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Formation of a Company

NCERT Class 11 · Business Studies Based on NCERT Class 11 Business Studies textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter explains the complete legal and procedural journey from conceiving a business idea to legally commencing business as a company. It is essential in the syllabus because it demystifies the complex regulatory framework under the Companies Act, 2013, which every entrepreneur and business student must understand. The one big idea a student must walk away with is that forming a company is a three-stage process—Promotion, Incorporation, and Capital Subscription—each with distinct legal formalities, documents, and consequences, and that the Certificate of Incorporation is the conclusive 'birth certificate' of the company.
Key Concepts (24)
Promotion
The first stage in the formation of a company, involving conceiving a business idea and taking an initiative to form a company so that practical shape can be given to exploiting the available business opportunity.
e.g. Avtar, a brilliant automobile engineer, develops a new carburettor and decides to form a company to produce it on a large scale.
Promoter
A person who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose. As per section 69, a promoter means a person who has been named as such in a prospectus, or who has control over the affairs of the company, or in accordance with whose advice the Board of Directors is accustomed to act.
e.g. Avtar, who discovered the business opportunity and decides to form a company, is a promoter.
Feasibility Studies
Detailed investigations undertaken by promoters to examine whether a perceived business opportunity can be profitably exploited, covering technical, financial, and economic feasibility.
e.g. Avtar checks if the required metal for his carburettor is available (technical), if he can arrange the required funds (financial), and if the project will be profitable (economic).
Technical Feasibility
An assessment of whether a business idea is technically possible to execute, considering the availability of raw materials, technology, and other technical requirements.
e.g. If the metal needed for Avtar's carburettor is not produced in India and cannot be imported due to poor political relations, the project would be technically unfeasible.
Financial Feasibility
An assessment of whether the required funds for a project can be arranged within the available means of the promoters.
e.g. If developing a township requires several crores of rupees which cannot be arranged by floating a company, the idea may be abandoned due to lack of financial feasibility.
Economic Feasibility
An assessment of whether a project, though technically viable and financially feasible, has a reasonable chance of being profitable.
e.g. A project that is technically and financially feasible but has very little chance of being profitable may be abandoned on economic feasibility grounds.
Memorandum of Association (MOA)
The most important document of a company, as per section 2(56) of The Companies Act, 2013, which defines the objectives of the company and contains clauses such as name clause, registered office clause, objects clause, liability clause, and capital clause.
e.g. A company's MOA states its name, that its registered office is in Maharashtra, its main objects (e.g., to manufacture automobiles), that members' liability is limited to unpaid amounts on shares, and that its authorised capital is ₹25 lakhs divided into 2.5 lakh shares of ₹10 each.
Name Clause
A clause in the Memorandum of Association that contains the name of the company with which the company will be known, which has already been approved by the Registrar of Companies.
e.g. The name 'Avtar Automobiles Limited' appears in the name clause of the MOA.
Registered Office Clause
A clause in the Memorandum of Association that contains the name of the state in which the registered office of the company is proposed to be situated. The exact address must be notified to the Registrar within 30 days of incorporation.
e.g. The MOA states that the registered office will be situated in the State of Gujarat.
Objects Clause
The most important clause of the Memorandum of Association, which defines the purpose for which the company is formed. A company is not legally entitled to undertake an activity beyond the objects stated in this clause.
e.g. The objects clause lists the main objects, such as manufacturing and marketing carburettors, and matters incidental to achieving those objects.
Liability Clause
A clause in the Memorandum of Association that limits the liability of the members to the amount unpaid on the shares owned by them.
e.g. If a shareholder has purchased 1000 shares of ₹10 each and has already paid ₹6 per share, his/her liability is limited to ₹4 per share, i.e., ₹4,000 in total.
Capital Clause
A clause in the Memorandum of Association that specifies the maximum capital which the company will be authorised to raise through the issue of shares, along with its division into shares of a fixed face value.
e.g. The authorised share capital of the company is ₹25 lakhs divided into 2.5 lakh shares of ₹10 each.
Articles of Association (AOA)
Rules regarding internal management of a company, subsidiary to the Memorandum of Association, as per section 2(5) of The Companies Act, 2013. They indicate how the objectives of the company are to be achieved.
e.g. The AOA contains rules about allotment of shares, calls on shares, transfer of shares, meetings, directors, dividends, and winding up.
Prospectus
Any document described or issued as a prospectus including 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 securities of a body corporate.
e.g. A public company issues a prospectus inviting the public to apply for its shares, disclosing all material information about the company.
Minimum Subscription
The minimum amount of shares that must be applied for before a company can proceed with allotment, as per SEBI guidelines, which is 90 per cent of the size of the issue.
e.g. If a company issues shares worth ₹10 crores, it must receive applications for at least ₹9 crores (90%) before it can allot shares.
Certificate of Incorporation
The certificate issued by the Registrar of Companies after being satisfied that all statutory requirements for registration have been complied with, signifying the birth of the company. It is conclusive evidence of the legal existence of the company.
e.g. When the Registrar issues the Certificate of Incorporation on 8th January, the company becomes a legal entity with perpetual succession from that date.
Preliminary Contracts (Pre-incorporation Contracts)
Contracts entered into by promoters with third parties on behalf of the company before its incorporation. These are not legally binding on the company, and promoters remain personally liable for them.
e.g. Avtar signs a contract with a supplier for raw materials before the company is registered. The company, after incorporation, may choose to enter into a fresh contract on the same terms but cannot ratify the preliminary contract.
Qualification Shares
Shares that directors are required to buy and pay for before the company obtains the Certificate of Commencement of Business, as per the Articles of Association, to ensure they have some stake in the company.
e.g. The AOA requires each director to buy 500 shares of ₹10 each before the company can commence business.
Director Identification Number (DIN)
A unique identification number allotted by the Central Government to every individual intending to be appointed as a director of a company, upon application in the prescribed form along with fees.
e.g. Before Avtar can be appointed as a director of his company, he must apply for and obtain a DIN from the Central Government.
Corporate Identity Number (CIN)
A unique identification number allotted by the Registrar of Companies to a company upon incorporation, with effect from November 1, 2000.
e.g. After incorporation, the company receives a CIN which is used for all official communications.
Underwriters
Professionals appointed by a company who undertake to buy the shares if these are not subscribed by the public, receiving a commission for underwriting the issue.
e.g. If a public issue of shares is not fully subscribed, the underwriter buys the remaining shares.
Return of Allotment
A statement containing the names and addresses of shareholders and the number of shares allotted to each, signed by a director or secretary, filed with the Registrar of Companies within 30 days of allotment.
e.g. After allotting shares to applicants, the company files a return of allotment with the ROC listing all allottees and their shareholdings.
Statutory Declaration
A declaration stating that all the legal requirements pertaining to registration have been complied with, signed by an advocate, chartered accountant, cost accountant, or company secretary in practice, or by a person named in the articles as a director, manager, or secretary.
e.g. Before registration, a chartered accountant signs a statutory declaration affirming that all formalities are complete.
SEBI (Securities and Exchange Board of India)
The regulatory authority in India that has issued guidelines for the disclosure of information and investor protection, requiring a public company to make adequate disclosure of all relevant information before raising funds from the public.
e.g. A public company must obtain prior approval from SEBI before issuing a prospectus to the public.
How It Works
Stages in the Formation of a Company
  1. Step 1: Promotion — Conceiving a business idea, conducting feasibility studies (technical, financial, economic), obtaining name approval, fixing signatories to MOA, appointing professionals, and preparing necessary documents (MOA, AOA, consent of directors, agreement, statutory declaration).
  2. Step 2: Incorporation — Filing an application with the Registrar of Companies along with all required documents and registration fee; the Registrar issues the Certificate of Incorporation upon satisfaction of compliance.
  3. Step 3: Capital Subscription (for public companies) — Raising funds from the public by issuing a prospectus, obtaining SEBI approval, appointing bankers/brokers/underwriters, ensuring minimum subscription (90%), applying to stock exchange, allotting shares, and filing return of allotment.
💡 A private company does not need to go through the Capital Subscription stage because it is prohibited from raising funds from the public. It only needs Promotion and Incorporation.
Steps in Promotion of a Company
  1. Step 1: Identification of business opportunity — The promoter identifies a potential business idea, such as producing a new product or service.
  2. Step 2: Feasibility studies — The promoter undertakes technical, financial, and economic feasibility studies with the help of specialists like engineers and chartered accountants.
  3. Step 3: Name approval — The promoter submits an application to the Registrar of Companies with three names in order of priority for approval.
  4. Step 4: Fixing up signatories to the Memorandum of Association — The promoter decides on the members who will sign the MOA (at least 7 for public, 2 for private), who are usually the first directors.
  5. Step 5: Appointment of professionals — The promoter appoints professionals such as mercantile bankers and auditors to assist in preparing documents.
  6. Step 6: Preparation of necessary documents — The promoter prepares the Memorandum of Association, Articles of Association, consent of directors, agreement (if any), and statutory declaration.
💡 Experts who assist in feasibility studies do not become promoters just because they are assisting. Promoters are personally liable for preliminary contracts.
Steps in Capital Subscription (for a Public Company)
  1. Step 1: SEBI Approval — Obtain prior approval from SEBI for disclosure of information and investor protection.
  2. Step 2: Filing of Prospectus — File a copy of the prospectus with the Registrar of Companies.
  3. Step 3: Appointment of Bankers, Brokers, Underwriters — Appoint bankers to receive application money, brokers to sell shares, and optionally underwriters to buy unsubscribed shares.
  4. Step 4: Minimum Subscription — Ensure that applications for at least 90% of the issue size are received before allotment.
  5. Step 5: Application to Stock Exchange — Apply to at least one stock exchange for permission to deal in its shares; if not granted within 10 weeks of closure of subscription list, allotment becomes void and money must be returned within 8 days.
  6. Step 6: Allotment of Shares — Allot shares to successful applicants, issue allotment letters, and file return of allotment with the ROC within 30 days.
💡 Application money received must remain in a separate bank account until allotment and must not be used by the company. If minimum subscription is not met, the entire application money must be returned to applicants.
Effect of Certificate of Incorporation
  1. Step 1: The company is legally born on the date printed on the Certificate of Incorporation.
  2. Step 2: It becomes a legal entity with perpetual succession.
  3. Step 3: It becomes entitled to enter into valid contracts.
  4. Step 4: The Certificate of Incorporation is conclusive evidence of the regularity of the incorporation — even if there is a flaw in registration, the company's legal existence cannot be questioned.
💡 Even if documents were filed on 6th January but the certificate was issued on 8th January with the date 6th January, the company is considered to have existed on 6th January. Even forged signatures on the MOA do not invalidate the incorporation.
Exam Traps — Don't Make These Mistakes
⚠ Confusing Promotion with Incorporation
✗ Promotion is the stage where the company is legally registered and gets the Certificate of Incorporation.
→ Promotion is the first stage, which involves conceiving the idea and preparing documents, but the company is not yet legally born. Incorporation is the second stage where the company is legally registered.
✓ Promotion is the first stage involving conceiving the business idea, conducting feasibility studies, and preparing documents. Incorporation is the second stage where the company is legally registered and receives the Certificate of Incorporation.
⚠ Thinking Preliminary Contracts are Binding on the Company
✗ Preliminary contracts signed by promoters are binding on the company after incorporation.
→ Preliminary contracts are not legally binding on the company because the company did not exist at the time of signing. The company cannot ratify them; it can only enter into fresh contracts on the same terms.
✓ Preliminary contracts are not legally binding on the company. Promoters remain personally liable to third parties for these contracts. The company may, after incorporation, enter into fresh contracts with the same terms and conditions.
⚠ Assuming a Private Company Needs Capital Subscription
✗ All companies must go through the capital subscription stage to raise funds from the public.
→ A private company is prohibited from raising funds from the public and does not need to issue a prospectus or complete the formality of minimum subscription. Only a public company raising funds from the public needs the capital subscription stage.
✓ A private company does not need to go through the capital subscription stage because it cannot raise funds from the public. It only requires promotion and incorporation stages.
⚠ Misunderstanding the Conclusiveness of Certificate of Incorporation
✗ If there is any flaw in the registration process, the Certificate of Incorporation can be cancelled and the company is considered never to have existed.
→ The Certificate of Incorporation is conclusive evidence of the legal existence of the company, regardless of any flaw in registration. Even if the company was registered with illegal objects, its birth cannot be questioned; the only remedy is to wind it up.
✓ The Certificate of Incorporation is conclusive evidence of the legal existence of the company. Even if there is a deficiency in formalities or forged signatures, the company's existence cannot be questioned. The only remedy for illegal objects is to wind up the company.
⚠ Confusing Minimum Subscription Percentage
✗ Minimum subscription is 100% of the issue size.
→ As per SEBI guidelines, the limit of minimum subscription is 90 per cent of the size of the issue, not 100%.
✓ As per SEBI guidelines, the minimum subscription is 90 per cent of the size of the issue. If applications are received for less than 90%, allotment cannot be made and the application money must be returned.
⚠ Thinking Articles of Association are Compulsory for All Companies
✗ Every company must file Articles of Association.
→ A public company may adopt Table F (a model set of Articles given in the Companies Act) and does not need to file its own Articles of Association. However, a private company must file its own Articles.
✓ A public company is not required to file Articles of Association if it adopts Table F of the Companies Act, 2013. A private company must file its own Articles of Association.
Compare & Contrast
Position and Purpose
Memorandum of Association (MOA)
Articles of Association (AOA)
MOA is the main document defining the objectives and scope of the company, while AOA is a subsidiary document containing rules for internal management. MOA defines the relationship of the company with outsiders; AOA defines the relationship between members and the company.
Validity of Acts
Memorandum of Association (MOA)
Articles of Association (AOA)
Acts beyond the MOA are invalid and cannot be ratified even by a unanimous vote of members. Acts beyond the AOA can be ratified by members, provided they do not violate the MOA.
Stages of Formation
Public Company
Private Company
A public company must go through all three stages: Promotion, Incorporation, and Capital Subscription. A private company only needs Promotion and Incorporation; it does not need to issue a prospectus or meet minimum subscription requirements.
Timing of Signing
Preliminary Contracts
Provisional Contracts
Preliminary contracts are signed by promoters before incorporation (pre-incorporation). Provisional contracts are signed after incorporation but before commencement of business.
Exam Focus
Marks pattern: Typically, 2 MCQs (1 mark each), 1 short answer question (3 marks), 1 long answer question (5 marks), and sometimes a case study-based question (4-5 marks). Total weightage: approximately 10-12 marks.
Most asked: Stages in the formation of a company (Promotion, Incorporation, Capital Subscription) · Functions of a promoter · Clauses of Memorandum of Association (especially Objects Clause and Name Clause) · Difference between Memorandum of Association and Articles of Association · Certificate of Incorporation and its conclusiveness · Minimum Subscription (90% rule) · Preliminary contracts and their legal position · Documents required for incorporation
Don't skip: Explain the stages in the formation of a company with steps involved in each stage (5 marks).; Distinguish between Memorandum of Association and Articles of Association (3-5 marks).; What is a Certificate of Incorporation? Explain its conclusiveness with examples (3-5 marks).; Explain the legal position of promoters with respect to preliminary contracts (3 marks).
One-Line Revision (read aloud before the exam)
  1. Formation of a company has three stages: Promotion, Incorporation, and Capital Subscription.
  2. A promoter is a person who conceives a business idea, takes steps to form a company, and assumes associated risks.
  3. Feasibility studies include technical, financial, and economic feasibility.
  4. The Memorandum of Association is the most important document defining the company's objectives and contains name, registered office, objects, liability, and capital clauses.
  5. The Objects Clause is the most important clause of the MOA; a company cannot undertake activities beyond it.
  6. Articles of Association are rules for internal management and are subsidiary to the Memorandum of Association.
  7. A public company must have at least 7 signatories to the MOA; a private company needs at least 2.
  8. The Certificate of Incorporation is the birth certificate of the company and is conclusive evidence of its legal existence.
  9. Preliminary contracts are not binding on the company; promoters remain personally liable for them.
  10. Minimum subscription as per SEBI is 90% of the issue size.
  11. A private company does not need to issue a prospectus or complete capital subscription formalities.
  12. Application money for shares must be kept in a separate bank account until allotment.
  13. Return of allotment must be filed with the ROC within 30 days of allotment.
  14. The Certificate of Incorporation is conclusive even if there are forged signatures or other deficiencies in registration.
  15. Directors must obtain a Director Identification Number (DIN) before appointment.
  16. A public company may adopt Table F of the Companies Act instead of filing its own Articles of Association.
  17. Underwriters undertake to buy unsubscribed shares and receive a commission.
  18. The Registrar of Companies allots a Corporate Identity Number (CIN) to the company upon incorporation.

MCQs — 10 Questions with Answers

Q1. According to the Companies Act, a promoter can be identified in how many ways under Section 69?

  • A. Two ways only
  • B. Three ways: named in prospectus, controls company affairs, or whose advice Board follows ✓
  • C. Four ways including being a shareholder
  • D. One way only – by being named in the prospectus

Answer: B — Section 69 defines promoters through three distinct criteria covering prospectus naming, control, and influence over Board decisions.

Q2. Why did Avtar decide to form a company instead of converting his sole proprietorship to a partnership for manufacturing his new carburettor?

  • A. Because partnership requires more government approvals than company
  • B. Because the large capital requirement and high risk associated with a new product made the company form more suitable ✓
  • C. Because sole proprietorship cannot be converted to partnership
  • D. Because companies have lower taxation than partnerships

Answer: B — The case study explicitly states that large fund requirements and significant risk involved with a new product make company form preferable over partnership.

Q3. What is the primary purpose of conducting technical feasibility study during the promotion stage?

  • A. To estimate the total capital requirements
  • B. To verify whether the required raw materials, technology, and equipment can be obtained for the project ✓
  • C. To calculate the profit margin of the project
  • D. To determine the number of workers needed

Answer: B — Technical feasibility examines whether required raw materials and technology are available and obtainable, as explained in the carburettor metal example.

Q4. A promoter undertakes detailed feasibility studies. Which of the following is NOT a type of feasibility study mentioned in the chapter?

  • A. Technical feasibility
  • B. Financial feasibility
  • C. Economic feasibility
  • D. Legal feasibility ✓

Answer: D — The chapter identifies only three types of feasibility studies: technical, financial, and economic; legal feasibility is not mentioned as a distinct category.

Q5. Which statement about the Memorandum of Association (MoA) is correct?

  • A. The MoA contains only internal management rules of the company
  • B. The MoA defines the company's relationship with the outside world and is filed with the Registrar of Companies ✓
  • C. The MoA is prepared after the company receives the Certificate of Incorporation
  • D. The MoA is required for private companies but not for public companies

Answer: B — The MoA is the fundamental document defining external relationships and contains company name, objects, registered office, liability, and capital clauses.

Q6. Read the following statements: Assertion (A): A promoter becomes a director of the company immediately after identification of the business opportunity. Reason (R): Promoters and directors have the same legal status and responsibilities in a company. Which of the following is correct?

  • A. Both A and R are correct, and R is the correct explanation of A
  • B. Both A and R are correct, but R is not the correct explanation of A
  • C. A is incorrect, but R is correct
  • D. Both A and R are incorrect ✓

Answer: D — Promoters exist before legal incorporation and take steps to form the company; directors only come into existence after the company is legally incorporated, so both statements are incorrect.

Q7. A company requires capital of ₹50 crores for a township development project, but the promoters can only raise ₹30 crores through available sources. Which type of feasibility has been violated?

  • A. Technical feasibility
  • B. Economic feasibility
  • C. Financial feasibility ✓
  • D. Legal feasibility

Answer: C — Financial feasibility concerns whether required funds can be arranged within available means; insufficient capital availability makes the project financially infeasible.

Q8. Which of the following correctly distinguishes between private and public companies in the context of company formation?

  • A. Both private and public companies must issue a prospectus and complete minimum subscription formality
  • B. Private companies are prohibited from raising funds from the public and do not need to issue prospectus or complete minimum subscription ✓
  • C. Private companies must complete minimum subscription but public companies do not
  • D. Public companies do not need a Certificate of Incorporation but private companies do

Answer: B — The chapter states that private companies cannot raise public funds, so they are exempt from prospectus and minimum subscription formalities unlike public companies.

Q9. An expert engineer assists promoters in examining technical feasibility by checking raw material availability for a manufacturing project. According to the chapter, what is the status of this engineer?

  • A. The engineer automatically becomes a promoter of the company
  • B. The engineer is a co-promoter with equal legal liability
  • C. The engineer is not a promoter but merely assisting promoters in a professional capacity ✓
  • D. The engineer will become a promoter once the company is incorporated

Answer: C — The chapter explicitly states that experts assisting promoters do not become promoters themselves, as they are acting in a professional capacity only.

Q10. After Avtar's company receives the Certificate of Incorporation from the Registrar, what is the most critical next step before the company can begin actual manufacturing and marketing operations?

  • A. Appoint the Board of Directors immediately
  • B. Verify minimum subscription of capital and obtain the Certificate to Commence Business ✓
  • C. Purchase all manufacturing equipment and raw materials
  • D. Register all trademarks and patents for the carburettor

Answer: B — After incorporation, the subscription of capital stage must be completed with minimum capital collected before obtaining the Certificate to Commence Business, which legally permits business operations.

Flashcards

What is a promoter in company formation?

A promoter is a person who conceives a business idea, undertakes feasibility studies, assembles resources, and takes necessary steps to form and get a company registered and ready to commence business.

Name the three distinct stages in company formation.

The three stages are: (1) Promotion, (2) Incorporation, and (3) Subscription of Capital.

What is the Memorandum of Association (MoA)?

The MoA is the fundamental document that defines the company's relationship with the outside world and contains the company's name, objects, registered office location, liability clause, and capital clause.

Define the Articles of Association (AoA).

The AoA is the document containing the rules and regulations for the internal management and administration of the company.

What is the Certificate of Incorporation?

It is the certificate issued by the Registrar of Companies after incorporating a company, which gives the company its legal status and existence.

Why do private companies not need to issue a prospectus?

Private companies are prohibited from raising funds from the general public; they can only invite specific persons to subscribe to shares, so a prospectus is not required.

What is the purpose of feasibility studies in promotion stage?

Feasibility studies examine technical, financial, and economic viability to determine whether an identified business opportunity can be profitably and practically executed.

What is the minimum subscription requirement and when does it apply?

Minimum subscription is the minimum amount of capital that must be subscribed (committed) by the public before a public company can commence business; it does not apply to private companies.

What is the difference between Certificate of Incorporation and Certificate to Commence Business?

Certificate of Incorporation marks the company's legal birth and commencement of incorporation stage, while Certificate to Commence Business marks the company's readiness to start actual business operations after subscription stage is complete.

Name four main functions of a promoter.

The four main functions are: (1) Identification of business opportunity, (2) Feasibility studies (technical, financial, economic), (3) Name approval, and (4) Preparation and filing of legal documents.

Important Board Questions

Define a promoter according to Section 69 of the Companies Act and state any two functions of a promoter. [2 marks]

State the three-part definition (prospectus naming, control, or Board influence), then name two functions such as business opportunity identification or feasibility studies.

Distinguish between the Memorandum of Association and the Articles of Association with respect to their contents and purpose in company formation. [5 marks]

MoA defines company's external constitution (name, objects, registered office, liability, capital) and is filed with Registrar; AoA contains internal management rules and regulations. Provide one example for each document to illustrate the distinction.

Avtar's carburettor company is planning to raise capital through public share offering. Explain why the company must issue a prospectus and complete minimum subscription formality, and state how this differs for a private company in the same industry. Also discuss the role of the Certificate to Commence Business in the formation process. [6 marks]

Explain that public companies raise funds from general public (requiring prospectus and minimum subscription), while private companies cannot. Discuss why private companies are exempt from these formalities. Finally, explain that the Certificate to Commence Business marks the transition from promotion/incorporation stage to actual business operations after subscription stage is completed and minimum capital is verified.

Assertion-Reason Questions for Formation of a Company

Q1. Assertion (A):

A promoter is defined as a person who undertakes to form a company and takes necessary steps to accomplish that purpose.

Reason (R):

Promoters must assemble resources, prepare necessary documents, give a name to the company, and perform various activities to get it registered before it can commence business.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true, and the reason correctly explains why the assertion is accurate. The reason provides the practical basis for understanding the promoter's definition by describing the actual activities involved in forming a company.

Q2. Assertion (A):

Experts such as engineers and chartered accountants who assist promoters in conducting feasibility studies automatically become promoters of the company.

Reason (R):

Section 69 of the Companies Act provides an exception stating that acting merely in a professional capacity does not make one a promoter.

Answer: D — A is false but R is true — The assertion is false because the study material explicitly states that experts do not become promoters just by providing professional assistance. The reason is also problematic in framing, as it references an exception that applies when considering control/influence, not professional assistance. The correct understanding is that experts remain non-promoters when acting professionally.

Q3. Assertion (A):

Technical feasibility studies examine whether required raw materials and technology are easily available for the project.

Reason (R):

Economic feasibility studies investigate whether a project is technically viable and financially feasible but lacks sufficient profitability potential.

Answer: C — A is true but R is false — The assertion is true—technical feasibility does examine availability of raw materials and technology. However, the reason is false because it incorrectly describes economic feasibility. Economic feasibility assesses profitability potential, not the combined technical and financial viability described in the reason.

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Case-Based Questions (CBQ) for Formation of a Company

Case Study:

Raj and Priya, two engineers, identified a business opportunity in manufacturing eco-friendly packaging materials. They conducted a comprehensive technical feasibility study with a specialized environmental engineer and found that the technology is available in India and raw materials can be sourced locally. Their financial feasibility study revealed they need ₹50 crores to establish the manufacturing plant, which they determined could be arranged through institutional investors and government subsidies. The economic feasibility study showed strong market demand with projected profit margins of 20% annually. Based on these positive feasibility reports, Raj and Priya decided to proceed with forming a company.

Q1. In the above scenario, who would be classified as promoters of the company according to Section 69 of the Companies Act?

  • A. Raj, Priya, and the environmental engineer who conducted the technical feasibility study
  • B. Only Raj and Priya, as the engineer acted in a professional capacity ✓
  • C. The institutional investors who will provide funds to the company
  • D. All parties mentioned, including the government agencies providing subsidies

Answer: B

Q2. Which feasibility study conducted in the scenario would be MOST critical in determining whether Raj and Priya should proceed with company formation despite having positive results in other studies?

  • A. The technical feasibility study, as it determines technology availability
  • B. The financial feasibility study, as it confirms fund availability of ₹50 crores
  • C. The economic feasibility study, as it demonstrates profitability potential of 20%
  • D. None of the above; all three are equally important and interdependent ✓

Answer: D

Q3. If, after receiving positive feasibility reports, Raj and Priya discover that the required packaging material raw materials can only be sourced from a politically unstable country with trade restrictions, what implication does this have?

  • A. This is an economic feasibility issue that would require re-examination of profitability
  • B. This is a technical feasibility issue requiring reconsideration despite earlier positive findings ✓
  • C. This indicates financial feasibility is compromised due to increased import costs
  • D. This has no impact on the promotion stage as all studies are already completed

Answer: B

Q4. If Raj and Priya now wish to form a private company for this eco-friendly packaging business, what would be their significant advantage in the formation process compared to forming a public limited company?

  • A. They would not need to conduct any feasibility studies
  • B. They would be exempted from the promotion stage entirely
  • C. They would not need to issue a prospectus or complete minimum subscription formalities ✓
  • D. They would receive faster government approval and incorporation

Answer: C

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