Company Law Fundamentals: Formation, Features, and Share Capital

Posted on Jun 26, 2025 in Law & Jurisprudence

Definition and Features of a Company

Definition of Company

A Company is a voluntary association of individuals, formed to carry on a business and registered under the Companies Act. It is a legal entity separate from its members, having perpetual succession and a common seal.

According to Section 2(20) of the Companies Act, 2013: “A company means a company incorporated under this Act or under any previous company law.”

Features of a Company

  • Incorporated Association: A company must be registered under the Companies Act. It comes into existence only after incorporation.
  • Separate Legal Entity: A company is distinct from its members. It can own property, incur debts, and sue or be sued in its own name.
  • Perpetual Succession: The existence of a company is not affected by the death, insolvency, or insanity of its members. It continues forever until it is legally dissolved.
  • Limited Liability: The liability of members is limited to the amount unpaid on their shares. Members are not personally liable for the company’s debts.
  • Common Seal: A company may have a common seal which acts as its official signature. However, as per the Companies (Amendment) Act, 2015, having a common seal is now optional.
  • Separate Property: The company owns its property. Members cannot claim ownership over the assets of the company.
  • Transferability of Shares: In a public company, shares can be freely transferred. This provides liquidity to investors.
  • Capacity to Sue and Be Sued: Being a legal entity, a company can file a case in its own name and can be sued.

Private Company Details

Meaning of Private Company

A Private Company is a type of company which restricts the right to transfer its shares, limits the number of its members, and does not invite the public to subscribe to its shares or debentures.

As per Section 2(68) of the Companies Act, 2013: “A private company means a company which by its Articles of Association restricts the transfer of its shares, limits the number of its members to 200, and prohibits any invitation to the public to subscribe for any securities.”

Features of a Private Company

  • Minimum 2 and maximum 200 members.
  • Minimum 2 directors are required.
  • Restriction on transfer of shares.
  • No invitation to the public for share subscription.
  • Can start business immediately after incorporation (no need for Certificate of Commencement).

Stages in Formation of a Private Company

The formation of a private company involves the following important stages:

  1. Promotion:
    • The idea of starting a business is conceived.
    • Promoters identify the business opportunity and take steps to establish the company.
    • They prepare necessary documents like Memorandum of Association (MOA) and Articles of Association (AOA).
  2. Incorporation (Registration):
    • The company gets legally registered with the Registrar of Companies (ROC).
    • Documents to be submitted:
      • Memorandum of Association (MOA).
      • Articles of Association (AOA).
      • Declaration by professionals (lawyer, chartered accountant).
      • Details of directors and registered office.
    • Upon verification, the ROC issues the Certificate of Incorporation.
  3. Subscription of Capital:
    • In a private company, the promoters or initial subscribers bring in the required capital.
    • There is no need to issue a prospectus to the public.
    • Shares are allotted to initial members directly.
  4. Commencement of Business:
    • After receiving the Certificate of Incorporation, a private company can start its business immediately.
    • No separate certificate of commencement is required.

Stages in Company Formation

The formation of a company involves various stages, especially for a public company. These stages are:

  1. Promotion Stage:
    • This is the first stage.
    • A promoter conceives the idea of setting up a company and takes initial steps.
    • Activities include deciding name, preparing documents Memorandum of Association (MOA) and Articles of Association (AOA).
    • Promoters may also appoint professionals like lawyers and chartered accountants.
  2. Incorporation Stage (Registration):
    • In this stage, the company comes into legal existence.
    • Important documents are filed with the Registrar of Companies:
      • Memorandum of Association (MOA),
      • Articles of Association (AOA).
      • Declaration by professionals.
      • Address proof of registered office.
    • On satisfaction, Registrar issues a Certificate of Incorporation.
    • After this, the company becomes a legal entity.
  3. Subscription Stage (only for Public Company):
    • Public companies issue a prospectus to invite the public to subscribe to shares.
    • Minimum subscription must be received.
    • Allotment of shares is done to applicants.
    • A return of allotment is filed with the Registrar.
  4. Commencement of Business Stage:
    • Only applicable for companies requiring a certificate to commence business (mainly public companies).
    • Company files a declaration that:
      • Minimum subscription is received.
      • Directors have paid for their shares.
      • No misleading information was issued.
    • Registrar issues a Certificate of Commencement of Business.

Share Capital and Calls on Shares

Meaning of Share Capital

Share capital refers to the amount of capital raised by a company through the issue of shares. It represents the fund contributed by shareholders to carry on the company’s operations.

Definition

According to Section 2(84) of the Companies Act, 2013: “Share capital means the capital raised by a company by issue of shares.”

Types of Share Capital

  1. Authorized Capital: Maximum amount of share capital the company is allowed to issue.
  2. Issued Capital: Portion of authorized capital offered to investors.
  3. Subscribed Capital: Portion of issued capital that investors agree to buy.
  4. Called-up Capital: Portion of subscribed capital that the company has called for payment.
  5. Paid-up Capital: Portion of called-up capital actually paid by shareholders.
  6. Reserve Capital: Portion of uncalled capital reserved for winding up.

Provisions Relating to Calls on Shares

When a company demands payment on shares from shareholders, it is called a “Call on Shares.” Statutory provisions include:

  1. Board Resolution: A valid call must be made by a resolution passed at a Board meeting.
  2. Uniformity: Calls must be made on all shares of the same class equally.
  3. Notice of Call: Shareholders must be given proper notice (usually 14 days) specifying amount, time, and place of payment.
  4. Reasonable Interval: There should be a reasonable gap between two calls, unless otherwise stated in Articles of Association.
  5. Bona fide: Calls must be made in the best interest of the company and its shareholders.
  6. Payment Terms: If a shareholder fails to pay a call amount, company can impose interest and even forfeit shares as per Articles.
  7. Provision in Articles: If Articles of Association specify rules for calls, they must be strictly followed.