Coupon Accepted Successfully!


Promotion of a Company

Promotion is the first stage in the process of formation. It involves dreaming of a business opportunity and taking necessary steps to form a company so that practical shape can be given to exploiting the provided business opportunity. So it has to begin with someone who has come up with a potential business opportunity. It can be a person or a group or even a company. And if they succeed to form a company, then they are said to be the promoters. A promoter does not have any statory definition. A promoter agrees to take the initiatives to form the company for the given projectand and accomplishes the given task. The promoters examine its prospects and bring together the men, materials, machinery, managerial abilities and financial resources to set the organisation going. After thorough analyzation of the feasibility of the idea, the promoters gather resources, prepare required documents, give a name and perform various other activities to get a company registered and obtain the necessary certificate enabling the company to start its business. Hence various functions are performed by the promoters.

Functions of a Promoter
The important ones are given below:
  1. Identification of Business Opportunity: This is the first and the foremost aspect necessary. The opportunity may include any opportunity like producing a new product or service or making some product available through a different channel and which has an investment potential. The technical and economic feasibility is later examined.
  2. Feasibility Studies: Its always not feasible or profitable to setup real projects through the given opportunity. Hence the promoter has to take detailed feasibility studies to investigate the business with all respects which they intend to accomplish. The promoters are normally advised to seek the help of the specialists like engineers, chartered accountants etc., depending on the nature of the project to see if it can be profitably exploited.
    1. Technical Feasibility: Sometimes even good ideas are not feasible to execute. The reason for that can vary like non availability of raw materials, improper market, etc., For example, in our previous story avtar required a particular metal to manufacture his product.
      If suppose that metal is not produced in our country and its difficult to import it then his project may not be feasible until other arrangements are made.
    2. Financial Feasibility: Funds are mandatory required for any business. The promoters has to estimate the required amount of funds before trying to setup the company. The project has to be given up if the outlay is very large and the necessary arrangements cannot be made. For example, we may imagine that setting up a township maybe a lucrative job. It maybe that the required investment is so large that it may become impossible by the promoters.
    3. Economic Feasibility: Sometimes the project turn out not to be profitable even though all the other factors are favorable and hence the idea may have to be abandoned in such cases also. Promoters normally seek help from the experts to study this problem. But the experts do not become promoters just because they help out the promoters. After all these investigations, if the project turns out to give positive results then the promoters may launch their project.
  3. Name Approval: After finalsing to launch a company, the promoters have to decide a name for it and submit, an application to the registrar of companies of the state where the registered office of the company is to be situated, for its approval. It may happen that another company with the same name or a similar one may exists. This case may lead to misleading the company and hence another name has to be suggested.
Name Clause
A name is considered undesirable in the following cases:
  1. If it is identical with or too closely resembles the name of an existing company.
  2. If it is misleading. It is so considered if the name suggests that the company is in a particular business or it is an association of a particular type when it is not true.
  3. If it is violative of the provisions of 'The Emblem and Names (Prevention of Improper Use) Act 950, as given in the schedule to this Act. This schedule specifies, inter alia, the name, emblem or official seal of the UNO and its bodies like WHO, UNESCO etc. Government of India, State Governments, President of India or Governer of any State, the Indian National Flag. The Act also prohibits use of any name which may suggest patronage of Government of India, or any state government or any local authority.

Hence normally three names are given in the order we prefer from which the registrar approves the appropriate one. (Performa application for availability of names (Form 1A) is given at the end of the chapter.)
  1. Fixing up Signatories to the Memorandum of Association: Memorandum of Association of the proposed company is signed by the people who have been decided by the promoters. The first Directors of the Company are the people who first sign the memorandum. And its necessary to get their written consent to act as Directors and to take up the qualification shares in the company
  2. Appointment of Professionals: Some professionals such as mercantile bankers, auditors etc., are appointed to help the promoters in the preparation of necessary documents as required by the Registrar of Companies. The name, address and the number of shares allotted to each share holder is submitted to the Registrar in a statement called return of allotment.
  3. Preparation of Necessary Documents: According to the law the promoters have to prepare certain legal documents and submit to the Registrar of the companies for getting the company registered like the Memorandum of Association, Articles of Association and Consent of Directors.

Documents Required to be Submitted

  1. Memorandum of Association: Memorandum of Association contains all the important objectives of the company. The company cannot undertake any activities which are not stated in the Memorandum of Association. The clauses present in the Memorandum of Association are given:
    1. The Name Clause: This clause contains the name of the company which Registrar of Companies has already approved.
    2. Registered Office Clause: It contains the name of the state where the company has got permission to setup by the registrar office. The exact address of the registered office is not necessary to be notified at this stage but the same must be notified with in 30 days after the company has been incorporated to the registrar.
    3. Objects Clause: This is the most important clause as it defines the purpose for which the company has been formed. A company is not legally allowed to do a job beyond the clauses mentioned in this memorandum. This id divided into two subclauses:
      • The Main Objects: The main objectives of the company are stated in this. It must be noted that an activity which is either essential or incidental for the achievement of the main objects of the company is deemed to be valid, although it may not have been stated explicitly in the sub-clause.
      • Other Objects: This subclause contains all the other clauses which are not been stated in the main clause. However, if a company desires to undertake a business included in this subclause, it has to either pass a special resolution or pass an ordinary resolution and get approval from the central government fordoing the same.
    4. Liability Clause: The liability clause limits the liability of the share owners to the amount unpaid by them. For example, if a shareholder purchases 10000 shares of Rs.100 each and has already paid Rs. 60 per share, his/her liability gets limited to Rs. 40 per share.
    5. Capital Clause: The maximum capital which the company is permitted to raise through the issue of shares is specified in this clause. The permitted share capital of the suggested company along with its division into the number of shares having a fixed face value is mentioned in this clause. For example, the permitted share capital of the company may be Rs. 250 with divided into 25 lakh shares of Rs.100 each. But the said company should not issue share capital in excess of the value specified in this clause.
    6. Association Clause: The signatories to the Memorandum of Association mention their intention to be associated with the company along with their consent to purchase qualification shares in the association clause. Atleast seven persons in case of a public company and two persons in case of a private company are suppose to sign this Memorandum of association.
  2. Articles of Association: The rules regarding the internal management of a company come under the article of association and are subsidiary to the Memorandum of Association and hence, should not be contradicted or exceeded more than stated in the Memorandum of Association. A public limited company can adopt Table A which is a model set of articles given in the Companies Act. which is a document containing rules and regulations for the internal management of a company. There is no need to prepare separate Articles of Association in such a case. For companies not adopting it separate articles of association.
Association Clause

The association clause reads as under:

"We, the several persons whose names and addresses are subscribed, are desirous of being formed into a company in pursuance of this Memorandum of Association, and we respectively agree to take the number of shares in the capital of the company set opposite our respective names."

are duly signed by the signatories and sent to the registrar for registration.
  1. Consent of Proposed Directors: Apart from all these memorandums and articles of association, a hand written consent of each director is needed confirming that they agree to act in that capacity and undertake to buy and pay for qualification shares, as stated in the Articles of Association.
  2. Agreement: The contract, if any, which the company proposes to sign with any individual for appointment as its Managing Director or a whole time Director or Manager is another document which is needed to be submitted to the Registrar for getting the company registered under the Act.
  3. Statutory Declaration: A declaration mentioning that all the legal requirements relating to registration have been gathered with is to be submitted to the Registrar with the above stated documents to get the company registered under the law. This declaration can be signed by an advocate of High Court or Supreme Court or by a Chartered Accountant in full time practice or by a person named as a director or manager or secretary of the company as stated in the articles proposed.
  4. Payment of Fee: Along with all these documents, necessary fees is also to be paid for registering the company and the fees depends on the authorized share capital of that company.

Position of Promoters

Promoters carry out different activities to get a company registered and get it to the position of start of business. But they are'nt the agents or the trustees of the company since the company is not yet been incorporated. Hence, they are liable in person for all the agreements entered by them, for the company before its incorporation, in case the same are not accepted by the company later on. Promoters of a company get an important position in the company, which they are not suppose to misuse. They can make a profit only if it is disclosed but must not make any secret profits. In the event of a non-disclosure, the company can withdraw the agreement and claim back the purchase price paid to the promoters along with the damages caused due to it.
Qualification Shares

To ensure that the directors have some stake in the proposed company, the Articles usually have a provision requiring them to buy a certain number of shares. They have to pay for these shares before the company obtains Certificate of Commencement of Business. These are called Qualification Shares.

But the promoters are legally not permitted to demand the expenses incurred in the promotion of the company. But the company may reimburse them with the pre-incorporation expenditure. The company can also remunerate the promoters for their work by paying a lump sum amount or a commission for the purchase price of the property purchased through them or the shares sold. The company sometimes allots them shares or debentures or gives them an option to purchase the securities in the future.

Test Your Skills Now!
Take a Quiz now
Reviewer Name