Section 3 Formation of company


Provisions of the Companies Act, 2013:
Section 3 Formation of company
Rule 2.1 of the Companies Rules, 2013
[Section 3 is not yet brought to force. The Companies Rules, 2013 is not yet brought to force.]

Corresponding provisions of the Companies Act, 1956:
Section 12.

Corresponding provisions of the English Companies Act, 2006:
Section 7

Other laws:
Emblems and Names (Prevention of Improper Use) Act, 1950.

This provision is applicable to public limited, private limited company, One Person Company and unlimited company.

This section deals with objects of the company, who can be and number of subscribers and One Person Company.

A company should have a lawful purpose. It means if some activity is not permitted under law, a company cannot be formed to carry out such activities.

Since any ‘person’ can be subscriber to the Memorandum of Association, it may be an individual or even a body corporate (including company); except in case of a One Person Company (see Rule 2.1).

However, under section 11 of the Contract Act,1972 a person shall be of major age, of sound mind and is not disqualified from contracting in order to enter into a valid contract. And subscribing shares of a company is a contract between a company to be formed and subscriber.

Where a subscriber is not a natural person, then under section 179 (similar to section 292 of the Companies Act, 1956) copy of resolution passed at the meeting of the Board to invest funds of the subscriber company would be required. Such resolution to contain name of any individual / officers nominated to sign and subscribe for and on behalf of the subscriber.

Required number of subscribers to memorandum of association of a company to be incorporated are:
Seven or more, for public company;
two or more, for private company; and
one for One Person Company.

It may be noted that section 149 specifies minimum and maximum number of directors. Accordingly, minimum of 3 directors are required for a public company, 2 directors for a private company and 1 director for an OPC.
Maximum number of 15 directors can be appointed by a company. And with consent of members by special resolution more than 15 number of directors can be appointed by a company.

Every company shall have atleast one director, who has stayed in India for atleast 182 days in the previous calendar year [sec.149(3)].

It may also be noted that where articles of association of a company do not provide for appointment of its first directors, subscribers to the memorandum, who are individuals, shall be the first directors, until directors are duly appointed by members. [sec.152].

One person company (‘OPC’) shall be a private limited company.
Since OPC can have only one person as its member (‘the sole member’), he shall indicate at the time of incorporation, one other person, who shall in the event of death or incapacity to contract, become the member of the one person company. However, such other person shall give his prior written consent in the prescribed form no. 2.2 (Rule 2.2(2)).
The sole member and other person nominated shall be (Rule 2.1(1))
(a) natural persons (individuals),
(b) Indian Citizen; and
(c) resident in India.

An explanation to Rule 2.1(1), clarifies that the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty two days during the immediately preceding one financial year.
Financial Year means the period ending on the 31st day of March every year. (Section 2(41)).
Stay in India need to be consecutive 182 days.

It may be noted that, in case of an OPC, requirement of ‘stay in India’ is for the member, whereas section 149(3) provides for ‘stay in India’ for atleast one of the directors. Further, draft Rule 2.1 requires that member of OPC shall ‘stay in India’ for consecutive 182 days in previous financial year, whereas section 149(3) requires a director of a company to ‘stay in India’ in aggregate for 182 days in previous calendar year.

Such other person may withdraw his consent at any time. For withdrawing consent, he need to give a notice in writing to the sole member and to the OPC. No specific form is prescribed for withdrawal of the consent.
The sole member is required to nominate another willing individual to become member of the OPC, in the event of death or incapacity to contract of the sole member. Such nomination is required to be made within 15 days of the receipt of notice of withdrawal (Proviso to Rule 2.2 (3)). The Sole member in turn is required to intimate such new nomination in writing to the OPC along with the written consent of such other person so nominated in Form No. 2.2. The OPC in turn is required to file with the Registrar of Companies within thirty days of receipt of the notice of withdrawal of consent, a notice of such withdrawal of consent and the intimation of the name of another person nominated by the sole member in Form No.2.3. (Rule 2.2(4)).

The sole member of the OPC may at any time change the name of such other person for any reason including in case of death or incapacity to contract of nominee and nominate another person after obtaining the prior consent of such another person in Form No. 2.2. (Rule 2.2(5). No format is prescribed for communication, if any, between the sole member and the nominee to be removed. The sole member shall intimate the change to the OPC. Not format is prescribed for intimating to the OPC.  The OPC in turn is required to file with the Registrar of Companies within thirty days of receipt of the notice of change in Form no. 2.4.

In the event of death of or incapacity to contract by the sole member of the OPC, the nominee shall become the member of the OPC and he shall nominate within fifteen days of becoming the member a person who shall in the event of his death or his incapacity to contract become the member of the OPC. The OPC shall file with the Registrar of Companies an intimation of such cessation and nomination in Form No. 2.5.

Rule 2.1 further provides that an individual can incorporate maximum of five OPCs. Thus, an individual cannot be a member of more than five OPCs.
In the event a member of OPC, becomes a member in another OPC by virtue of his being a nominee in that OPC, he shall ensure within 180 days that he is a member of not more than 5 OPCs.

If OPC or any officer of the OPC contravenes the provisions of these rules, OPC or any officer of the OPC shall be punishable with a fine which may extend to INR 5,000/- and with a further fine which may extend to INR 500/- for every day after the first during which such contravention continues.

Under Section 454, the officer appointed by the Central Government, not below the rank of Registrar of Companies, may adjudicate and impose monetary penalty for violation of this section. However, before imposing penalty, an opportunity of hearing shall be given to the OPC and its officers.

It may be noted that under section 441, where offence is punishable with fine only, the same may be compounded by the National Company Law Tribunal or where the fine does not exceed Rs.5,00,000/- by the Regional Director or any other officer authorised by the Central Government.

Summary of forms and records:
Form no. 2.1: nomination form, to be filed at time of incorporation of OPC (with consent in form no.2.2),
Form no. 2.2: consent of nominee
Form no. 2.3: intimation by OPC of withdrawal of consent by previous nominee and new nomination form (with new consent in form no.2.2)
Form no. 2.4: intimation by OPC of change in nominee effected by the sole member and new nomination form (with new consent in form no.2.2)
Form no. 2.5: intimation by OPC of nominee becoming the sole member (due to death or incapacity to contract of the original sole member) and new nomination form (with new consent in form no.2.2)


%d bloggers like this:
Verified by MonsterInsights



Chamber of Prakash K. Pandya

Advocate, Mediator and Insolvency Professional

The Bar Council of India does not permit advertisement or solicitation by advocates in any form or manner. By accessing this website,, you acknowledge and confirm that you are seeking information relating to/from Chamber of Prakash K. Pandya of your own accord and that there has been no form of solicitation, advertisement or inducement by Chamber of Prakash K. Pandya or its members and associates. The content of this website is for informational purposes only and should not be interpreted as soliciting or advertisement.

The visit to this website implies your willing consent, acceptance and agreement to our terms of services including our privacy policy and cookie policy.