4 Stages of Formation of a Company in India: Complete Guide

Overview: Stages Of Formation Of A Company

India is one of the fastest-growing economies in the world, attracting both local and international entrepreneurs to set up their businesses. Whether you’re a startup founder or a seasoned investor, understanding the stages of formation of a company in India is crucial. The process involves multiple steps, from initial ideation to legally commencing operations. 

There are four stages of formation of company:

1. Promotion of the Company
2. Registration of the Company
3. Certificate of Incorporation
4. Commencement of the Business

In this article, we will explain the different stages in the formation of a company mentioned above.  

Stage 1: Promotion Of The Company

The first stage of formation of company in India is promotion. We can say that promotion is the entire procedure by which a company is brought into existence. It involves conceptualizing the business idea, preparing the groundwork, and taking necessary steps to establish the company legally. The individuals who initiate this process are called promoters. 

Now you might be wondering who is a promoter of the company. Well, the answer to that is, that a promoter is a person who is starting with the stages of formation of a company and is concerned with the promotion of the business. He would be the person who would be pitching in the business idea, and finding out ways to fund his business. That person would start the legal procedure for the incorporation of the company. They would appoint the board of directors and bankers for the company.

Now there are mainly 4 types of promoters in the formation of a company:

• Professional Promoters: They promote the company in the initial stage and as soon as the company is incorporated and has a good position in the market the company would be handed over to its shareholders.
• Occasional Promoters: As the name suggests are not very active in the promotion of the company. they might be promoters of a few other companies. they are only involved in the important affairs of the company.
• Financial Promoters: Venture capitalists would invest money or capital into a venture and hold an important stake in the venture. They hold a strong power over the working of the company.
• Managing Agents as Promoters of the Company: These promoters would float new companies in India. They would get managing agency rights in return.

Stage 2: Registration of a Company (Incorporation Stage)

Once the promotion phase is complete, the company must be legally registered with the Ministry of Corporate Affairs (MCA). This process is known as incorporation and is the second stage of formation of a company in India. It is a very important factor that the company has to be registered under the Companies Act, 2013.

Many steps have to be followed while registering to accompany according to the Companies Act, 2013.

They are as follows:

• Memorandum of Association: The Memorandum of Association has to be signed by the owners of the company. In the case of a public company, a minimum of 7 people has to sign the Memorandum of Association. In the case of a private company, only two people have to sign it at a minimum.
• Articles of Association: It is also required to sign the Article of Association. Those who have signed the Memorandum of Association are required to sign the Articles of Association.
• List of Directors: In the next step the list of directors and their details have to be prepared and it should be filed with the registrar of the companies.
• Written consent of the directors: The directors who have been selected should write a written consent in which they agree to be the director of the company. This has to be filed with the Registrar of Companies.

• Notice of address of the registered office: In this step, the address of the registered office has to be filed.
• Statutory declaration: A statutory declaration has to be made by any advocate of the supreme court or the high court or the person who is the director, secretary, or any practising chartered accountant or manager of the company. This has to be filed with the Registrar of Companies.
• Payment of Fee: Along with the document mentioned above, required fees have to be paid for the registration of the company. The registrar of the Company would then check all the documents and then would verify them
• Certificate of Incorporation: Once all documents are verified, the MCA issues the Certificate of Incorporation, officially registering the company. The COI contains the Corporate Identification Number (CIN), which is essential for legal business operations.

Stage 3: Subscription of Capital

After the company is incorporated, it must raise capital to start its operations. This is the subscription stage of formation of company, where shareholders commit to purchasing shares in the company.

There are seven steps involved in the initial public allotment:

1. Hiring financial experts from investment banks
2. IPO registration
3. SEBI verification
4. Appling in the stock exchange
5. Public advertisement
6. Pricing of IPO
7. Allotment of shares

For a private company to issue shares to the public they will have to follow these steps strictly. This process takes a long time to complete. Hiring financial experts from the financial bank is one of the crucial steps involved in this process. They would decide about the capital to be raised and other important financial details.

Registration for Initial Public Offering is also an important as well as lengthy process. It involves the procedure of preparation of RHP(red herring prospectus). Submission of that is mandatory as per the Companies Act, 2013. RHP has many components which are involved in the process. Then the company would submit the document to SEBI for their verification. 

If they are satisfied with the documents, they will approve the application and the company can announce the date for the issue of the IPO. Then the company would apply in the stock market to issue their shares. There are 2 types of Stock Exchanges in India – the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). 

In the next process, the company would advertise its IPO dates to attract investors who are ready to invest in their shares. Then they would price their IPO and then they would allot their shares.

Stage 4: Certificate of Commencement of Business

The final steps in formation of a company in India is obtaining the Certificate of Commencement of Business.

Requirements to Obtain the Certificate

Filing Form INC-20A:

• Companies must file Form INC-20A within 180 days of incorporation.
• The form must include a bank statement showing the initial capital deposit by shareholders.

Verification by the Registrar of Companies (ROC):

• The ROC ensures that the company has met the legal capital requirements and is ready to start operations.

Issuance of the Certificate:

• Once verified, the MCA issues the Certificate of Commencement of Business.

Legal Consequences of Non-Compliance:

• Companies failing to obtain this certificate cannot commence operations.
• A penalty of INR 50,000 ($600) for the company and INR 1,000 ($12) per day for directors applies

Conclusion

India’s booming startup ecosystem, government incentives like Startup India, and increasing ease of doing business make it an attractive destination for company formation. By following the four stages of formation of company—Promotion, Registration, Capital Subscription, and Business Commencement—entrepreneurs can ensure a smooth incorporation process.

For more details regarding the stages of formation of a company in India, get in touch with our experts from OnDemand International today.