Class 11 NCERT Solutions: Chapter 7 Formation of a Company Exercise 7.1 (Business Studies)

True/False Answer Questions

1. It is necessary to get every company incorporated, whether private or public.

Answer: True, it is essential for every company, whether private or public to get incorporated.

2. Statement in lieu of prospectus can be filed by a public company going for a public issue.

Answer: False, a public limited company seeking applications from the general public for the subscription of its shares or debentures must fill the prospectus with the Registrar of Companies.

3. A private company can commence business after incorporation.

Answer: True, once a private company can immediately commence its business after incorporation.

4. Experts who help promoters in the promotion of a company are also called promoters.

Answer:  False, a promoter is a person who conceives the idea of starting a business, examines its feasibility, assembles the required resources, prepares required documents, and performs other activities needed to commence a business.

5. A company can ratify preliminary contracts after incorporation.

Answer: A company cannot ratify the preliminary contracts after incorporation as these contracts are not legally enforceable.

6. If a company is registered on the basis of fictitious names, its incorporation is invalid.

Answer: False, once a company gets the certificate of incorporation, it becomes valid even though it is registered on the basis of fictitious names.

7. ‘Articles of Association’ is the main document of a company.

Answer: False, Memorandum of Association is the main document of a company.

8. Every company must file Articles of Association.

Answer: False, it is essential for a company to file the Articles of Association. However, it may adopt able F of the Companies Act instead of AOA.

9. A provisional contract is signed by promoters before the incorporation of the company.

Answer: False, a provisional contract is signed after the incorporation of the company and before the commencement of business.

10. If a company suffers heavy issues and its assets are not enough to pay off its liabilities, the balance can be recovered from the private assets of its members.

Answer: False, a member does not have to use his private assets to recover the lost balance. It is because the members have limited liability and are responsible for that only.

Short Answer Questions

Question 1: Name the stages in the formation of a company.

Answer: The steps which are required from the time a business idea originates to the time a firm is legally ready to commence business are referred to as stages in the formation of a company. These stages are as follows:

1. Promotion: Promotion is the first stage in the formation of a company. It involves conceiving a business opportunity and taking the initiative to form a company so that practical shape can be given to exploiting the available business opportunity.
2. Incorporation: After going through the formalities required in the above step, the promotors of the company make an application for the Incorporation of the company. The application is to be filed with the Registrar of the Companies of the state within which they plan to establish the registered office of the company. 
3. Subscription of Capital: A Public Company can raise the required funds from the public using an issue of shares and debentures. For this purpose, it has to issue a prospectus which is a kind of invitation to the public to subscribe to the capital of the company and undergo various other formalities.
4. Commencement of Business: If the amount of minimum subscription is raised through the new issue of shares, a public company applies to the Registrar of Companies for the issue of a Certificate of Commencement of Business.

Question 2: List the documents required for the incorporation of a company.

Answer.  After going through the formalities required in Promotion, the promotors of the company make an application for the Incorporation of the company. The application is to be filed with the Registrar of the Companies of the state within which they plan to establish the registered office of the company. 

The documents required for the incorporation of a company are as follows:

1. Memorandum of Association duly stamped, signed, and witnessed.

2. Article of Association duly stamped, signed, and witnessed.

3. Written Consent of the Proposed Directors

4. Agreement, if any, with the proposed Managing Director, Manager, etc.

5. A copy of the Registrar’s Letter approving the Name of the Company.

6. A Statutory Declaration affirming that all legal requirements of registration have been submitted.

7. Notice the exact Address of the Registered Office.

8. Documentary evidence of Payment of Fees.

Question 3: What is a prospectus? Is it necessary for every company to file a prospectus?

Answer: A prospectus is a document that includes any notice, circular, advertisement, or other documents inviting offers from the public for the subscription. It is one of the important documents required for the incorporation of a business and has to be filed with the Registrar of Companies. The invitation must be made by or on behalf of the company to the public at large.

It is not necessary for a private company to file a prospectus. However, a public company that is not raising funds from the public may file a statement in lieu of prospectus with the registrar. 

Question 4.  Briefly explain the term ‘Return of Allotment’.

Answer: Once the company gets its name listed with the Registrar of Companies, it prepares a return of allotment. It is a statement that gives details about the names and addresses of the shareholders of the company. The company has to submit this statement with the registrar stating the names, addresses, and the number of shares allotted to the shareholders. 

Question 5. At which stage in the formation of a company does it interact with SEBI?

Answer: SEBI is a regulatory body controlling the capital market of India with the aim of protecting the interest of investors. A company interacts with the Securities and Exchange Board of India (SEBI) during the third stage of the formation of the company; i.e., Capital Subscription. In this stage, a Public Company raises the required funds from the public through the issue of shares and debentures. While raising funds, the company must submit every relevant information with the SEBI, before issuing its securities in the capital market. The companies should not hide any material fact from SEBI; otherwise, according to the ‘Guidelines for disclosure and investor protection 2000’, the company’s registration will get cancelled.