Unit – 2

Joint Stock Company

**Joint Stock Company Meaning: A Joint Stock Company is a voluntary association of

persons to carry on the business. It is an association of persons who contribute money which is called
capital for some common purpose. These persons are members of the company. The proportion of
capital to which each member is entitled is his share and every member holding such share is called
shareholders and the capital of the company is known as share capital.

In other words, A joint-stock company (JSC) is a form of company or joint venture involving two
or more individuals that own shares of stock in the business. Certificates of ownership ("shares") are
issued by the corporation in return for each financial contribution, and the shareholders are free to
relocate their ownership interest at any time by selling their shares to others.

Definition: The Companies Act 1956 defines a joint stock company as an artificial person created by
law, having separate legal entity from its owner with perpetual succession and a common seal.
Shareholders of Joint Stock Company have limited liability i.e liability limited by guarantee or shares.
Shares of such company are easily transferable.

**Characteristics of Joint Stock Company:

1. Artificial Person : A Joint Stock Company is an artificial person as it does not possess any
physical attributes of a natural person and it is created by law. Thus it has a legal entity separate
from its members.
2. Separate legal Entity : Being an artificial person a company has its own legal entity separate
from its members. It can own assets or property, enter into contracts, sue or can be sued by
anyone in the court of law. Its shareholders can not be held liable for any conduct of the company.
3. Perpetual Existence : A company once formed continues to exist as long as it is fulfilling all
the conditions prescribed by the law. Its existence is not affected by the death, insolvency or
retirement of its members.
4. Limited liability of shareholders : Shareholders of a joint stock company are only liable to
the extent of shares they hold in a company not more than that. Their liability is limited by
guarantee or shares held by them.
5. Common Seal : Being an artificial person a joint stock company cannot sign any documents thus
this common seal is the company’s representative while dealing with the outsiders. Any
document having common seal and the signature of the officer is binding on the company.
6. Transferability of Shares : Members of a joint stock company are free to transfer their shares
to anyone.
7. Capital : A joint stock company can raise large amount of capital by issuing its shares.
8. Management : A joint stock company has a democratic management which is managed by the
elected representatives of shareholders, known as directors of the company.
9. Membership : To form a private limited company minimum number of members prescribed in
the companies Act is 2 and the maximum number is 50. But in the case of public limited company
the minimum limit is 7 and no limit on maximum number of members.
 10. Formation : Generally a company is formed with the initiative of group of members who are
also known as promoters but it comes into existence after completing all the formalities
prescribed in Companies Act 1956.

**Types of Joint Stock Company:

1. Chartered Company: The companies that form by the order of the king of England are called
the charter company. These companies were formed before 1844. For example, East India
Company, Chartered Bank of England, the charter of the British South Africa Company, given
by Queen Victoria

2. Statutory Company: Companies that are formed by the order of the President, or by the
Legislative Committee or by bill of Parliament are called Statutory Company. These Companies
are operated by those laws. For example, municipal councils, universities, central banks and
government regulators, Central Bank.

3. Registered Corporation: Companies that are formed under the prevailing law of the company
are called the registered company. The corporation that has filed a registration statement with the
SEC prior to releasing a new stock issue. It is two types-

i) Unlimited Company: The liabilities of the shareholders of this company are unlimited. For
example, British all-terrain vehicle manufacturer Land Rover, GlaxoSmithKline Services
Unlimited.

ii) Limited Company / limited corporation: The liabilities of the shareholders are limited.
For example, Charitable organisations, Financial Services Authority. This liability of a company
can be of two types.

a) By Guarantee

b) By share value. The company limited by share can be of two types.

• Private Limited Company, where the number of shareholder ranges from two to fifty. The
share of these companies can’t be traded in the stock market.
 • Public Limited Company, where the number of shareholder ranges from seven to share
limitation. The share of the public limited company is traded in the stock market.

**Procedure of Formation of a Joint Stock Company

In "Bangladesh" perspective (but the moreover same process all over the world) Joint Stock
Company is formed, registered and guided by the Companies Act 1994. The promoters by themselves
or by their appointed person (advocate, consultancy firm, or consultant) undertook the task of
formation. However, the task of formation could be discussed in steps.

1. Promotional Steps: The person who undertook the task of formation is called promoter or
entrepreneur. For Public Limited Company there should be at least seven (7) and for Private
Limited company, there should be at least two (2) promoters. These promoters undertook the
following tasks:

a) Planning: Here the promoters decide about the objectives, area, type, capital structure of the
new business. Based on these factors, the promoters go forward.

b) Feasibility Analysis: Here the promoters undertook the feasibility analysis for the new
venture: both from existing and potential viewpoint. Promoters undertook different tools like
SWOT (Strength, Weakness, Opportunity and Threat) Analysis; Competitive Analysis, etc.
Being assured of the potentiality of the business the promoters go for the further.

c) Naming the Company: The name of the company should be such that is not used by any
other existing company; it is not a name of the King or Queen or President. The Public Limited
Company should use (pvt.) Limited and the Public Limited Company must use Limited at the
end of the company name. The promoter upon deciding the name, they submit the name in black
and white for Clearance in the registrar office. The registrar upon verifying the uniqueness of
the proposed name gives clearance of using the name.

2. Registration or Incorporation: To incorporate the new company the promoters needs go

through the following steps:

a) Collecting Registration Form and Filling it up: The promoters have to collect the
registration form and other papers for a fee from the registrar office. Then they should fill up it
by themselves or should take the help of the consultants or advocates.

b) Preparing Documents and Submitting for Registration: The promoters have to submit the
filled-up form with fees and the following documents in the registrar office:

• Memorandum of Association

• Articles of Association

• Capital Structure of the proposed Company

• List of Directors and the amount of the sponsored share they purchased

• Declaration regarding the proposed name of the company

 • Declaration of an advocate or chartered accountant or any director of a proposed company
that the company has followed all the rules and regulations of Company Act 1994.

The registrar being satisfied on the paper submitted for the proposed company issues'
Certificate of Incorporation. On getting that certificate the Private Limited Company can start
its business but the Public Limited Company has to go to another step to start its business.

c) Obtaining Certificate of Commencement: Here the promoters should make the Prospectus for
the company. This prospectus needs to be published in the daily newspaper. To get theCertificate
of Commencement, the promoters need to submit the following documents to the registrar:

• A copy of Prospectus

• Name, address, designation, occupation, etc. of Directors

• Directors’ written Letter of Agreement that they want to work as director of that company.

• Declaration that the directors have fully paid the minimum amount of sponsor share.

• Declaration by the company secretary or other authorized person that the above affairs have
maintained all rules and regulation of Company Act 1994.

The registrar being satisfied on the paper submitted for the proposed company issues'
Certificate of Commencement. On getting that certificate the Public Limited Company can start
its business.

3. Flotation Stage: If the sponsor directors are unable to provide the adequate capital, public
limited company can float their share in the capital market (Stock Exchange) to get required
capital. By this time, the company can do its other functions.

**Advantages of Joint Stock Company:

1. Large capital: A company can secure large capital compared to a sole trader or partnership.
Large amount of capital is necessary for conducting business on a large scale. For e.g. Reliance
has invested more than Rs.25,000 crore in its telecom venture. Raising such huge amount of
funds would be next to impossible in a sole-tradership or partnership.

2. Limited liability: The liability of a shareholder is limited. The risk of loss is limited to the unpaid
amount on the face value of shares held. In the case of a company limited by shares, the liability
of a shareholder is restricted to the unpaid amount on the shares held by him. In the case of a
company limited by guarantee, his liability is restricted to the amount that he has guaranteed to
contribute in the event of winding up of the company.

3. Transferability of shares: Transaction of Shares between two individuals are easy. So there is
liquidity of investment. Any shareholder can easily convert his shares into money by selling his
shares.

4. Perpetual succession: A company has perpetual or continuous existence. Members may go or

new members may come in, but the company continues to exist. This ensures continuity in
operations and the company can undertake long term investments.
 5. Promotion of saving and investment habit: Joint stock company system encourages people to
save. Even small amount can be used for the purchase of shares. A person can buy even one share
of a company.

6. Risk bearing capacity: The loss of the company is distributed over a large number of
shareholder. So each shareholder bears a very little amount of loss. Hence the company form of
organization has risk bearing capacity.

7. Economies of large-scale operation: A joint stock company can undertake business on large
scale. As a result it can derive all the advantages of large scale production. For e.g. Hero Honda
Ltd., the world’s largest seller of two-wheelers, manufactures motorbikes on a large scale and
is able to enjoy cost efficiency.

8. Economic development: Joint stock company system has been responsible for the rapidgrowth
of industries and trade in many countries. Since Joint Stock Companies have large financial
resources, they are able to undertake large scale production, satisfy needs of more number of
consumers, create large scale employment opportunities, promote balanced regional
development and contribute substantially to the government by way of taxes.

9. Public confidence: The operation and financial position of joint stock companies are known to
the public. Their accounts are audited by Chartered Accountants who certify that the accounts
are free from errors and frauds. This promotes confidence in the minds of the public.

10. Social benefit: They have been:

i. Able to supply goods of better quality at low prices,

ii. Innovating new products,

iii. Providing employment to millions of persons,

iv. Setting up industries in backward areas and promoted their development,

v. Exporting goods to other countries and earn valuable foreign exchange,

vi. Promoting import substitution and conserved valuable foreign exchange,

vii. Aiding government relief efforts at the time of war, natural calamities by contributing
men, money and material,

viii. Contributing to government funds by way of taxes.

**Disadvantages of Joint Stock Company:

Despite so many advantages it has got many disadvantages which are as follows:

1. Difficulty in Formation: The legal requirements and formalities required to be completed

are so many. The cost involved is quite heavy. It has to approach large number of people for
its capital. It cannot start its business unless certificate of incorporation has been obtained. This
is granted after a long time when all the formalities are completed.
2. Reckless Speculation Encouraged: This form of organisation encourages reckless speculation
in shares at stock exchanges. This is an evil of great magnitude in our country because in many
cases stock exchanges act as ‘bush agencies’, rather than aid to sound investment or stability.
Sometimes the management of Joint Stock Company encourages speculation in shares for its
personal gains.

3. Fraudulent Management: Frauds have been a common feature of many a company. The
promoters and directors may indulge in fraudulent practices. The company law has devised
various methods to check the fraudulent practices but they have not proved to check them
completely.

4. Delay in Decision-Making: In this form of organisation, decisions are not made by single
individual. All important decisions are taken by the Board of Directors. Decision-makingprocess
is time-consuming. So many opportunities may be costly because of delay in decision- making.
Promptness of decisions which is a common feature of sole tradership and partnership is not
found in a company.

5. Monopolistic Powers: There is, generally, tendency for company organisation to form
themselves into combinations exercising monopolistic powers which may react detrimentally to
other producers in the same line or to consumers of the commodity produced.

6. Excessive Regulation by Law: The State that creates the company, minutely watches the
activities of the company organisation. A company and the management have to function well
within the law and the provisions of Companies Act are quite elaborate and complex. At every
step, it is necessary to comply with its provisions lest the company and the management should
be penalised. The penalties are quite heavy and in several cases, officers in default can be
punished with imprisonment. This hampers the proper functioning of the company.

7. Conflict of Interests: The management does not care for the interest of shareholders because
the management is not the owner. Actually, the management body is not composed of owners,
it is composed of those who have no interest in the business.

It is only the few who govern the way they like. Though, in theory, company is a
democracy but in actual practice it is oligarchy. The lack of interest between the company and
its management encourages manipulation and speculation.

8. Lack of Secrecy: The management of companies remains in the hands of many persons. Every
important thing is discussed in the meetings of Board of Directors. Hence secrets of the business
cannot be maintained. In case of sole proprietorship and partnership forms of organisation, such
secrecy is possible because a few persons are involved in the management.

9. Bureaucratic Approach: The bureaucratic habit of company officials to shirk trouble of some
initiative because they get no direct benefit from it; often retard the growth. This leads to
classification of social organism and leveling down the character. The company organisation
does not enjoy the same flexibility and promptness in the making as other organisations [Link]
delays in taking the decision affect the growth of the business.
 From the above discussions, it may be concluded that the advantages of company
form of organization outnumber its weakness. It is clear that the company is best suited for
business, which requires huge capital and maximum stability.

**Promotion Meaning: The dictionary meaning of the word ‘promotion’ is ‘to help bring into
being’. The term promotion of a company, therefore, means to help bringing a company intoexistence.
A company is defined in the Companies Act, 1956 as “company means a company formed and
registered under this Act or an existing company .......................................... ” (Sec. 3(l)(i).

Definition: According to L.H. Haney, “Promotion may be defined as the process of organizing and
planning the finance of a business enterprise under the corporate form.”

C.W. Gernstenberg says, “Promotion may be defined as the discovery of business

opportunities, and the subsequent organization of funds, property an managerial ability into a business
concern for the purpose of making profits therefore.” Promotion is considered as putting an idea into
practice.

Guthmann and Dougal consider that ‘promotion starts with the conception of the idea from
which the business is fully ready to being operation as going concern.”

**Stages of Promotion
There are four stages in the promotion of a Company. These stages are:

➢ Discovery of an idea.

➢ Detailed Investigation

➢ Assembling the requirements.

➢ Financing the proposition.

➢ Discovery of an Idea: The first stage in company promotion is the conception of a new idea. A
person visualizes that there are opportunities for a particular type of business and it can be a
profitability run. The idea may be to exploit a new area of natural resources or more profitable
ventures in an existing line of business. He develops this idea with the help of technical experts
in that field. If they are convinced that profitable avenues are available in that line of business the
idea is taken forward for more exhaustive analysis.
➢ Detailed Investigation: At the second stage various factors relating to that business are studied
from a practical point of view. The promoters will estimate total demand for the product. There
may be certain concerns already in that type of business and so he will determine his share of
demand. After determining the prospective demand for goods he will think of arranging finances
for the ventures. The availability of power, labor, raw materials and machinery is also considered.
The cost structure of the product is analyzed to find out profitability from the venture. An expert
opinion is sought of the viability of the project. The work of estimation becomes more difficult if
the proposed line of business is new. The estimates should be based on proper analysis of different
factors. A guess work creates problems later on.
➢ Assembling the Requirements: After making sure that the propositions are practical and
profitable, the promoter proceeds to assemble the requirements. He persuades some more persons
to join hands with him by becoming directors or founder members. If he has invented something
new, he should get it registered in his name. He may also acquire some patent rights. The promoter
selects the factory site, decides about plant and machinery and contacts suppliers of raw materials,
etc. he does not purchase all these things because it involves huge sums of money. Instead of going
for outright purchase he uses option methods. The contracts are finalized by paying option money
and the ultimate purchase is done only when the company is [Link] the company fails to
come up, the promoter only loses option money.

➢ Financing the Proposition: The promoter decides about the capital structure of the company. The
requirements of finances are estimated first. Then the sources from which this money will come
are determined. How much share capital will be issued, the type of shares to be issued, and the
nature of loans, whether debentures or borrowing from financial institutions for a long period all
are finalized. Generally, commercial banks are helpful only in financing working capital
requirements. The financial requirements fort short period and long period are estimated separately
so that the capital figures may be given in the memorandum of association. The mode for issuing
shares and debentures is also decided by the promoter. Whether the issue is to be underwritten
through some agency or the company is to issue securities it is decide after considering money
market position and the expected response form the public.

**Promoters: A promoter conceives an idea for setting up a particular business at a given place and
performs various formalities required for starting a company. A promoter may be an individual, firm,
association of persons or a company. The persons who assist the promoter in completing various
legal formalities are professional people like Counsels, Solicitors, accountants etc. and not promoters.

**Definitions of Promoters Following definitions of a promoter clarify his status and role:

Justice C. J. Cokburn: “A promoter is one who undertakes to form a company with reference to a
given object and set it going and takes the necessary steps to accomplish that purpose.”

Arthur Dewing: “ A promoter is the person conscious of the possibility of transforming an idea into
a business capable of yielding a profit; who brings together various persons concerned and who finally
superintendents the various steps necessary to bring the new business into existence.”

Sir Francis Palmer: “A person, who originates the scheme of the promotion of a company, has the
memorandum and articles prepared, executed and registered and find the first directors, settle the
terms, preliminary contract, and prospectus if any, and make arrangements for advertising and
circulating the prospectus and raising the capital.

Lord Justice Bowen: “The term ‘promoter’ is not a term of law but of business usually summing up
in a single word, a number of business operations familiar to the commercial word, by which a
company is brought into existence.”

**Characteristics or Features of a Promoter

• Promoter conceives an idea for setting up a business.

 • He makes preliminary investigations and censures about the future prospects of the business.

• He bring together various persons who agree to associate with him and share business
responsibilities.

• He prepares various documents and gets the company incorporated.

• He raises the enquired finances and gets the company going.

**Kinds of Promoters
The promoters may be the following types:

1. Professional Promoters: These are the persons who specialize in promotion of companies. They
hand over the companies to shareholders when the business starts. In India, there is lackof
professional promoters. In many other countries professional promoters have played an important
role and helped the business community to a great extent. In England, Issue Houses; in U.S.A.,
Investment banks and in Germany, Joint Stock Banks have played the role of promoters very
appreciably.

2. Occasional Promoters: These promoters take interest in floating some companies. They are not
in promotion work on a regular basis but take up the promotion of some company and then go to
their earlier profession. For instance, engineers, lawyers etc. may float some companies.

3. Financial Promoters: Some financial institutions may take up the promotion of a company.
They generally take up this work when financial environment is favorable at the time.

4. Managing Agents as Promoters: In India Managing Agents played an important role in

promoting new companies. These persons used to float new companies and then got their
Managing Agency rights. Managing Agency system has since long been abolished in India.

5. Government as a Promoter: Since independence Government of India has promoted a number

of public sector undertakings in different sectors of economy. The state governments have also
promoted many undertakings under state control. The government has come up as an important
promoter.

6. Specialized Institutions as Promoters: In order to promote new industrial and commercial

venture government has set up a number of institutions for this purpose. National Industrial
Development Corporation (NIDC), Industrial Development Bank of India (IDBI,) Industrial
Finance Corporation (Ifc0, state level financial corporation’s etc. are established for the purpose
of promoting new units and also for helping the existing units.

7. Entrepreneur Promoters: Some persons set up their own units after making required
investigation and completing legal formalities. In India most of the entrepreneurial promoters are
covered in this category.

**Function of a Promoter
• A promoter is required to perform the following functions:
 • A promoter has first to select a particular line of business where the company has to be
promoted.

• He should investigate the possibilities of setting up a business in a particular line and the
future possibilities of it.

• The name of the company, objects of the company and the place for registered office are to
be selected by the promoter.

• The promoter has to prepare documents like memorandum of Association, Articles of

Association for getting the company incorporated with the Registrar of companies.

• He also makes necessary arrangements for raising initial capital of the company.

• The first directors of the company are also selected by the promoter.

• Promoter has also to select bankers, auditors, brokers and legal advisors for the proposed
company.

• He has to make necessary arrangements for allotment of shares and securities.

**Remuneration of Promoters
The promoters undertake the work of promoting new companies and bear the initial risks. They
do this work with a view to get some gains for them. In India promoters try to become managing
directors of the companies promoted by them; so they do not charge anything separately for this work.
In other cases, the promoters may be remunerated in the following ways:

• They may be given lump sum amount for their services. They may also be allotted shares or
debentures too.

• The promoters may purchase some property and then transfer it to the company at inflated
rates and pocket the difference.

• They may be given some commission on the purchase of business taken over by the
company.

**Legal Position of a Promoter

The company law has not given any legal status to promoters. A prompter is neither an agent
nor a trustee of the company because it is a non-entity before incorporation. Some legal cases have
tried to specify the status of a promoter. He stands in a fiduciary position. The promoter moulds and
creates the company and under his supervision it comes into existence. It is the duty of the promoter
to get maximum benefits for the company. He should not get secret profits from the company. If he
sells his property to the company, then he should explain his interest I such property.

**Memorandum of Association:
Definition of Memorandum: According to Sec. 2 (28) of the Companies Act, “Memorandum
means the Memorandum of Association of a company as originally framed or as altered from time to
time in pursuance of any previous companies law or of this act.”
 According to Lord Macmillan, “The purpose of the memorandum is to enable the shareholders,
creditors and those who deal with the company, to know what is its permitted range of enterprise.”

According to Lord Salborne, “The memorandum of association is an important and unalterable

(excluding a few conditions) charter. The company is incorporated only for such objects which are
given in the Memorandum.”

**Forms of Memorandum: The Memorandum of Association of a company should be divided

into paragraphs, numbered consecutively and printed. The memorandum shall be such in one of the
forms in Table B, C, D, and E in Schedule I of the Act.

The prescribed forms are as follows:

1. Table B. Memorandum of Association of a company limited by shares.

2. Table C. Memorandum of Association of a company limited by guarantee and not having a

share capital.

3. Table D. Memorandum of Association of a company limited by guarantee and having a share

capital.

4. Table E. Memorandum of Association of an unlimited company.

At least seven persons in the case of a public company and at least two in the case of a
private company must subscribe to the memorandum.

**Contents or Clauses or Subject Matter of Memorandum:

The Memorandum of Association of a company limited by shares must contain the following
contents or clauses:

1. The Name of the Company: The Name Clause: The first clause of Memorandum of
Association requires a company to state its name. The company being a legal person, must have
a name to establish its identity.

The Memorandum of Association of every company must state the name of company
with the word ‘Limited’ as the last word of the name in case of a public limited company and
with “Private Limited” as the last word of the name in case of private limited company.

2. The Registered Office of the Company – Registered Office Clause or Situation Clause: This
clause of Memorandum states the name of the State where the registered office of the company
is to situate. This is required in order to fix the domicile of the company, that is, the place of its
registration. The actual address of the registered office is not required to be stated in the
Memorandum of Association of the Company. But it is enough to mention in the Memorandum
the name of the State in which the registered office is to be situated.

3. The Objects of the Company – The Object Clause: This is the most important clause in the
memorandum because it not only shows the object for which the company is formed but also
determines the extent of the powers which the company can exercise in order to achieve the
 object or objects. Stating the objects of the company in the Memorandum of Association is not
a mere legal technicality but is a necessity of great practical importance.

The objects clause must state separately:

(i) Main Object: This sub-clause has to state the main object to be pursued by the company on
its incorporation and objects incidental or ancillary to the attainment of main objects.

(ii) Other Objects: This sub-clause shall state other objects which are not included in the
above clause.

4. The Liability of Shareholders – The Liability Clause: This clause of Memorandum of

Association has to state the nature of liability that the members incur. In case of a company
limited by shares, the members are liable only to the amount unpaid on the shares taken by them.
In the case of company limited by guarantee the members are liable to the amount undertaken to
be contributed by them to the assets of the company in the event of its winding up.

5. The Capital Clause: Every limited company having a share capital must state the amount of
its share capital with which the company is proposed to be registered and the division thereof
into shares of a fixed denomination, in this clause This capital is described as “registered”,
“authorised” or “nominal” capital and the stamp duty is payable on this amount. There is no legal
limit to the amount of share capital.

It may be any amount running into crores of rupees but denomination of each share should
be Rs. 10 or 100 in the case of equity shares and Rs. 100 in the case of preference shares. The
amount of authorised capital should be sufficiently high so that further issue of shares may easily
be done to finance the expanding business.

An unlimited company having a share capital is not required to have the capital clauses
in its Memorandum of Association.

6. The Association or Subscription Clause: Under this clause we have the “declaration of
association”, which is made by the signatories of the Memorandum of Association under their
signatures duly attested by witness, that they desire to be formed into a company and that they
agree to the purchase of qualification shares, if any. Each subscriber must take at least one share.

The statement reads as follows: “We, the several persons whose names and addresses
are subscribed, are desirous of being formed into a company in pursuance to the Memorandum
of Association and we agree to take the number of shares in the capital of the company shown
against our names.”

**Importance of Memorandum:
1. An unalterable charter of the company: Until the year 1890, it was regarded as an unalterable
charter of the company. That, however, led to a number of difficulties in the working of the
companies. Consequently, a provision had to be made in the Act itself for altering it in certain
cases. Except for this provision the Memorandum of Association is still
 regarded as an unalterable charter. Section 16 of the Companies Act recognises this unalterable
character of this document.

2. Base of incorporation: In order to get the company incorporated, Memorandum of Association

is to be filed with the Registrar of Companies. It is signed by at least seven persons in case of
public company and signed by two person in case of a private company.

3. It determines the area of operation of the company: It lays down the activities to be
undertaken by the company. Any action outside the scope of Memorandum of Association will
be void.

4. It defines the relationship of company with the outsiders: It defines the relationship of
company with the outsiders. Its purpose is to enable the shareholders and creditors and those who
deal with the company to know what is its permitted range of enterprise and powers.

**Alteration of Memorandum: Section 16 of the Act provides that a company shall not alter
the conditions contained in its memorandum except in the case, in the manner and to the extent
provided in the Act. The intention of the Legislature is to prevent too easy an alteration of the
conditions contained in the Memorandum of Association.

Alteration of matters other than conditions in the memorandum may be effected in the same
manner as the alternation of articles, or in any other manner provided by the Act.

**Articles of Association (AOA): The Articles of Association (AOA) or the Articles, contain
rules for the internal management of a company. It is a legal document prepared by a company to
explicitly state the purpose of a company, the procedure to conduct its internal affairs and most
importantly the responsibility and authority of the directors, members and other stakeholder. The
Articles have to be submitted to the Registrar of Companies during formation of a company in Form
INC-34 along with the Memorandum of Association in Form INC-33.

While the Memorandum deals with the external affairs of a company, the Articles essentially
deal with the internal working of a company. Table F to J of Schedule 1 of the Companies Act, 2013
contain the model articles that companies can refer to. Companies may adopt wholly or in part these
tables i.e. tailor their articles depending upon specific requirements.

The following companies must have their own articles of association:

1. Unlimited Companies

2. Companies limited by guarantee

3. Private companies limited by shares

**Contents of Articles of Association

Section 5(1) and section 5(2) of the Companies Act, 2013 provide for the contents of the articles
of association. The articles must contain the regulations for the management of the company along
with the matters prescribed by the Central Government.

The contents of articles of association should not contradict with the Companies Act and the
MOA. If the document contains anything contrary to the Companies Act or the Memorandum of
Association, it will be inoperative. The Pvt Concern that is limited by shares and those limited by
guarantee and unlimited companies must have their articles of association. Public companies may not
have their articles but may adopt Model articles given in Table A of Schedule I of Companies Act,
1956. If a public company has only some articles of its own, for the rest, articles of Table A will be
applicable.

Articles that are profound to be registered should be printed, segmented well and sequenced
consecutively. Each subscriber to Memorandum of Association must sign the articles in the presence
of at least one witness.

Further, the articles of association must also contain the following:

1. Share capital including sub-division, rights of various shareholders, the relationship of these
rights, payment of commission, share certificates.

2. Lien of shares: Lien of shares means to retain possession of shares incase the member is unable
to pay his debt to the company.

3. Calls on shares: Calls on shares include the whole or part remaining unpaid on each share
which has to be paid by the shareholders on the company’s demand.

4. Transfer of shares: The articles of association include the procedure for the transfer of shares
by the shareholder to the transferee.

5. Transmission of shares: Transmission includes devolution of title by death, succession,

marriage, insolvency, etc. It is not voluntary but is in fact brought about by operation of law.

6. Forfeiture of shares: The articles of association provide for the forfeiture of shares if the
purchase requirements such as paying any allotment or call money, are not met with.

7. Surrender of shares: Surrender of shares is when the shareholders voluntary return the shares
they own to the company.

8. Conversion of shares in stock: In consonance with the articles of association, the company can
convert the shares into stock by an ordinary resolution in a general meeting.

9. Share warrant: A share warrant is a bearer document relating to the title of shares and cannot
be issued by private companies; only public limited companies can issue a share warrant.

10. Alteration of capital: Increase, decrease or rearrangement of capital must be done as the articles
of association provide.

11. General meetings and proceedings: All the provisions relating to the general meetings and the
manner in which they are to be conducted are to be contained in the articles of association.

12. Voting rights of members, voting by poll, proxies: The members right to vote on certain
company matters and the manner in which voting can be done is provided in the articles of
association.

13. Directors: Their appointment, remuneration, qualifications, powers and proceedings of the
boards of directors meetings.
 14. Dividends and reserves: The articles of association of a company also provide for the
distribution of dividend to the shareholders.

15. Accounts and Audits: The auditing of a company shall be done subject to the provisions of
the articles of association of the company.

16. Borrowing powers: Every company has powers to However, this must be done according to
the articles of association of the company.

17. Winding up: Provisions relating to the winding up of the company finds mention in articles of
association of the company and must be done accordingly.

**Alteration of Articles of Association

The alteration of the Articles should not sanction anything illegal. They should be for the
benefit of the company. They should not lead to breach of contract with the third parties. The following
are the regulations regarding alteration of articles:

A company may alter its Articles with a special resolution. Due importance and care should
be given to ensure that the alteration of AoA does not conflict with the provisions of the Memorandum
of Association or the Companies Act. A copy of every special resolution altering the Articles must be
filed with the Registrar within 30 days of its passing.

1. The proposed alteration should not contravene the provisions of the Companies Act.

2. The proposed alteration should not contravene the provisions of the Memorandum of Association.

3. The alteration should not propose anything that is illegal.

4. The alteration should be bonafide for the benefit of the company.

5. The proposed alteration should in no way increase the liability of existing members.

6. Alteration can be made only by a special resolution.

7. Alteration can be done with retrospective effect.

8. The Court does not have any power to order alteration of the Articles of Association.

**Difference between MOA and AOA

The fundamental points of distinction between MOA and AOA are as follows:

BASIS FOR MEMORANDUM OF ARTICLES OF ASSOCIATION

COMPARISON ASSOCIATION
Definition Memorandum of Association Articles of Association (AOA) is a
(MOA) is a document that document containing all the rules and
contains all the fundamental data regulations that govern the company
which are required for the
company incorporation.
Registration MOA must be registered at the The articles may or may not be
time of incorporation. registered.
Scope The Memorandum is the charter, The articles demonstrate obligations,
 which characterizes and limits rights, and powers of individuals,
powers and constraints of the who are endowed with the
organization. responsibility of running the
organization and administration.
Status Supreme document. It is subordinate to the memorandum.
Power The memorandum cannot give The articles are constrained by theact,
the company power to do but they are also subsidiary to the
anything opposed to the memorandum and cannot exceed the
provision of the companies act. powers contained therein.
Contents A memorandum must contain six The articles can be drafted according
clauses. to the decision of the Company.
Objectives The memorandum contains the The articles provide the regulations
objectives and powers of the by which those objectives and powers
company. are to be conveyed into impact.
Validity The memorandum is the Any provision, as opposed to a
dominant instrument and memorandum of association, is
controls articles. invalid.

**Prospectus: Meaning of Prospectus: Sec. 2(36) of the Companies Act describes a prospectus
as “any document 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.”

In other words, it is a document which invites deposits from the public or invites offers from
the public for the subscription of shares in, or debentures of, a company. The words “inviting deposits
from the public” were added by the Companies (Amendment) Act, 1974.

**Features and Characteristics of Prospectus:

(i) It is a document issued as a prospectus;

(ii) It is an invitation to the member of the public;

(iii) The public is invited to subscribe to the shares or debentures of the company;

(iv) It includes any notice, circular, advertisement inviting deposits from the public;

(v) It is a document by which the company procures its share capital needed to carry on its
activities.

**Forms and Contents of the Prospectus:

Sec. 56 states that every prospectus must

i. State the matters specified in Part I of Schedule II, and

ii. Set out the reports specified in Part II of Schedule II.

Part I of Schedule II—Matters to be Specified:

(a) The contents of the Memorandum: It expresses the name of the company, objects, nature of
business, share capital and its division, liability of members, names and addresses of the signatories
and the number of shares subscribed by them.

(b) The qualification shares of the Directors: If the Articles of the company provides that certain
minimum number of shares to be possessed by the directors as qualification, in that case, a person shall
not be qualified to act as a director unless he holds such number of shares.

(c) No. of redeemable preference shares: Particulars regarding debentures and redeemable
preference shares with their date of redemption must be stated.

(d) Remuneration of the Directors and Promoters: The prospectus must contain the rate of
remuneration for attending meetings and for other services of the Directors and Promoters.

(e) The names, descriptions and addresses of the Directors and Managing Directors: Thenames,
addresses, descriptions, occupations of the Directors, Managing Directors, Managers and the
provisions regarding their appointment must be stated.

(f) The Minimum Subscription: The minimum subscription on which the directors may proceed to
allotment and the amount payable on application, allotment etc. on each share should also be stated
in the prospectus.

(g) Time of opening: The time of the opening of subscription list should also be stated.

(h) Names and Addresses: The names and addresses of vendors, if any, and the mode of payment of
purchase price and goodwill should also be contained in the prospectus.

(i) Underwriting Commission, Brokerage etc.: The names of underwriters and the opinion of the
directors regarding their financial position and business integrity should also be stated clearly.

(j) Names of the auditors with their addresses: The reputation of the auditors is also an important
factor necessary for public patronage.

(k) Particular of Contracts: The dates of and parties to every material contract, and reasonable time
and place of its inspection are also significant.

(l) Preliminary Expenses: The estimated amount of preliminary expenses to be incurred should also
be furnished.

(m) Particulars of Directors: Full particulars of the nature and interest of every director or promoter
in the promotion of or in the property proposed to be acquired by the company within two years with
statement of all sums paid or agreed to be paid to him in cash or shares for service rendered.

(n) Disclosure: Full disclosure on these matters should also be made in the prospectus.

(o) Expected rate of dividend and voting rights: The rights of shareholders relating to voting,
meeting and dividends along with the nature and extent of restrictions to be imposed by Articles on
their right to transfer shares should also be stated in clear and convincing terms.
(p) Capitalisation of Profits and Surplus from revaluation of assets: Capitalisation of
profits/reserves of a company or if any of its subsidiaries have been capitalized (i.e. issuing bonus
shares) — particular of such capitalisation and also surplus, if any, assets from the revaluation of assets
should also be stated.

(q) Inspection of Balance Sheet and Profit and Loss Account: The following reports are to be
annexed:

Part II of Schedule II— Reports to be set out:

(a) Report by the Auditor: An audit report of the company relating to:

(i) Its profits .and losses, assets and liabilities,

(ii) The dividend paid by the company during the five financial years preceding the issue of
prospectus should also be furnished.

(b) Report by the Accountant: The accountant should also state a report relating to profits or losses
and assets and liabilities on a date which must not be more than 120 days before the date of issue of
the prospectus.

Mis-Statements in Prospectus: Mis-statements and false statements in the prospectus are instruments
by which dishonest company promoters may practice fraud on the public money. Inorder to prevent
this practice the law imposes certain duties and liabilities on those persons who are responsible for
such issues.

If, however, the prospectus contains any mis-statement of a material fact or if the prospectus
wants in any material fact, two types of liabilities will arise.

They are:

(1) Civil Liability

(2) Criminal Liability

Before discussing the above we are to know the liability which may arise for Untrue Statement.
It is the duty of the authors of the prospectus to see that the prospectus does not contain any untrue
statement which may mislead the public.

According to Sec. 65 of the Companies Act, Untrue Statement’ in connection with a prospectus
shall deem to include:

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

(ii) An omission which is calculated to mislead.

In short, untrue statement means and includes any statement which is not only a falsestatement
but also a statement which creates a wrong impression of actual fact. Concealment of material fact is
also treated as mis-statement or untrue statement.

Now we are going to highlight the civil and criminal liabilities that may appear due to mis-
statement in the prospectus:
(1) Civil Liability: Sec. 62(1) of the Companies Act states 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 on the basis of the untrue statement. Consequently, a person who has suffered a loss may
claim contribution from the others who were associated relating to issue of prospect until it appears
that he was guilty of fraud while the others were not proved to be guilty.

(2) Criminal Liability: According to Sec. 63(1) of the Companies Act, every person who has
authorized 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. 5,000—or both.

Penalty: Sec. 68 of the Companies Act provides that a person shall not, either knowingly orrecklessly,
by making any statement, promise or forecast which is false, deceptive or misleading or, by any
dishonest concealment of material facts, induce or attempt to induce another person to enter into or to
offer to enter into any

(i) Agreement for acquiring, disposing-off, subscribing for or underwriting shares or debentures;

(ii) 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 inference to fluctuations in the value of shares or
debentures.

Otherwise, he shall be punishable with imprisonment for a term which may extend to 5 years or with
fine which may extend to Rs. 10,000—or with both.

Persons who are liable for untrue statements in the prospectus:

According to Sec. 62 (1) of the Companies Act, 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 authorized 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 authorized the issues of the prospectus.

**Defense available in an action on the prospectus: The parties against whom the proceeding have
been taken for mis-statement in the prospectus may use certain pleas as their defense:

1. Defenses against the Civil Liability: According to Sec. 62(2) of the Companies Act, no decree for
damage shall be passed if the person charged can prove any one of the followings:

(a) Withdrawal of consent: A person is not liable if he withdrew his consent before the issue of the
prospectus.

(b) Issue without knowledge and consent: If the person can prove that the prospectus was issued
without his knowledge or consent and, after becoming aware of its issues, he gave public notice that
the same was issued without his knowledge and consent.
(c) Statement of an expert: If the statement which is alleged to be untrue purports to be
a statement of an expert or a copy or of a valuation report of an expert, the person charged
can be discharged from his liability if he can prove:

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

(ii) He had reasonable grounds to believe;

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

(iv) The expert had not withdrawn his consent before registration.

(d) True Statement: The person charged can escape from his liability if he can prove that
he had reasonable ground to believe and did, up to the time of the allotment of shares or
debentures, believe that the statement was true.

2. Defences available to an expert: Sec. 62(4) states that an expert whose opinion was
included in the prospectus can use the following as defense:

(a) Withdrawal of consent: After giving consent, he withdrew it in writing before

delivery of acopy of the prospectus for registration.

(b) Knowledge of untrue statement: If the person, on becoming aware of the untrue
statement, withdrew his consent in writing and gave public notice with reasons thereof,
after delivery of the copy of the prospectus to and before allotment.

(c) True statement: He was competent to make such statement and he had reasonable
grounds to believe and did up to the time of the allotment of shares and debentures, believe
that the statement was true.

3. Defense’s against Criminal Liability: Sec. 63(1) states that a person charged in a
criminal court will be acquitted if he can prove any one of the following:

(a) That the statement was immaterial, or

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

**Statement In Lieu of Prospectus:

If a public company does not invite the public to subscribe for its shares but
acquires to have money from private sources it may not issue a prospectus. In the
circumstances, the promoters are required to prepare a draft prospectus which is known as
‘Statement in lieu of Prospectus’ which must contain the information required to be
disclosed by Schedule III of the Act.

Sec. 70(1) states that a company having a share capital which does not issue a
prospectusshall not allot any of its shares or debentures unless at least 3 days before the
allotment of shares or debentures there has been delivered to the Registrar for registration
a statement in lieu of prospectus.

The statement shall be signed by every person who is named therein as a director
or proposeddirector of the company or by his authorized agent in writing. It shall be in the
form and contain particulars set out in Schedule III of the Act.