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The NCERT Class 11 Business Studies Chapter 7 explains the process of forming a company, including the stages of promotion, incorporation, and capital subscription. It covers the role of promoters, their legal position, feasibility studies, key documents like the Memorandum of Association (MOA) and Articles of Association (AOA), certificates of incorporation and commencement of business, and interactions with regulatory bodies like SEBI. The chapter also distinguishes between private and public companies in the formation process. These solutions provide clear, concise, and CBSE-aligned answers for effective exam preparation. You can also download the free PDF for revision.
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NCERT Solutions Class 11 Business Studies Chapter 7: Formation of a Company
This section provides detailed and student-friendly answers for the Class 11 Business Studies Chapter 7 exercise questions. Each answer is explained clearly to strengthen understanding and exam preparation.
Exercise
Short Answer Questions:
1. Name the stages in the formation of a company.
The formation of a company involves three main stages:
(i) Promotion, where the business idea is conceived, and feasibility is assessed
(ii) Incorporation, which involves legal registration and obtaining the Certificate of Incorporation
(iii) Capital Subscription, where funds are raised, primarily for public companies, through shares and debentures.
Private companies complete their formation at the incorporation stage, as they do not raise funds from the public.
2. List the documents required for the incorporation of a company.
The documents required for incorporation include:
(i) Memorandum of Association (MOA), defining the company’s objectives and scope;
(ii) Articles of Association (AOA), outlining internal rules;
(iii) Consent of proposed directors, confirming their agreement to act as directors and purchase qualification shares;
(iv) Agreement with proposed directors, managers, or whole-time directors, if any;
(v) Statutory declaration by a professional (advocate, chartered accountant, etc.) affirming compliance with legal requirements; and
(vi) Receipt of payment of the prescribed registration fees based on authorised capital.
3. What is a prospectus? Is it necessary for every company to file a prospectus?
A prospectus is a document issued by a public company inviting the public to subscribe to its shares or debentures. It provides detailed information about the company, its objectives, capital structure, and risks to help investors make informed decisions. Every company doesn’t need to file a prospectus; private companies are prohibited from issuing one as they cannot raise funds from the public. Public companies may issue a statement instead of a prospectus when raising funds privately.
4. Briefly explain the term ‘Return of Allotment’.
Return of Allotment is a document filed by the company with the Registrar of Companies within 30 days of allotting shares. It details the number of shares allotted, allottees’ names and addresses, amounts paid or due, and any bonus or discount shares. This ensures transparency in share allocation and compliance with legal requirements.
5. At which stage in the formation of a company does it interact with SEBI?
A company interacts with SEBI (Securities and Exchange Board of India) during the capital subscription stage. SEBI approval is required for public companies raising funds from the public through shares or debentures to ensure investor protection and compliance with securities regulations. Private companies do not interact with SEBI as they do not raise public funds.
Also Read: CBSE Class 10 Economics Chapter 2 NCERT Solutions
Long Answer Questions:
1. What is meant by the term ‘Promotion’? Discuss the legal position of promoters with respect to a company promoted by them.
Promotion refers to the initial stage in forming a company, where a business opportunity is identified, its feasibility is analysed, and necessary steps are taken to assemble resources and establish the company as a going concern. It involves converting a business idea into a viable enterprise through detailed studies and preparations.
The legal position of promoters is fiduciary, meaning they act as trustees for the company. They must act in good faith, disclose all profits made during promotion, and avoid secret gains. If they breach this duty, the company can rescind contracts, recover profits, or claim damages. Promoters are not agents (as the company does not exist yet) but are personally liable for pre-incorporation contracts unless ratified post-formation. Under Section 2(69) of the Companies Act 2013, promoters include those named in the prospectus, controlling company affairs, or advising the board. They have no automatic right to compensation but may be reimbursed by the company for legitimate expenses.
2. Explain the steps taken by promoters in the promotion of a company.
Promoters undertake the following steps in the promotion stage:
(i) Identification of business opportunity: Evaluate potential ideas for technical, financial, and economic viability.
(ii) Feasibility studies: Conduct technical (production methods), financial (cost-benefit analysis), and economic (market demand) studies to assess profitability.
(iii) Name approval: Submit an application to the Registrar of Companies with preferred names for approval.
(iv) Fixing signatories: Appoint individuals to sign the MOA and AOA.
(v) Appointment of professionals: Engage bankers, auditors, legal advisors, and other experts.
(vi) Preparation of documents: Draft MOA, AOA, consent forms, agreements, and statutory declarations for submission during incorporation. These steps ensure the idea is viable before proceeding to legal registration.
3. What is a ‘Memorandum of Association’? Briefly explain its clauses.
The Memorandum of Association (MOA) is the fundamental charter of a company, defining its objectives, scope, and relationship with the external world. It outlines the limits within which the company must operate and is mandatory for registration.
Its main clauses are:
(i) Name Clause: Specifies the company’s name, ending with ‘Limited’ (for public) or ‘Private Limited’ (for private), avoiding similarity to existing names.
(ii) Situation Clause: States the location of the registered office.
(iii) Object Clause: Defines the main and incidental objectives; the company cannot act beyond these.
(iv) Liability Clause: Indicates members’ liability (limited by shares or guarantee).
(v) Capital Clause: Details authorised capital and its division into shares.
(vi) Subscription Clause: Lists subscribers to the MOA, their shares, and witnesses. These clauses ensure clarity on the company’s purpose and structure.
4. Distinguish between the ‘Memorandum of Association’ and the ‘Articles of Association’.
Here is the difference between the ‘Memorandum of Association’ and the ‘Articles of Association’.
| Basis | Memorandum of Association (MOA) | Articles of Association (AOA) |
| Nature | Fundamental charter defining objectives and external relations. | Internal rules governing management and operations. |
| Scope | Defines the company’s limits and powers. | Subordinate to MOA; details how objectives are achieved. |
| Necessity | Compulsory for all companies. | Compulsory for private companies; public companies may adopt Table F. |
| Alteration | Difficult; requires court or government approval for major changes. | Easier; can be altered by special resolution. |
| Relation | Acts as the company’s constitution. | Acts as the bylaws for internal conduct. |
| Legal Effect | Binds the company to outsiders. | Binds members to the company and among themselves. |
5. What is the meaning of a Certificate of Incorporation?
The Certificate of Incorporation is a legal document issued by the Registrar of Companies upon successful registration, signifying the company’s birth as a separate legal entity. It bears the date from which the company exists, enjoys perpetual succession, and can enter into contracts, sue, or be sued. The certificate is conclusive evidence of incorporation, meaning its validity cannot be challenged even if irregularities occurred. For public companies, it allows proceeding to capital subscription, but business commencement requires a separate Certificate of Commencement if raising public funds.
6. Discuss the stages of the formation of a company.
The formation of a company involves three stages:
(i) Promotion: Involves identifying opportunities, conducting feasibility studies (technical, financial, economic), obtaining name approval, appointing professionals, and preparing documents like the MOA and AOA. Promoters lead this stage to ensure viability.
(ii) Incorporation: Application is filed with the Registrar along with required documents and fees. If satisfied, the Registrar issues the Certificate of Incorporation, granting legal existence, perpetual succession, and a common seal.
(iii) Capital Subscription: Applicable mainly to public companies; involves SEBI approval, filing a prospectus, appointing bankers/underwriters, ensuring minimum subscription (90% of issue), allotting shares, and filing a return of allotment. Private companies skip this, as they raise funds privately. These stages ensure legal compliance and operational readiness.
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