Month: December 2020

The formation of a public company is a long and arduous process. First, the company is floated by its promoters, and the process of gathering financial backing begins. The promotion of a company is the very first step in this long process.

Promotion of a Company

It is the first stage in the formation of a company. It begins with a person or a group of persons having thought of or conceived a possible future business opportunity and then taking an initiative to give it a practical shape by way of forming a company. Such a person or a group of persons who proceed to form a company are known as promoters of the company.

Promoters not only conceive a business opportunity but also analyze its prospects and bring together the men, materials, machinery, managerial abilities and financial resources that are necessary for the formation and existence of the company.

Functions of a Promoter 

(i) Identification of Business Opportunity

The promoter first identifies a potential business opportunity. This opportunity may be regarding the production of a new product or service or making a product available through a different channel than before or production of an old product with new updated features or any other such opportunity having an investment potential.

(ii) Feasibility Studies

The promoter after having conceived a business opportunity analyzes the opportunity to see whether it is feasible, technically as well as economically. All identified business opportunities cannot be converted into real projects.

Therefore, the promoters undertake detailed feasibility studies so as to investigate all aspects of the business that they intend to begin with the help of various tools like a study of the market trend, industry trend, market survey, etc. and with the help of specialists like engineers, chartered accountants etc. A venture is only feasible when it passes all the three below mentioned tests.

• Technical feasibility: Sometimes an idea may be good and unique but technically not possible to execute because the required raw material or technology may not be easily available. Every business requires funds.
• Financial feasibility: Sometimes it may not be feasible to arrange a large amount of funds needed for the business in the limited available means. Also, financial institutions may hesitate to grant huge amounts of loan for the new businesses.
• Economic feasibility: A business opportunity may be technically and financially feasible but not economically feasible. It may not be a profitable venture or may not yield enough profits. In such a case, the promoters refrain from starting the business.

(iii) Name Approval

Once the promoters have decided to launch a company next step is to select a name for the company and get it registered with the registrar of companies of the state in which the registered office of the company is to be situated. An application with three names, in the order of their priority, is filed with the registrar to get the name approved.

(iv) Fixing up Signatories to the Memorandum of Association

The promoters decide upon the members who will be signing the Memorandum of Association of the proposed company. Usually, the signatories of the memorandum are the first Directors of the Company. However, the written consent of the persons signing the memorandum is required to act as Directors and to take up the qualification shares in the company.

(v) Appointment of Professionals

Promoters are also required to appoint certain professionals. These professionals help them in the preparation of necessary documents that are required to be filed with the Registrar of Companies such as mercantile bankers, auditors, lawyers, etc.

(vi) Preparation of Necessary Documents

The promoters are required to prepare necessary legal documents that have to be submitted to the Registrar of the Companies for getting the company registered. These documents are return of allotment, Memorandum of Association, Articles of Association, consent of Directors and statutory declaration.

Stages of Promotion

1. Discovery of an Idea:

When a person or persons get an idea that there is the possibility of starting a new business to take advantage of the untapped natural resources or a new invention, discovery of some business opportunities begins.

Such an idea may also be to start a business unit to supply the product at a lower price by breaking the monopoly of existing concern in a particular line of business or to expand an existing concern by converting partnership into private limited company or into public limited company or by combining some going concerns.

But the promoter cannot go ahead immediately after such an idea strikes him. When a person or persons called promoters, understand that there is a possibility of starting some business concern, the idea is said to have been conceived.

2. Detailed Investigation:

Before money is invested to exploit the idea conceived through a detailed investigation of commercial feasibility of idea with reference to sources of supply, extent of demand, present and potential competition, the amount of capital necessary etc. is absolutely essential. The idea must be put to “the rigid test of cold fact of costs and inflexible law of supply and demand.”

For this purpose, promoters have to acquire the services of experts like engineers, values, accountants, statisticians, marketing experts etc. who prepare a report on the position of the market, present and potential competition, amount required for the fixed assets like land, building, machinery, furniture etc.

The report would also include the survey of supply positions of raw material, labour, transport facilities and other relevant items of expenditure. Such an investigation gives the critical appraisal of the idea conceived and reveals whether the idea is commercially feasible or not.

3. Assembling:

After a detailed investigation of the proposition has been made, the promoter decides whether he wants to take the risk of promotion and decide upon a plan of capitalisation. After this he starts to assemble the proposition.

By assembling we mean projecting the fundamental idea, securing all the property needed by enterprise and making contract with all those who are selected to file the chief management positions.

4. Financing the Proposition:

The promoter decides about the capital structure of a company. First of all the requirements of finances are estimated and after that the sources from which this money will come are determined. The financial requirements of short period and long period are estimated so that capital figures may be presented in the Memorandum of Association of a company.

Memorandum of Association:

The Memorandum of Association is the constitution of the company and provides the foundation on which its structure is built. It is the principal document of the company and no company can be registered without the memorandum of association. It defines the scope of the company’s activities as well as its relation with the outside world.

The company law defines it as “The memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous Company Laws or of this Act.”: Section 2 (28) of the Companies Act

Purpose:

The main purpose of the memorandum is to explain the scope of activities of the company. The prospective shareholders know the areas where company will invest their money and the risk, they are taking in investing the money. The outsiders will understand the limits of the working of the company and their dealings with it should remain within the prescribed scope.

Clauses of memorandum:

The memorandum of association contains the following clauses:

1. The Name Clause:

A company being a separate legal entity must have a name. A company may select any name which does not resemble the name of any other company and it should not contain the words like king, queen, emperor, government bodies and the names of world bodies like U.N.O., W.H.O., World Bank, etc.

The name should not be objectionable in the opinion of the government. The word ‘Limited’ must be used at the end of the name of a Public and ‘Private Limited’ is used by a Private Company. These words are used to ensure that all persons dealing with the company should know that the liability of its members is limited.

The name of the company must be painted outside every place, where business of the company is carried on. If the company has a name which is undesirable or resembles the name of any other existing company, this name can be changed by passing an ordinary resolution.

2. Registered Office Clause:

Every company should have a registered office, the address of which should be communicated to the Registrar of Companies. This helps the Registrar to have correspondence with the company. The place of registered office can be intimated to the Registrar within 30 days of incorporation or commencement of business, whichever is earlier.

A company can shift its registered office from one place to another in the same town with an intimation to the Registrar. But, if the company wants to shift its registered office from one town to another town in the same state, a special resolution is required to be passed. If the office is to be shifted from one state to another state it involves alteration in the memorandum.

3. Object Clause:

This is one of the important clauses of the Memorandum of Association. It determines the rights and power of the company and also defines its sphere of activities. The object clause should be decided carefully because it is difficult to alter his clause later on. No activity can be taken up by the company which is not mentioned in the object clause.

Moreover, the investors i.e., shareholders will know the sphere of activities which the company can undertake. The choice of the object clause lies with the subscribers to the memorandum. They are free to add anything to it provided it is not contrary to the provisions of the Companies Act and other laws of the land.

The object clause can be altered to enable a company to carry on its activities more economically, or by improved means to carry on some business which under existing circumstances may conveniently be combined with the object clause.

4. Liability Clause:

This clause states that the liability of the members is limited to the value of shares held by them. It means that the members will be liable to pay only the unpaid balance of their shares. The liability of the members may be limited by guarantee. It also states the amount which every member will undertake to contribute to the assets of the company in the event of its winding up.

5. Capital Clause:

This clause states the total capital of the proposed company. The division of capital into equity shares capital and preference share capital should also be mentioned. The number of shares in each category and their value should be given. If some special rights and privileges are conferred on any type of shareholders, mention may also be made in the clause to enable the public to know the exact nature of capital structure of the company.

The capital clause can be altered by passing a special resolution and by obtaining the approval of Company Law Board.

6. Association Clause:

This clause contains the names of signatories to the memorandum of association. The memorandum must be signed by at least seven persons in the case of a public limited company and by at least two persons in case of private limited company. Each subscriber must take at least one share in the company. The subscribers declare that they agree to incorporate the company and agree to take the shares stated against their names. The signatures of subscribers are attested by at least one witness each. The full addresses and occupations of subscribers and the witnesses are also given.

2. Articles of Association:

The rules and regulations which are framed for the internal management of the company are set out in a document named Articles of Association. The articles are framed to help the company in achieving its objectives set out in memorandum of association. It is a supplementary document to the memorandum.

“Articles of association of the company as originally framed or as altered from time to time in pursuance of any previous companies law or of this act.” —Section 2(2) of the Companies Act. The private companies limited by shares, companies limited by guarantee and unlimited companies must have their articles of association. A public company limited by shares may or may not have its own Articles of Association.

As per Action 26 of Companies Act, it is not obligatory on the part of a public company limited by shares to prepare and register Articles of Association along with Memorandum of Association. However, such a company may adopt all or any of the regulations contained in the model set of Articles given in Table A in Schedule I of the Act.

It means the company can partly frame its own articles and partly incorporate some of the regulations in Table A. Unless the company prepares its own articles then regulations of Table A shall be applicable in the same manner as if they were contained in its own registered articles.

The articles cannot contain anything contrary to the Companies Act and also to the memorandum of association. If the document contains anything contrary to the Companies Act or memorandum, it will be inoperative. When articles are proposed to be registered, they must be printed, divided into paragraphs and numbered consecutively. Each subscriber to the memorandum must sign the articles in the presence of at least one witness.

The nature of Articles of Association may be explained as follows:

(i) Articles of association are subordinate to memorandum of association.

(ii) These are controlled by memorandum.

(iii) Articles help in achieving the objectives laid down in the memorandum.

(iv) Articles are only internal regulations over which members exercise control.

(v) Articles lay down the regulations for governance of the company.

Contents:

Some of the contents of articles of association are as follows:

1. The amount of share capital issued, different types of shares, calls on shares, forfeiture of shares, transfer and transmission of shares and rights and privileges of different categories of shareholders.
2. Powers to alter as well as reduce share capital.
3. The appointment of directors, powers, duties and their remuneration.
4. The appointment of manager, managing director, etc.
5. The procedure for holding and conducting of various meetings.
6. Matters relating to maintaining of accounts, declaration of dividends and keeping of reserves, etc.
7. Procedure for winding up the company.

Alteration of Articles of Association:

The articles of association can be altered by passing a special resolution. Certain restrictions are imposed on the nature and extent of the alternation that may be made.

(a) The change should not be violating the provisions of the Companies Act.

(b) It should not be contrary to the provisions of the memorandum of association.

(c) The alteration must not have anything illegal.

(d) The alteration should not adversely affect the minority shareholders.

3. Prospectus:

After getting the company incorporated, promoters will raise finances. The public is invited to purchase shares and debentures of the company through an advertisement. A document containing detailed information about the company and an invitation to the public subscribing to the share capital and debentures is issued. This document is called ‘prospectus’. Private companies cannot issue a prospectus because they are strictly prohibited from inviting the public to subscribe to their shares. Only public companies can issue a prospectus.

“A prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate.” —Section 2(36) of the Companies Act

The prospectus is not an offer in the contractual sense but only an invitation to offer. A document construed to be a prospectus should be issued to the public.

A prospectus should have the following essentials:

(i) There must be an invitation offering to the public.

(ii) The invitation must be made on behalf of the company or intended company.

(iii) The invitation must be to subscribe or purchase.

(iv) The invitation must relate to shares or debentures.

A prospectus must be filed with the Registrar of companies before it is issued to the public. The issue of prospectus is essential when the company wishes the public to purchase its shares or debentures.

If the promoters are confident of obtaining the required capital through private contacts, even a public company may not issue a prospectus. The promoters prepare a draft prospectus containing required information and this document is known as a statement in lieu of ‘prospectus.’ A prospectus duly dated and signed by all the directors should be field with the Registrar of Company before it is issued to the public.

A prospectus brings to the notice of the public that a new company has been formed. The company tries to convince the public that it offers best opportunity for their investment. A prospectus outlines in detail the terms and conditions on which the shares or debentures have been offered to the public. Every prospectus contains an application form on which an intending investor can apply for the purchase of shares or debentures.

A company must get minimum subscription within 120 days from the issue of prospectus. If it fails to obtain minimum subscription from the members of the public within the specified period, then the amount already received from public is returned. The company cannot get a certificate of commencement of business because the public is not interested in that company.

Contents:

The following matters are to be disclosed in a prospectus:

1. Name and full address of the company.
2. Full particulars about the signatories to the memorandum of association and the number of shares taken up by them.
3. The number and classes of shares. The interest of shareholders in the property and profits of the company.
4. Name, addresses and occupations of members of the Board of Directors or proposed Directors.
5. The minimum subscription is fixed by promoters after taking into account all financial requirements at the beginning.
6. If the company acquires any property from vendors, their full particulars are to be given.
7. The full address of underwriters, if any, and the opinion of directors that the underwriters have sufficient resources to meet their obligations.
8. The time of opening of the subscription list.
9. The nature and extent of interest of every promoter in the promotion of the company.
10. The amount payable on application, allotment and calls.
11. The particulars of preferential treatment given to any person for subscribing shares or debentures.
12. Particulars about reserves and surpluses.
13. The amount of preliminary expenses.
14. The name and address of the auditor.
15. Particulars regarding voting rights at the meetings of the company.
16. A report by the auditors regarding the profits and losses of the company.

These are some of the contents which every prospectus must include. The prospectus is an advertisement of the company therefore, the company may give any information which promotes its interest. Any information given in the prospectus must be true otherwise the subscriber can be held guilty for misrepresentation.

Promoter can be defined as any person or entity involved in the formation of a company. They are responsible for identifying a business opportunity, organizing resources, and bringing together the elements needed to form a company. The Companies Act, 2013, defines a promoter as a person who:

• Is named as such in the prospectus of the company.
• Has control over the company’s affairs, directly or indirectly.
• Is involved in the preparation of the documents or contracts required for the incorporation of a company.

Six Key Characteristics of a Promoter

1. Idea Originator:

Promoter is essentially the originator of the idea of forming a company. They identify the need or opportunity in the market and develop a concept around it. This idea is the basis for the business model the company will adopt.

2. Risk-Bearer:

During the promotion stage, the promoter assumes a significant amount of financial risk. They invest their own funds or arrange financing to cover the initial expenses of forming the company. These include feasibility studies, legal consultations, and other pre-incorporation costs.

3. Arranger of Capital:

Promoter is responsible for arranging the capital needed for the initial setup of the company. This may include securing investment from venture capitalists, angel investors, or financial institutions, as well as personal investments. They may also negotiate terms with banks for loans or other financial assistance.

4. Liaison with Legal Authorities:

Promoter is the one who ensures that the company meets all legal requirements for incorporation. This includes applying for the company name, drafting the Memorandum of Association (MoA) and Articles of Association (AoA), and submitting incorporation documents to the Registrar of Companies (RoC). The promoter handles these initial formalities to make sure the company is legally recognized.

5. Fiduciary Duty:

Promoters owe a fiduciary duty to the company they are forming, meaning they must act in the company’s best interests and avoid conflicts of interest. They must disclose any personal benefits they might gain from their dealings with the company, and they are expected to act with transparency and honesty.

6. Preliminary Contracts:

The promoter may enter into preliminary contracts with third parties on behalf of the company before its formal incorporation. These contracts often involve purchasing property, hiring personnel, or acquiring goods. The promoter may remain liable for these contracts if the company does not adopt them after incorporation.

Kinds of Promoters:

Promoters can be classified into different types depending on their involvement in the company’s formation and the role they play in bringing it into existence.

1. Professional Promoters:

These are individuals or firms that specialize in the business of forming companies. They are often experts in financial and legal matters and assist in setting up companies for others in exchange for fees. Professional promoters typically do not have a long-term interest in the company; their job is to handle the technical aspects of formation and then step back.

Example: Law firms, chartered accountants, and business consultants who assist in the formation of companies.

2. Occasional Promoters:

These promoters are typically individuals or entities who promote a company on a one-time basis. They do not regularly engage in company formation but do so when they identify a business opportunity or have a personal interest in starting a specific company. Once the company is set up, they may or may not continue to be involved in its operations.

Example: An entrepreneur who sets up a business but does not regularly promote companies.

3. Financial Promoters:

Financial institutions, such as banks or investment firms, may act as promoters by providing the necessary capital and expertise to start a company. These promoters have a vested interest in the company’s success because of their financial involvement.

Example: Venture capital firms or investment banks that promote companies in which they have made significant financial investments.

4. Institutional Promoters:

Institutions such as government bodies, development banks, or large corporations sometimes promote companies to support economic development or achieve strategic goals. Institutional promoters often help to form companies in sectors that require large-scale investments or are of national importance.

Example: State-owned enterprises (like public sector units) or large conglomerates forming subsidiaries.

5. Entrepreneurial Promoters:

These are individuals who start companies to pursue their entrepreneurial vision. They are typically the original founders and often stay involved with the company in a managerial or executive capacity after its incorporation. Entrepreneurial promoters are typically hands-on and continue to play a key role in shaping the company’s future.

Example: Startup founders like Steve Jobs (Apple) or Jeff Bezos (Amazon) who promote the company and stay involved in its operations post-incorporation.

6. Nominee Promoters:

Nominee promoters act on behalf of another party, usually a financial institution or a group of investors. They may be hired to set up a company but have no personal stake in the business. Their role is purely functional, as they serve the interests of the party that appointed them.

Example: A nominee appointed by a group of shareholders or an investment firm to handle the technicalities of company incorporation.