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 'floatation' 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's 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 filed with the Registrar a 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. 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.

When the company has complied with these conditions, the Registrar will issue a

certificate to commence business.

Penalty: If any public company having share capital commences business or

exercises borrowing power without obtaining the certificate to commence business, then every person at fault is liable to a fine upto Rs 5000 for every day of default.

The certificate to commence business entitles the company to commence business given in the main objects clause of the memorandum. No business given in the ‘other objects’ clause can be commenced without obtaining prior approval of the shareholder by special resolution. However, the Central Government may, on an application made by the Board of Directors allow a company to commence business in the 'other objects' clause, even if only ordinary resolution is passed by the company in general meeting.