investigation satisfactory then they
try to accumulate different factors of production. For this, they also take
help of several specialist persons and enter into agreements with them.
(iv) Estimation of Preliminary Expenses:
The promoters also work out the estimated preliminary expenses,
which are necessary to start and run the business.
(v) Financial Sources:
The promoters also decide the financial sources of the company. The
public company can raise its finance by issuing shares and debentures or
by making agreement with underwriters.
(vi) Name of the Company:
The promoters also decide the name of company. The name of the
company should be such which can indicate its functions and the name is
easy to remember. For the name, the permission of the Registrar should be
received in advance.
(vii) Sanction for Capital Issue:
For the maximum issue of shares capital or debentures, promoters
have to take permission from central government in advance.
(viii) Preparation of Essential Documents:
In addition to above discussed matters, the promoters also prepare
following essential documents for the formation of company:
(a) Memorandum of company.
(b) Articles of company.
(c) Prospectus of company.
162 INTRODUCTION TO BUSINESS

2. INCORPORATION STAGE
For registration or incorporation of a company, promoters have to
perform following formalities.
(i) Filing of Documents:
Following documents have to be submitted by the promoters in the
office of the Registrar of the area in which the company is to be
established.
(a) Memorandum of Association:
This document indicates the name of the company along with the
address of its Registered office and name of state. The most important
clause of this document is the objects of the company. It also indicates the
Authorized or Registered Capital of the company.
(b) Articles of Association:
This document contains byelaws for internal control and
management but it cannot go out of the objects mentioned in
Memorandum of Association.
(c) List of Directors:
Promoters have to send a list of the names of directors, occupation
and addresses along with their declaration to the registrar that they are
ready to take the qualification shares. But private company is not required
to send such list.
(d) Written Consent of Directors:
All the directors whose names are in the list have to give their
written consent that they are ready to act as directors of the company. This
consent should be sent to the registrar.
(e) Declaration of Qualifying Shares:
Directors have to submit a declaration certificate to the registrar that
they have taken up qualifying shares and paid up the money or would pay
it in near future.
(f) Prospectus:
Promoters have to file a prospectus or statement in lieu of prospectus
with the registrar. This is not necessary in the case of a private company.
(g) Statutory Declaration:
At the end, promoters have to send a statutory declaration to the
Registrar that all legal formalities have been completed and fulfilled.
[CHAPTER-7] JOINT STOCK COMPANY (II) 163

(ii) Payment of Registration Fee:

For the registration of company, the registration fee is also paid to
registrar, which can be divided into following three parts.
❏ Application and documents filing fee.
❏ Registration fee (varies with the amount of authorized capital
of the company)
❏ Stamp fee on memorandum and articles.
(iii) Certificate of Incorporation:
If the registrar finds all the documents right and thinks that all the
formalities have been done then he issues the certificate of incorporation
to promoters. After this, the private company can start its business.
Certificate of Incorporation
Date: July 01, 2017
I hereby certify that ABC Company Limited of Lahore is
incorporated under the Companies Act (xxxx), and that Company is a
Limited Company.

Given under my seal in Lahore.

Xxxx
Registrar
Joint-Stock Companies
3. CERTIFICATE OF COMMENCEMENT
After getting certificate of incorporation, every public company has
to obtain the certificate of commencement to start the business activities,
which requires the fulfillment of following conditions.
(i) Arrangement of Capital:
The next stage is to make arrangement for raising capital. For any
kind of business, the company raises its capital through following sources
(a) By issuing shares.
(b) By issuing debentures.
(c) By savings.
164 INTRODUCTION TO BUSINESS

(ii) Issuance of Prospectus:

The company issues prospectus for selling shares to public. The
interested investors apply for shares through nominated banks by
depositing the required amount.
(iii) Minimum Subscription:
After receiving applications from the people for purchasing shares, it
is also certified that the amount of shares have been received and the
amount is not less than the minimum subscription.
(iv) Allotment of Shares:
The bank allots the share according to the provisions of
memorandum and the decision to allot share is communicated to
applicants through the letters.
After verifying the foregoing documents, the registrar issues a
certificate of commencement of business to public company.
Certificate of Commencement of Business
Date: July 01, 2017
I hereby certify that ABC Company Limited of Lahore is
incorporated under the Companies Act (xxxx), and which has this day
filed statutory declaration in the prescribed form that the conditions of the
Companies Act (xxxx) have been complied with, is entitled to commence
its business.

Given under my seal in Lahore.

Xxxx
Registrar
Joint-Stock Companies

BASIC/IMPORTANT DOCUMENTS OF A COMPANY

The documents necessary for the formation/registration of a Joint
Stock Company are known as Basic/Important Legal Documents. There
are following three important or basic documents of a company.
1. Memorandum of Association. [Section 27, 28, 29, 30 & 31]
2. Articles of Association. [Section 36 & 37]
3. Prospectus. [Section 2(51)]
[CHAPTER-7] JOINT STOCK COMPANY (II) 165

1. MEMORANDUM OF ASSOCIATION:
It is a document, which determines the rights, powers and objects
of company. It is the most important legal document, which must be
submitted to the registrar before the establishment of company. This
document is a sort of contract between the company and other persons
outside the company like bankers and creditors etc., which explains the
legal position of company. No change can be made in memorandum
without the prior permission of court.
If the company works on a line, which is not given in Memorandum
then it will be considered as illegal. The memorandum should be printed
and divided into different paragraphs. Each paragraph should be numbered
and signed by its promoters.
Main Points of Definition
• Most important document.
• Determines the rights, powers and objects of company.
• Necessary to submit the registrar of company.
[CONTENTS]
1. Name Clause:
The name of the company should be selected very carefully and it
must not be similar to any exiting company. If the liability of shareholders
is limited then the word limited must be written with the name of company
and word private should be used with the name of private company.
2. Head Office:
The company should have registered head office in the state and
province where it wants to initiate its business. The company cannot start
its business without registered head office. In case of any change in the
address, it is required to inform the registrar within 28 days.
3. Capital Clause:
It is also mentioned in memorandum that what will be the amount of
total capital, its division in shares and the value of each share.
4. Object Clause:
It is an important clause of memorandum. In this clause it is always
written that what type of business the company will do. If company does
not work according to its object then this action will be considered as
illegal.
5. Liability Clause:
It is clearly written in memorandum that the liability of the
shareholders is limited or unlimited.
166 INTRODUCTION TO BUSINESS

6. Association Clause:
This clause includes an agreement among all the promoters in which
they give their consent to (a) Form a particular company (b) Purchase
allocated shares (c) Work for better prospects. In this clause, signatures,
names, addresses and other relevant information about the promoters are
also included.
Alteration:
According to section 32 and 33 of Companies Act 2017, the
company can change the clauses of memorandum with the sanction of the
commission.
2. ARTICLES OF ASSOCIATION:
It is second important document of the company, which includes
the rules and regulations necessary to run the company and to govern
the internal organization. "Articles" are responsible for the good conduct
of whole management. This document never includes any such rule or
regulation, which is against the memorandum. When a company does not
disclose its rules and regulations then a model called Table ‘A’ comprised
of 90 clause First Schedule contained in Companies Act 2017 is
considered as articles of the company.
Main Points of Definition
• Second important document of company.
• Rules and regulations for running a company.
• Does not contain any rule against the memorandum.
[CONTENTS]
1. Capital and its division into shares.
2. Different types of shares.
3. Value of shares and their transfer.
4. Method for the change in capital.
5. Rights of shareholders.
6. Conversion of shares into stock.
7. Name and number of directors.
8. Powers and duties of directors.
9. Methods to call the meetings.
[CHAPTER-7] JOINT STOCK COMPANY (II) 167

10. Voting powers of shareholders.

11. Appointment of directors.
12. Accounts and their audit.
13. Appointment of auditors, their rights and duties.
14. Distribution of profit and reserve capital.
15. Directors’ meeting.
16. Method of selling shares.
17. Seal of company.
18. Right, duties and remuneration of managing agents.
Alteration:
According to Section 38 of Companies Act 2017, the shareholders of
the company can change the articles by passing special resolution but this
change should not be against the memorandum and ordinance.
3. PROSPECTUS:
Prospectus is a document advertised by a company for raising the
capital. In this, the general public is invited to purchase the shares. An
attested copy of prospectus should be submitted to registrar's office. It also
contains the date of issue.
Main Points of Definition
• An offer by a company.
• To general public.
• For the purchase of shares.
[CONTENTS]
1. All points of memorandum.
2. Name and address of company.
3. Names and addresses of directors.
4. Names and addresses of auditors.
5. Conditions on which the shares to be issued.
6. Rights of shareholders attached to shares.
168 INTRODUCTION TO BUSINESS

7. Estimated preliminary expenses.

8. Detail of property purchased by the company.
9. Balance sheet of company.
10. Amount payable on application.
11. Any restriction on the transfer of shares.
12. Minimum Subscription on which the directors may allot the
shares.
13. Name of underwriters and their commission.
14. Duties and remuneration of Directors.
15. Business contracts.
16. Dividend ratio on different kinds of shares.
17. Kinds of shares.
18. Sale of shares (at par, discount or premium)
STATEMENT IN LIEU OF PROSPECTUS
According to Section 19(1)(e) of Companies Act 2017, if a public
company is not in a position to submit prospectus at the time of
registration or the promoters want to raise necessary capital through
private contacts then another statement containing all necessary
information in the form described in second scheduled of the said Act is
sent to registrar's office before the first allotment of shares. This statement
is known as "Statement in Lieu of Prospectus".
[CONTENTS]
1. Name of the company.
2. Corporate Universal Identification No. (CUIN).
3. Registered Office, Telephone No., Fax No., Website Address
and E-mail Address.
4. Authorized share capital of the company.
5. Description of the business to be actually undertaken and future
prospects of the said business.
6. Particulars of chief executive, directors, company secretary,
chief accountant, chief financial officer, auditor, legal advisor
and managing agent (if any) of the company.
7. Remuneration payable to the persons referred to in 6 above.
[CHAPTER-7] JOINT STOCK COMPANY (II) 169

8. Number and amount of shares to be issued, including those

agreed to be taken by virtue of Memorandum of Association
for cash.
9. Number and amount of shares agreed to be issued for
consideration otherwise than in cash.
10. Number and amount of debentures agreed to be issued for cash
and otherwise than in cash.
11. Commission agreed to be paid for arranging the subscribers of
shares and debentures.
12. Details of the every agreement entered into since the date of
incorporation relating to property or other intangible assets.
13. In case it is proposed to acquire a running business, net profit /
loss of that business as certified by the auditor for the last 5
years or such number of years being less than five years for
which the business has been carried on.
14. Details of preliminary expenses.
15. Minimum subscription and its proposed utilization.
16. Signatures of the Directors or their authorized agents.

COMPARSION OF MEMORANDUM & ARTICLES

Memorandum of Association:
It is a document, which determines the rights, powers and objects of
company.
Articles of Association:
It is a document, which contains rules & regulations regarding the
operation of business.
Memorandum of Association Articles of Association
1. Registration:
No company can be registered Articles of association is not
without submitting necessary for the registration of
memorandum to registrar. company.
2. Importance:
It is the most important and It is the secondary document of
primary document of the the company.
company.
170 INTRODUCTION TO BUSINESS

3. Nature:
A memorandum is a sort of The articles of association
contract between the determine the relationship
company and the other between the shareholders and the
persons outside the company management of company.
like bankers and creditors etc.
4. Need:
Every company has to A company limited by shares may
prepare memorandum of not have its articles upto a
association. specified limit of shares.
5. Clauses:
The memorandum of The articles are not limited to six
association has usually six clauses (e.g.) Table A in first
clauses which can be schedule of Companies Act has
increased as per requirement. 90 clauses.
6. Contents:
Memorandum of association The articles of association state
contains the powers and provisions for achieving the
objects of company. objects of company.
7. Alteration:
It cannot be altered without It can be altered by a special
the permission of court and resolution at any time.
central government.
8. Preparation:
It is prepared under the It is prepared under the provisions
provisions of companies of companies ordinance and
ordinance. memorandum of association.
9. Status:
It is the charter of company. Articles of association are the by-
laws of company.
10. Legal Effect:
A company cannot go A company can go beyond the
beyond the scope of scope of articles of association.
memorandum of association.
[CHAPTER-7] JOINT STOCK COMPANY (II) 171

CAPITAL / FINANCING SOURCES OF COMPANY

There are following sources of a company to obtain capital.

Capital Sources

(1) (3)
Shares Savings

Ordinary Preference Deferred

Shares Shares Shares

Cumulative Non–cumulative
Preference Preference
Shares Shares

(2)
Debentures

Simple Mortgage Registered Bearer Redeemable Irredeemable Convertible

Debentures Debentures Debentures Debentures Debentures Debentures Debentures

1. SHARES:
The total authorized capital of the company is divided into small
units and each unit is individually called "Share". The purchasers of these
shares are called "shareholders". Moreover, the shares are considered as
the main source to raise company's capital.

KINDS OF SHARES
(i) Preference Shares:
These are the shares whose holders have preferential rights in respect
of the payment of dividend and repayment of capital in the event of
winding up. The rate of dividend on these shares is fixed. There are further
two types of preference shares.
172 INTRODUCTION TO BUSINESS

(a) Cumulative Preference Shares:

If the profit of company is not enough to pay dividend on any kind of
shares at the end of financial year then the right of dividend on these
shares accumulates until all arrears of unpaid dividend have been paid.
(b) Non-Cumulative Preference Shares:
Non-cumulative preference shares are the shares on which if
dividend is not paid out of current year's profit in any year then it is never
paid.
(ii) Ordinary Shares:
Ordinary shares are the shares on which dividend is not paid at fixed
rate. Ordinary shareholders receive the dividend proportionally out of
profit earned by the company after the payment of fixed dividend on
preference shares.
(iii) Deferred Shares:
The shares issued to promoters of the company are called "Deferred
or Founders Shares". The dividend on these shares is paid after the
payment of dividend on all other kinds of shares.
TERMS OF ISSUANCE OF SHARES
A company can sell its shares on following terms.
Terms of Issue

At par At discount At premium

(a) At Par:
If the company sells its shares at face or nominal value then it is
called issuance of shares at par.
(b) At discount:
When the shares are issued at a price, which is less than its face
value then it is called issue of shares at discount.
(c) At Premium:
Issue of shares at premium means that the shares are being issued at
a higher price than the face value of shares.
ISSUANCE OF SHARES
After obtaining registration certificate, the company issues its
prospectus to sell the shares to general public. The interested parties
deposit the amount of shares along with the form attached with prospectus
into the bank. After this, the directors of the company call the meeting and
send the allotted shares to shareholders within 30 days.
[CHAPTER-7] JOINT STOCK COMPANY (II) 173

2. DEBENTURES:
If a Public Limited Company is empowered by its memorandum of
association to borrow a fixed amount of money for meeting the long term
needs of the business, the company invites applications from interested
persons to lend money for a specified period and acknowledges the receipt
of this loan through a certificate. The document or certificate, which the
company issues as receipt of the borrowed amount to the lender, is known
as debenture. It contains a contract for the repayment of the principal
amount and amount of interest at a specified future date to the
debentureholder. The debenture holders have a preferential claim on the
assets of the company as compared to all kinds of shareholders.
KINDS OF DEBENTURES
There are following major kinds of debentures, which are normally
issued by the companies.
(i) Ordinary Debentures:
The debentures issued without any security of repayment (loan and
interest) are known as ordinary debentures. The company issues these
debentures to well-known persons and institutions.
(ii) Mortgage Debentures:
A mortgage debenture is one, which is secured by a mortgage of total
or a portion of the property of company. If the company fails to repay the
borrowed amount at the specified period of time, the debentureholder has
legal right to sell the mortgaged property to recover the amount of loan.
(iii) Registered Debentures:
If the names and addresses of debentureholders are recorded in the
register of company then the debentures are considered as registered
debentures. Transfer of these debentures must also be registered in the
books of company. Interest and principal amount are paid to the registered
debentureholders only.
(iv) Bearer Debentures:
In case of bearer (unregistered) debentures, the names and addresses
of debenture holders are not written in the books of company. The holders
or bearers of such debentures are entitled to receive the interest and
principal amount on due dates. Moreover, these debentures are freely
transferable.
(v) Redeemable Debentures:
These are the debentures, which are repayable at a specified time in
future are known as "Redeemable Debentures”. Normally the joint stock
companies issue redeemable debentures.
174 INTRODUCTION TO BUSINESS

(vi) Irredeemable Debentures:

The debentures, which are not payable during the life of issuing
company and only repayable at the time of winding up of company is
known as irredeemable debentures.
(vii) Convertible Debentures:
These are the debentures, which allow the debentureholders to
convert their debentures into ordinary or preference shares of the company.
If the investors avail this opportunity then they become the shareholders of
company.
3. BY SAVING:
According to this method, the company requires a long period to
raise the capital. Sometimes, the company earns more profit as compared
to previous years then a specified portion of excess profit is transferred to
"Reserve Fund" instead of distribution among shareholders. This fund can
be used for the operation of company's affairs in future and the company
has not to pay interest etc. on such capital.

COMPARISON OF DEBENTUREHOLDER & SHAREHOLDER

Shareholder:
The people who provide finance to company by purchasing shares
are called shareholders.
Debenture holder:
The people to whom company issues debentures as a security of loan
are called debenture holders.
Shareholder Debentureholder
1. Status:
Shareholders are the owners Debentureholders are the creditors
of the company. of the company.
2. Management:
Shareholders participate in Debentureholders cannot interfere
the management of in the affairs of company.
company.
3. Rights:
Shareholders share profit & Debentureholders receive interest
loss of the company. at a fixed rate.
[CHAPTER-7] JOINT STOCK COMPANY (II) 175

4. Withdrawal:
Shareholders cannot Debentureholders can withdraw
withdraw their capital their money after a fixed period.
because the shares exist till
the winding up of company.
5. Return on Investment:
The shareholder gets the The debentureholder gets the
return on his investment in return on his investment in form of
form of dividend. interest.
6. Islamic Point of View:
Islam has the concept of There is no concept of debenture
shareholder. holder in Islam.
7. Responsibility:
The shareholders are Debentureholders are not
responsible for the responsible for company's debts.
company's debts.
8. Rights & Powers:
The rights and powers of The rights and powers of
shareholders are written in debenture holders are printed on
articles of company. debentures.
9. Nature of Amount:
The amount contributed by The amount financed by debenture
shareholders is called the holders is considered as the loan of
capital of company. company.
10. Preference in Repayment:
The shareholders are paid The debentureholders are paid
after the payment made to before any payment to
debenture holders. shareholders.
11. Safety:
The partner is considered The debenture holder is considered
insecure as compared to secure as compared to shareholder.
debentureholder.
12. Rate of Dividend or
Interest: The rate of interest is fixed on
The rate of dividend debentures.
depends upon the amount of
profit, which may be
different in different years.
176 INTRODUCTION TO BUSINESS

13. Convertibility:
The shares can be converted The debentures may be converted
into stock. into shares.
14. Bonus:
Sometimes, shareholders No bonus is paid to
receive bonus in addition to debentureholders.
their dividend on shares.

KINDS OF COMPANY'S CAPITAL

According to Companies Act 2017, the capital of company can be
classified into following kinds.
Kinds of Company's Capital

Authorized Reserve
Capital Capital

Unissued Issued
Capital Capital

Unsubscribed Subscribed
Capital Capital
1. Authorized / Registered Capital:
It is the maximum amount of capital, which a company is authorized
to raise.
2. Issued Capital:
It is that part of authorized capital, which has been issued or offered
to public for subscription.
3. Un-issued Capital:
It is that part of authorized capital, which is not issued or offered to
public for subscription.
4. Subscribed Capital:
Subscribed capital is that portion of the issued capital, which has
been subscribed or taken up by the people through shares.
[CHAPTER-7] JOINT STOCK COMPANY (II) 177

5. Un-subscribed Capital:
Un-subscribed capital is that portion of the issued capital, which has
not been subscribed or taken up by the people through shares.
6. Reserve Capital:
Reserve capital is that part of capital, which the company has
decided by special resolution, shall not be called up unless there is
particular event or the company being wound up.
Note: According to Company’s Act 2017, a joint stock companies can
only issue fully paid shares.

EXERCISE
(SUBJECTIVE)

1. Discuss the various kinds of company in detail.

2. Explain the kinds, functions and liability of promoters.
3. How a joint stock company can be formed.
4. What are the different sources of company's capital.
5. Discuss the various kinds of company's capital.
6. Write a note on followings:
(i) Memorandum of Company.
(ii) Articles of Company.
(iii) Prospectus of Company.
(iv) Kinds of Shares.
(v) Kinds of Debentures.
7. Distinguish the following
(i) Memorandum and Articles.
(ii) Debenture and Shareholder.
(iii) Public and Private Company.
8. Describe the features of public and private company.
9. Define statement in lieu of prospectus and state its contents.
178 INTRODUCTION TO BUSINESS

(SHORT ANSWERS OF QUESTIONS)

Q.1 State the definition of a listed public company.

Ans. ❏ In this company, minimum number of members may be seven
but there is no restriction for maximum.
❏ Shares of the company can be easily sold and transferred.
❏ The liability of the shareholders is limited to the value of shares
purchased.
Q.2 Define a multi-members private ltd. company.
Ans. ❏ In this company, minimum number of members is two and
maximum is fifty.
❏ The company uses the word "Private" with its name and cannot
sell its shares to public.
❏ The shares of the company are not transferable.
Q.3 What are the stages involved in the formation of a joint stock
company.
Ans. Formation of Joint Stock Company

Promotion Incorporation Capital Subscription Certificate of

Stage Stage Stage Commencement

Q.4 Define the memorandum of association of a company.

Ans. It is a document, which determines the rights, powers and objects of
company.
Q.5 Define articles of association of a company.
Ans. It is second important document of the company, which includes the
rules and regulations necessary to run the company and to govern the
internal organization.
Q.6 Define prospectus of a company.
Ans. This document is advertised for raising the capital. In this the general
public is invited to purchase the shares. An attested copy of
prospectus should be submitted to registrar's office. It also contains
the date of issue.
[CHAPTER-7] JOINT STOCK COMPANY (II) 179

Q.7 State the kinds of company’s capital.

Ans. (i) Authorized capital (ii) Issued capital
(iii) Subscribed capital (iv) Unsubscribed capital
(v) Unissued capital (vi) Reserve capital
Q.8 Explain the preference shares of a joint stock company.
Ans. These are the shares whose holders have preferential rights in respect
of the payment of dividend and repayment of capital in the event of
winding up.
Q.9 Define the ordinary shares.
Ans. The shares on which the dividend is paid out of profit earned by the
company after the payment of dividend on preference shares.
Q.10 Define deferred shares.
Ans. The shares issued to promoters of the company are called "Deferred
or Founders Shares". The dividend on these shares is paid after the
payment of dividend on all other kinds of shares.
Q.11 Explain the terms for the issuance of shares.
Ans. (i) At par (ii) At premium (iii) At discount
Q.12 What is the meant by statement in lieu of prospectus.
Ans. If the company is not in a position to submit prospectus at the time of
registration, then another statement containing all necessary
information is sent to registrar's office. This statement is known as
"Statement in Lieu of Prospectus".
Q.13 What is meant by authorised capital of the company.
Ans. It is the total amount of capital which a company is authorized to
raise to general public.
Q.14 Define dividend.
Ans. Dividend is a distribution of earning made to shareholders by the
company in proportion to the number of shares owned.
Q.15 What is meant by debenture.
Ans. The document, which a company issues as receipt of the borrowed
amount to the lender, is known as Debenture.
180 INTRODUCTION TO BUSINESS

Q.16 What is issuance of shares at premium.

Ans. Issuance of shares at premium means that the shares are being issued
at a higher price than the face value of shares.
Q.17 What is meant by subscribed capital.
Ans. Subscribed capital is that portion of the issued capital, which has
been subscribed or taken up by the public through shares.
Q.18 What do you mean by issued capital.
Ans. It is that part of authorized capital, which has been issued or offered
to public for subscription.
Q.19 What is meant by Registered Company.
Ans. (i) Registered Company is formed under Company’s Act 2017. It
also includes an existing company defined in Sec 2(17) of the
said Act.
(ii) These companies are allowed to do various industrial,
agricultural and trading businesses. e.g., Subhan Textile Mill
etc.
Q.20 What is meant by Statutory Company.
Ans. (i) These companies are formed by the order of president or by the
act of parliament.
(ii) They work for welfare of people not for profit. e.g., Wapda etc.
Q.21 Define Share.
Ans. The total authorized capital of a company is divided into small units
and each unit is individually called “Share”.
Q.22 What is meant by Modarba.
Ans. Modarba is formed under Modarba ordinance 1980. In Modarba one
party contributes capital (known as Rab ul Mal) and other party
participates with his skills (known as Modarib). e.g., NBP Modarba
etc.
Q.23 What is meant by Holding company.
Ans. (i) It is a company which holds more than 50% shares of another
company.
(ii) The company may have the powers to appoint more than 50%
of directors of another company. e.g., Nishat Mills limited is
the holding company of Nishat power limited etc.
[CHAPTER-7] JOINT STOCK COMPANY (II) 181

Q.24 What is meant by Charter Company.

Ans. (i) These companies are formed by the royal order.
(ii) The word limited is not used with the name of company.
(iii) The management of the company is run according to the
provisions of charter. e.g., East India company etc.
Q.25 Write down the name of important documents of company.
Ans. There are three important documents of a company:
(i) Memorandum of association.
(ii) Articles of association.
(iii) Prospectus.

(MULTIPLE CHOICE QUESTIONS)

(1) A Public Ltd. Company is included in the list of:

(a) Business centre (b) Custom authorities
(c) Stock exchange (d) Chamber of commerce
(2) The memorandum of company is prepared by:
(a) Specialist (b) Promoters
(c) Experts (d) All the above
(3) Which company can issue the shares to public:
(a) Chartered company (b) Public ltd. company
(c) Private company (d) All the above
(4) A company formed by the royal order is:
(a) Modarba company (b) Chartered company
(c) Statutory company (d) Registered company
(5) What does a company issue to get loan from the public:
(a) Shares (b) Debentures
(c) Dividend (d) All the three
(6) Which company requires a certificate of commencement:
(a) Public company (b) Private company
(c) Chartered company (d) All the above
182 INTRODUCTION TO BUSINESS

(7) Holding company is a company which has:

(a) No shares of other company
(b) Less than 50% shares of other company
(c) More than 50% shares of other company
(d) 50% shares of other company
(8) Modarba company is formed under:
(a) Modarba companies ordinance 1980
(b) Modarba companies ordinance 1984
(c) Modarba companies ordinance 1960
(d) Modarba companies ordinance 1970
(9) The most important document of a company is:
(a) The memorandum (b) The articles
(c) The prospectus (d) The accounts of company
(10) The profit given to shareholder on their investment by a
company is called:
(a) Debenture (b) Share
(c) Dividend (d) Bonus
(11) What does a company get from the prospectus:
(a) Capital (b) Fame
(c) Registration (d) All the three
(12) Business can be started after getting certificate of incorporation:
(a) Public company (b) Statutory company
(c) Private company (d) All the above
(13) A company in which at least 51% shares are held by the govt. is
called:
(a) Chartered company (b) Public company
(c) Statutory company (d) Government company
(14) A company established by the order of parliament or president
is called:
(a) Government company (b) Chartered company
(c) Statutory company (d) None of these
[CHAPTER-7] JOINT STOCK COMPANY (II) 183

(15) The person who invests in a Modaraba company is called:

(a) Modarib (b) Capitalist
(c) Rab-ul-mal (d) All are correct
(16) Shares issued to promoter are called:
(a) Ordinary shares (b) Preference shares
(c) Deferred shares (d) None of these
(17) The debentureholders of the company are its:
(a) Workers (b) Managers
(c) Directors (d) Creditors
(18) The maximum capital of the company stated in its memorandum:
(a) Paid up capital (b) Subscribed capital
(c) Authorized capital (d) All are correct
(19) The word “private” is not used by:
(a) A statutory company (b) A public company
(c) A chartered company (d) All the above
(20) The powers of directors and promoters are discussed in:
(a) MOA (b) AOA
(c) Prospectus (d) All of these

ANSWERS

(1) (c) (2) (c) (3) (b) (4) (b) (5) (b)
(6) (a) (7) (c) (8) (b) (9) (a) (10) (c)
(11) (a) (12) (c) (13) (d) (14) (c) (15) (c)
(16) (c) (17) (d) (18) (c) (19) (d) (20) (b)

✬✬✬