Page 147 - DCOM404_CORPORATE_LEGAL_FRAMEWORK

Corporate Legal Framework

Notes shares on the members, etc. However, by far the largest number of public companies raise their
capital in the very first instance by inviting public to subscribe to its share capital.

Section 70 makes it obligatory for every public company to take either of the following two
steps:

(i) Issue a prospectus in case public is to be invited to subscribe to its capital, or
(ii) Submit a ‘statement in lieu of prospectus’ in case capital has been arranged privately.
It must be done at least 3 days before allotment.

Certificate to Commence Business
We have mentioned earlier that one of the privileges of a private company is that it has neither
to issue a prospectus nor to submit a statement in lieu of prospectus with the Registrar. It can
go ahead with the allotment of shares without these formalities and, therefore, can commence
business immediately after the certificate of incorporation has been obtained. Section 149 exempts

a private company from obtaining a certificate to commence business.
However, in the case of every public company having share capital, it is absolutely necessary to

obtain a certificate to commence business. This certificate can be obtained only after ‘fl oatation’
of the company.

The procedure for obtaining the certificate varies with the fact whether the company has issued
a prospectus or not. If the company has issued a prospectus, then the procedure stated in s.149
(1) becomes applicable, and if it has not issued a prospectus, then the procedure as laid down in
s.149 (2) shall apply.
Where the Company has issued a prospectus. S.149 (1) provides that if a company having a share
capital has issued a prospectus, it shall not commence business or exercise any borrowing powers
unless:
(a) shares upto the amount of the minimum subscription have been allotted by the company;
(b) every director of the company has paid to the company, on each of the shares taken or
contracted to be taken by him and for which he is liable to pay in cash, the same proportion
as is payable on application and allotment on the shares, offered for public subscription;
(c) no money is, or may become, liable to be repaid to the applicants for shares or debentures
offered for public subscription, for failure to apply for, or to obtain permission for the
shares to be dealt in any recognised stock exchange;
(d) there has been fi led with the Registrar a duly verifi ed declaration by one of the directors
or the secretary or, where the company has not appointed a secretary, a secretary in whole
time practice in the prescribed form (Form No. 19) that clauses (a), (b) and (c) (mentioned
above) have been complied with.
Where the company has not issued a prospectus. If a public company having share capital has
not issued a prospectus, s.149 (2) requires that it shall not commence business or exercise its
borrowing powers unless:

(a) it has filed with the Registrar a statement in lieu of prospectus;
(b) every director of the company has paid to the company on each of the shares taken or
contracted to be taken by him and for which he is liable to pay in cash, the same proportion
as is payable on application and allotment on the shares payable in cash;

(c) there has been filed with the Registrar duly verified declaration by one of the directors or
the secretary or where the company has not appointed a secretary, a secretary in whole
time practice in the prescribed form (form No. 20), that clause (b), as stated above, has been
complied with.

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