Category: Management Notes

To identify and evaluate whether its resources have got any strategic value or not firms generally use various approaches. Possessing valuable resources as indicated previously does not guarantee profits unless they are deployed in an effective and efficient manner. The various approaches that follow now aim at achieving this purpose.

VRIO Analysis is an analytical technique briliant for the evaluation of company’s resources and thus the competitive advantage. VRIO is an acronym from the initials of the names of the evaluation dimensions: Value, Rareness, Imitability, Organization.

The VRIO Analysis was developed by Jay B. Barney as a way of evaluating the resources of an organization (company’s micro-environment) which are as follows:

• Financial resources
• Human resources
• Material resources

Non-material resources (information, knowledge) Question of Value. Resources are valuable if they help organizations to increase the value offered to the customers. This is done by increasing differentiation or/and decreasing the costs of the production. The resources that cannot meet this condition, lead to competitive disadvantage.

Question of Rarity. Resources that can only be acquired by one or few companies are considered rare. When more than few companies have the same resource or capability, it results in competitive parity.

Question of Imitability. A company that has valuable and rare resource can achieve at least temporary competitive advantage. However, the resource must also be costly to imitate or to substitute for a rival, if a company wants to achieve sustained competitive advantage.

Question of Organization. The resources itself do not confer any advantage for a company if it’s not organized to capture the value from them. Only the firm that is capable to exploit the valuable, rare and imitable resources can achieve sustained competitive advantage.

SWOT Analysis:

SWOT is an acronym for the internal strengths and weaknesses of a firm and the external opportunities and threats facing that firm. SWOT analysis helps managers to have a quick overview of the firm’s strategic situation and assess whether there is a sound fit between internal resources, values and external environment (E-V-R Congruence).

A good fit maximizes a firm’s strengths and opportunities and minimizes its weakness and threats. The external analysis provides useful information required to identify opportunities and threats in a firm’s environment. Let’s see how internal analysis helps a firm find its feet in a competitive environment focusing attention on its strengths and weaknesses.

Terminology:

The word Strength implies competitive advantage and other distinct competencies which a firm enjoys in the market place. Having an ability to deliver against the placement of an order within 2 hours is strength to a firm if customers require delivery within a day and its major competitors are not able to fulfill these requirements. A strength is only a strength if it is something that is of value to customers and is also something which a firm does better than its competitors. The term weakness refers to an inherent limitation that creates a strategic disadvantage for a firm. It could come from an inappropriate location, uneconomical operation, outdated plants worn out machinery or militant labor class etc.

Opportunities and threats refer to external issues and are identified after environmental and competitive analysis. Generally speaking opportunities result from external market changes or existing needs which are poorly served. It is often difficult to identify relevant opportunities and threats. Academically speaking a firm is faced with limitless opportunities and myriads of threats. These can range from the opportunities in new markets, new products or the likelihood of increased market share, to the threats of nuclear war, earth quakes and competitive battles. What makes an opportunity or a threat relevant is its importance to the firm and its likelihood of occurring. In order to carry out a good SWOT, the firm should look into certain key issues.

Key Issues in SWOT Analysis:

Strengths

1) A distinctive competence?
2) Adequate financial resources?
3) Well thought of by buyers?
4) An acknowledged market leaders?
5) Well conceived functional area strategies?
6) Access to economies of scale?
7) Insulated (at least somewhat) from strong competitive pressures?
8) Proprietary technology
9) Cost advantages?

Weaknesses

1) No clear strategic direction ?
2) Deteriorating competitive positions?
3) Obsolete facilities?
4) Sub par profitability because …?
5) Lack of managerial depth and talent?
6) Missing any key skills or competencies?
7) Poor track record implementing strategy?
8) Plagued with internal operating problems?
9) Vulnerable to competitive pressures?
10) Falling behind in R&D?

Carrying out SWOT

Corporate success is usually linked to certain critical success factors (CSFs). These relate to the factors which suppliers in a market must meet if they are to compete successfully. While carrying out SWOT, the main CSFs in a market segment need to be identified clearly and each factor should be weighted out of 100 according to its importance to customers. Total weighting should add up to 100. It is the possible to score out each major competitor out of 10 on their performance against each CSF. Multi playing each score by its weights will offer a quantitative assessment of the relative strengths of each competitor within a segment.

Strategy Implementation refers to the execution of the plans and strategies, so as to accomplish the long-term goals of the organization. It converts the opted strategy into the moves and actions of the organisation to achieve the objectives.

Simply put, strategy implementation is the technique through which the firm develops, utilises and integrates its structure, culture, resources, people and control system to follow the strategies to have the edge over other competitors in the market.

Strategy Implementation is the fourth stage of the Strategic Management process, the other three being a determination of strategic mission, vision and objectives, environmental and organisational analysis, and formulating the strategy. It is followed by Strategic Evaluation and Control.

Process of Strategy Implementation

1. Building an organization, that possess the capability to put the strategies into action successfully.
2. Supplying resources, in sufficient quantity, to strategy-essential activities.
3. Developing policies which encourage strategy.
4. Such policies and programs are employed which helps in continuous improvement.
5. Combining the reward structure, for achieving the results.
6. Using strategic leadership.

The process of strategy implementation has an important role to play in the company’s success. The process takes places after environmental scanning, SWOT analyses and ascertaining the strategic issues.

Prerequisites of Strategy Implementation

• Institutionalization of Strategy: First of all the strategy is to be institutionalized, in the sense that the one who framed it should promote or defend it in front of the members, because it may be undermined.
• Developing proper organizational climate: Organizational climate implies the components of the internal environment, that includes the cooperation, development of personnel, the degree of commitment and determination, efficiency, etc., which converts the purpose into results.
• Formulation of operating plans: Operating plans refers to the action plans, decisions and the programs, that take place regularly, in different parts of the company. If they are framed to indicate the proposed strategic results, they assist in attaining the objectives of the organization by concentrating on the factors which are significant.
• Developing proper organisational structure: Organization structure implies the way in which different parts of the organisation are linked together. It highlights the relationships between various designations, positions and roles. To implement a strategy, the structure is to be designed as per the requirements of the strategy.
• Periodic Review of Strategy: Review of the strategy is to be taken at regular intervals so as to identify whether the strategy so implemented is relevant to the purpose of the organisation. As the organization operates in a dynamic environment, which may change anytime, so it is essential to take a review, to know if it can fulfil the needs of the organization.

Even the best-formulated strategies fail if they are not implemented in an appropriate manner. Further, it should be kept in mind that, if there is an alignment between strategy and other elements like resource allocation, organizational structure, work climate, culture, process and reward structure, then only the effective implementation is possible.

Aspects of Strategy Implementation

• Creating budgets which provide sufficient resources to those activities which are relevant to the strategic success of the business.
• Supplying the organization with skilled and experienced staff.
• Conforming that the policies and procedures of the organisation assist in the successful execution of the strategies.
• Leading practices are to be employed for carrying out key business functions.
• Setting up an information and communication system, that facilitate the workforce of the organisation, to perform their roles effectively.
• Developing a favourable work climate and culture, for proper implementation of the strategy.

Strategy implementation is the time-taking part of the overall process, as it puts the formulated plans into actions and desired results.

Every business must find a strategy that enables it to achieve a competitive advantage in the marketplace. That choice of strategy is based on the strengths and weaknesses of the company’s products and the position it wants to have in the minds of its customers. The best strategy is the one that leverages the company’s strengths for the greatest profits and the highest return on investment.

Porter’s generic strategies are as follows:

• Cost Leadership Strategy.
• Differentiation Strategy.
• Cost Focus.
• Differentiation Focus.

Cost Leadership

A cost leadership strategy works if the company can produce its products at the lowest cost in the industry. This strategy is commonly used in markets with products that are not distinctly different from each other. They are “standard” products in a broad market, frequently purchased and universally accepted by most consumers.

To become a cost leader, a company strives to reach the lowest cost of production with the least distribution cost so that it can offer the cheapest price in the market. With the lowest price, the company hopes to attract the most buyers and dominate the market by driving competitors out.

A successful cost leadership strategy requires the optimization of all aspects of a company’s operations. To becomes the lowest-cost producer, a business might pursue the following:

• Productivity: Study any process that uses labor and find ways to improve productivity and increase efficiency.
• Bargaining power: One way to lower the cost of production is to exploit the economies of scale. Higher volumes enable the business to negotiate lower prices from material suppliers and reduced costs for transportation.
• Technology: Improvements in technology happen rapidly, and a company must invest in the latest innovations to remain competitive.
• Distribution: As with technology, the methods of distribution are constantly evolving. Businesses must continuously analyze changes in distribution costs to find the lowest cost to transport their goods.
• Production methods: Lowering the cost of production is a continuous process. For example, implementing just-in-time inventory controls for raw materials is a way to reduce financing costs of assets.

Firms that are successful with a cost leadership strategy usually have the following advantages:

• They have access to the capital needed to large investments in manufacturing facilities that lower the cost of production. Weaker competitors may not have the financial strength to borrow large sums of money.
• More efficient producers will have highly-skilled engineering and production staff that work constantly to improve the manufacturing processes.
• Aggressive companies are always looking for ways to vertically integrate their processes by acquiring raw material suppliers, component manufacturers and distribution companies. Of course, this also requires having the financial strength to finance the purchases of these companies.

Walmart is one of the most well-known companies that has an effective cost leadership strategy. Their approach is to market to the largest number of customers with the lowest prices on all of its products.

The company has been able to dominate the low-cost market by negotiating price-volume discounts with suppliers and building an incredibly cost-efficient distribution system. Walmart works with all of its internal processes to operate at the lowest cost.

Differentiation Strategy

A differentiation strategy requires the company to offer products with unique characteristics that consumers believe have value and are willing to pay more for them. If consumers perceive that these unique properties are worthwhile, the company can charge premium prices for its products.

Ideally, the premium prices will be more than enough to offset the higher costs of production and allow the company to make a reasonable profit.

Companies that succeed with a differentiation generic marketing strategy need to have a talented and creative product development staff. These people must have the ability to survey the market and get into the minds of the potential buyers to identify the features that will attract consumers and make them willing to pay more for the products.

Having a unique product is not the end of the story. The implementation of a differentiation strategy requires a sales team that has the skills to effectively communicate the unique properties of the products and convince consumers that they are receiving more value for their money. At the same time, marketing campaigns should promote and establish the company as a reputable firm known for high-quality and innovative products.

A differentiation strategy has several risks. Competitors will not remain idle when losing market share; they will find ways to imitate products and begin their own differentiation campaigns.

Another risk is changing consumer tastes. Unique product characteristics that capture the minds of consumers at one time can fade away as competitors introduce other features that catch the eyes of buyers.

Cost Focus

A cost focus strategy centers on a limited market segment or a particular niche. It requires the company to understand the idiosyncrasies of that market and the unique needs of those specific customers.

Companies that pursue a cost focus strategy are taking a risk by abandoning the mass market. While concentrating on a specific demographic may develop a loyal pool of customers, the company is basing its fortunes on a small group of buyers. The features that are attractive to this niche market may not appeal to the broader market.

Differentiation Focus

Like a cost focus strategy, the differentiation focus approach aims for a narrow niche market. In this case, the company finds unique features of its products that appeal to a particular group of customers.

However, the company is depending on the spending habits of a small group of consumers for its profits. If this group changes its tastes, the company will have difficulty switching direction to start selling to the mass market.

A successful differentiation focus strategy depends on developing a strong brand loyalty from its customers and constantly finding unique features to stay ahead of the competition.

Choosing a Strategy

The first step in selecting a strategy for your company is to conduct a SWOT analysis of the business. This analysis will identify the strengths and weaknesses of the company in addition to highlighting market opportunities and threats.

To thoroughly understand the market, Porter developed another model known as the Five Forces Analysis. This analysis looks at the competitive position of the business and the factors that will adversely affect its profitability. Those factors are the

• Power of suppliers.
• Power of customers.
• Availability of similar products.
• Threat of new competitors.
• Internal competition.

The SWOT and Five Forces analyses will help to identify which one of these generic business strategies will work best for your company.

Strategic choice is a systemic theory of strategy. This theory is built on a notion of interaction in which organizations adapt to their environment in a self-regulating, negative-feedback (cybernetic) manner so as to achieve their goals. The dynamics, or pattern of movement over time, are those of movement to states of stable equilibrium. Prediction is not seen as problematic. The analysis is primarily at the macro level of the organization in which cause and effect are related to each other in a linear manner. Micro-diversity receives little attention and interaction is assumed to be uniform and harmonious.

Importance of Strategic Choices

Whether a business succeeds or fails depends in large measure on the strategic choices made by the owner. Spending large amounts of time and money introducing a product that turns out to have a very limited market is an example of a bad strategic choice. Anticipating a change in consumer tastes and introducing a service to take advantage of that change before competitors do is an example of a good strategic choice. The development of business strategy takes into account that all companies must cope with limited resources to some extent. The most successful companies can allocate scarce resources to the projects that have the greatest positive impact on revenue growth or improvements in productivity and efficiency that can increase profit margins.

Strategic Choice Process

(I) Focusing on strategic alternatives: It involves identification of all alternatives. The strategist examines what the organization wants to achieve (desired performance) and what it has really achieved (actual performance). The gap between the two positions constitutes the background for various alternatives and diagnosis. This is gap analysis. The gap between what is desired and what is achieved widens as the time passes if no strategy is adopted

(II) Evaluating strategic alternatives: The next step is to assess the pros and cons of various alternatives and their suitability. The tools which may be used are portfolio analysis, GE business screen and corporate Parenting.

(iii) Considering decision factors:

(a) Objective factors:

• Environmental factor
• Volatility of environment
• Input supply from environment
• Powerful stakeholders
• Organizational factors
• Organization’s mission
• Strategic intent
• Business definition
• Strengths and weaknesses

(b) Subjective factors:

• Strategies adopted in the previous period
• Personal preferences of decision- makers
• Management’s attitude toward risk
• Pressure from stakeholder
• Pressure from corporate culture
• Needs and desires of key managers.

1. Stability Strategy:

When an enterprise is satisfied by its present position, it will not like to change from here and it will be a stability strategy. Stability strategy will be successful when the environment is stable. This strategy is exercised most often and is less risky as a course of action. A stability strategy of a concern for example will be followed when the organization is satisfied with the same product, serving the same consumer groups and maintaining the same market share.

The organization may not be adventurous to try new strategies to change the status quo. This strategy may be possible in a mature industry with static technology. Stability strategy may create complacency among managers. The managers of such an organization may find it difficult to cope with the changes when they come.

Stability strategies can be of the following types:

(i) No-Change Strategy:

Stability strategy is a conscious decision to do nothing new, that is to continue with the present work. It does not mean an absence of strategy, rather taking no decision in itself is a strategy. When external environment is predictable and organizational environment is stable then a businessman may like to continue with the present situation. There may be major opportunities or threats operating in the environment.

There may be no new threat from competitors or no new competing product may be coming into the market, under these circumstances it will be prudent to continue the present strategies. The small and medium firms generally operate in a limited market and supply products and services with the use of time tested technology, such firms will prefer to continue with their present work. Unless otherwise there is a major threat in the environment or occurrence of some major upset in the market, the present strategy will serve the firms well.

(ii) Profit Strategy:

Sometimes things change in such a way that the firm has to adopt changes in its working. There may be unfavorable external factors such as increase in competition, recession in the industry, government attitude, industry down turn etc. Under these situations it becomes difficult to sustain profitability.

A supposition is that the changed situation will be a temporary phase and old situation will again return. The firm will try to sustain profitability by controlling expenses, reducing investments, raise prices, cut costs, increase productivity etc. These measures will help the firm in sustaining current profitability in the short run.

With the opening of markets, Indian industry is facing lot of problems with the presence of multinationals and reduction in tariff on imports. The firms will have to adjust their policies to the changing environment otherwise they will find it difficult to stay in the market.

Profit strategy will be successful for a short period only. In case things do not improve to the advantage of the firms then this strategy will only deteriorate their position. This strategy can work only if problems are temporary.

(iii) Proceed-With Caution Strategy:

Proceed with caution strategy is employed by firms that wish to test the ground before moving ahead with full-fledged grand strategy or by those firms which had a rapid pace of expansion and now wish to rest for a while before moving ahead. The pause is sometimes essential because intervening period will allow consolidation before embracing on further expansion strategies. The main object is to let the strategic changes seep down the organizational levels, allow structural changes to take place and let the system adopt to new strategies.

2. Growth Strategy:

Growth may mean expansion and diversification of operations of the enterprise. The management is not satisfied with their present status, the environment is changing, favourable opportunities are available, in such cases growth strategy will be helpful in expansion as well as diversification. The growth strategy may be implemented through product development, market development, diversification, vertical integration or merger. In product development, new products are added to the existing ones or new products replace the old ones when they are obsolete.

In market development strategy, new customers are approached or those markets are explored which were not covered earlier. In diversification both new products and new markets are added. The enterprise may also enter entirely new lines. In vertificial integration, the backward or forward lines may also be taken up.

A company may start producing its own raw materials or it may start processing its own output before marketing. For example, a weaving unit may start making thread and ginning of cotton (backward integration) or it may start producing readymade garments (forward integration).

In merger, two or more concerns may join their resources to take advantage of financial or marketing factors. Growth should be properly planned and controlled otherwise it may bring adverse results. Since growth is an indication of effective management it is not only essential but desirable too.

Growth strategies may be described as follows:

(i) Growth through Concentration:

Growth involves converging resources in one or more of enterprise’s businesses in terms of their respective customer needs, customer functions or alternative technologies in such a way that it results in growth. This strategy involves the investment of resources in a product line for an identified market with the help of proven technology. It may be done in a number of ways.

The enterprise may focus on existing markets with present products by using market penetration or it may attract new users for existing products or it may introduce newer products in existing markets by concentrating on product development. The concentration strategy will apply when industry possesses high growth potential and the firm should be strong enough to sustain the growth.

(ii) Growth through Integration:

Under integration strategy the firm continues serving the same customers but increases the scope of its business definition. Integration involves taking up more activities than taken up earlier. There can be backward integration as well as forward integration.

There are activities ranging from procurement of raw materials to marketing of finished products. The firm may move up or down of the value chain for increasing its scope of work. Several process based industries such as petrochemicals, steel, textiles etc. have integrated firms. These firms deal with products with a value chain extending from the basic raw materials to ultimate consumer. The firms operating at one end of the value chain attempt to move up or down in the process while integrating activities adjacent to their present activities.

While adopting integration strategy the firm must take into account the alternative cost of make or buy. If the cost of manufacturing one’s product is less than the cost of procuring it from the market only then this activity should be integrated. Similarly, if the cost of selling the finished product is lesser than the price paid to the sellers to do the same thing then it will be profitable to move down on the value chain.

(iii) Growth through Diversification:

Diversification strategy involves a substantial change in the business definition, singly or jointly, in terms of customer functions, customer groups or alternative technologies of one or more of a firm’s business. When an organization takes up an activity in such a manner that it is related to the existing business it is called concentric diversification.

The firm may market more products to the same customers, a new product or service may be offered to the same customers, these are the cases of diversification of business activities. Growth may also be undertaken by taking up those activities which are unrelated to the existing business, a cigarette company may diversify into hotel industry, it will be a case of conglomerate diversification. Diversification strategies are helpful in spreading risk over several businesses. If environmental and regulatory factors block growth then diversification may be a proper way.

(iv) Growth through co-operation:

There is a view that firms operate in a competing market. When one firm gains in its market share then one or more firms lose this share. It is a win-lose situation where if one wins then one or several others have to lose. But thinkers like James Moore, Ray Noorda, Barry J. Nalebuff are of the view that competition could co-exist with co-operation.

The strategies could take into account the possibility of mutual co-operation with competitors while competing with them at the same time so that market potential could expand. The co-operative strategies can take the form of mergers, acquisitions, joint ventures and strategic alliances. All these strategies taken separately or jointly can help the growth of a firm.

(v) Growth through Internationalization:

International strategies are a type of growth strategies that require firms to market their products or services beyond the national or domestic market. A firm would have to assess the international environment and evaluate its own capabilities and to form strategies to enter foreign markets. The firm may start exporting products or services to foreign countries or it may set up a subsidiary in other countries for producing and marketing the products or services there. In such situations the firm would have to implement the strategies and monitor and control its foreign operations. International strategies require a different strategic perspective than the strategies implemented in national context.

3. Retrenchment or Retreat Strategy:

An enterprise may retreat or retrench from its present position in order to survive or improve its performance. Such a strategy may be adopted during a period of recession, tough competition, scarcity of resources and re-organization of company in order to reduce waste. This strategy, though reflecting failure of the company to some degree becomes highly necessary for the survival of the company.

When an organization chooses to focus on ways and means to reverse the process of decline, it adopts a turnaround strategy. If it cuts off the loss-making units, divisions, curtails product line or reduces the functions performed, it adopts a disinvestment strategy. If these actions do not work then the activities may be totally abandoned and the unit may be liquidated.

(i) Turnaround Strategies:

Retrenchment may be done either internally or externally. Internal retrenchment is done to improve internal working. This usually takes the form of an operating turnaround strategy. In contrast, a strategic turn­around is a more serious form of external retrenchment and leads to disinvestment or liquidation.

Turnaround strategies may be adopted in different ways. One way may be that the existing chief executive and management team handles the turnaround strategy with the help of specialist or external consultant. The success of this approach will depend upon the type of credibility the chief executive has with banks and other financing institutions.

In another situation, the present chief executive withdraws from the scene temporarily and the work is done by the outside specialist employed for this job. The third approach to execute the turnaround strategy involves the replacement of the existing team or merging the sick organization with a healthy one.

(ii) Disinvestment Strategies:

It involves the sale or liquidation of a portion of business or major division or profit center etc. Disinvestment is usually a part of rehabilitation or restructuring plan. This strategy is adopted when turnaround strategy has failed. A firm may disinvest in two ways. A part of the company is divested by spinning it off as a financially and managerially independent company, with the parent company retaining or not retaining partial ownership. Alternatively, the firm may sell a unit outright.

(iii) Liquidation Strategies:

It involves the closing down of a firm and selling its assets. It is considered to be the last resort because it leads to serious consequences such as loss of employment for workers and other employees, termination of opportunities where the firm could pursue any future activities and also the stigma of failure which will be attached with this action.

4. Combination Strategy:

A large firm, active in a number of industries may adopt a combined strategy. It represents mix of the three strategies mentioned above. A large concern may adopt growth strategy’ on one side and retreat strategy in the other area. In order to make this strategy effective there should be right people who can take objective and intelligent decisions by considering various factors.

There may not be a concern which has adopted only one strategy throughout. The complexity of doing business demands that different strategies be adopted to suit the situational demands made upon the organization. A company which has adopted a stability strategy for long may like to use expansion strategy later. Similarly a firm which has seen expansion for quite some time may like to consolidate its working. Multi-business companies have to follow multiple strategies.

The word company is derived from a Latin word `companies` it means a group of persons who took their need together. In India law relating to companies are contained in The companies Act 1956.

A company is a voluntary association of persons formed for some common purpose with capital divisible into parts known as shares.

Justice Lindlay defines company “as an association of many persons who contribute money or money’s worth to a common stock and employ it in some trade or business and who share the profits arising there from”

According to companies act a company means a company formed and registered under companies act.

Features of a Registered company

1. Voluntary Association

A company is voluntary association of persons who have come together for a common object which generally is to earn profit.

The activities of this association are governed by the law and are limited by its memorandum of association

2. Incorporated association

A company comes into existence on incorporation or registration under the companies act. Minimum number of persons required for the purpose of incorporation is seven in case of a public company and two in case of a private company.

3. Separate legal entity

 On incorporation company gets personality which is separate and distinct from those of its members. Company is an artificial person created by law. 

4. Separate property

The company can own , enjoy  and dispose off its property in its own name.

5. Legal restrictions

The formation, working and winding up of a company are strictly governed by laws, rules and regulations

6. Perpetual succession

 unlike a person a company never dies. Its existence is not affected in any way by the death or insolvency of any shareholder. Members may come and members may go , but the company continues its operations until it is wound up.

7. Common seal

As a company is an artificial person it cannot sign its name on a contract. So it function with the help of seal. All contract entered into by the members will be under the common seal of the company.

8. Share capital

A company mobilizes its capital by selling its shares. Those persons who buy these shares become its share holders and thereby become members in it

9. Limited Liability

In case of limited companies liability of members will be limited to the amount unpaid on the shares.

10. Transferability of shares

Members can freely transfer and sell their shares .The right to transfer share is a statutory right of members.

11. Ownership and management

The owners of a company are its share holders.

The affairs of the company are managed by their representatives known as Directors

The Companies Act, 2013 details the regulations and company registration papers essential for the incorporation of a company. In this article, we will understand all such rules and documents listed in the Act.

Promoters

Section 2(69) of the Companies Act, 2013, defines promoters as an individual who:

• Is named as a promoter in the prospectus or in the annual returns of the company.
• Controls the affairs of a company, directly or indirectly.
• Advises, directs, or instructs the Board of Directors.

Hence, we can say that promoters are people who originally come up with the idea of the company, form it and register it. However, solicitors, accountants, etc. who act in their professional capacity are NOT promoters of the company.

Formation of a Company

Section 3 of the Companies Act, 2013, details the basic requirements of forming a company as follows:

• Formation of a public company involves 7 or more people who subscribe their names to the memorandum and register the company for any lawful purpose.
• Similarly, 2 or more people can form a private company.
• One person can form a One-person company.

Registration or Incorporation of a Company

Section 7 of the Companies Act, 2013, details the procedure for incorporation of a company. Here is the procedure:

Filing of company registration papers with the registrar

To incorporate a company, the subscriber has to file the following company registration papers with the registrar within whose jurisdiction the location of the registered office of the proposed company falls.

1. The Memorandum and Articles of the company. All subscribers have to sign on the memorandum.
2. The person who is engaged in the formation of the company has to give a declaration regarding compliance of all the requirements and rules of the Act. A person named in the Articles also has to sign the declaration.
3. Each subscriber to the Memorandum and individuals named as first directorsin the Articles should submit an affidavit with the following details:
   1. Declaration regarding non-conviction of any offence with respect to the formation, promotion, or management of any company.
   2. He has not been found guilty of fraud or any breach of duty to any company in the last five years.

• The documents filed with the registrar are complete and true to the best of his knowledge.

4. Address for correspondence until the registered office is set-up.
5. If the subscriber to the Memorandum is an individual, then he needs to provide his full name, residential address, and nationality along with a proof of identity. If the subscriber is a body corporate, then prescribed documents need to be provided.
6. Individuals mentioned as subscribers to the Memorandum in the Articles need to provide the details specified in the point above along with the Director Identification Number.
7. The individuals mentioned as first directors of the company in the Articles must provide particulars of interests in other firms or bodies corporate along with their consent to act as directors of the company as per the prescribed form and manner.

Issuing the Certificate of Incorporation

Once the Registrar receives the information and company registration papers, he registers all information and documents and issues a Certificate of Incorporation in the prescribed form.

Corporate Identity Number (CIN)

The Registrar also allocates a Corporate Identity Number (CIN) to the company which is a distinct identity for the company. The allotment of CIN is on and from the company’s incorporation date. The certificate carries this date.

Maintaining copies of Company registration papers

The company must maintain copies of all information and documents until dissolution.

Furnishing false information at the time of incorporation

During the formation of a company, an individual can:

• Furnish incorrect or false information
• Suppress any material information in the documents provided to the Registrar for the incorporation, on purpose

In such cases, the individual is liable for action for fraud under section 447.

The company is already incorporated based on false information

If a company is already incorporated but it is found at a later date that the information or documents submitted were false or incorrect, then the promoters, first directors, and persons making a declaration is liable for action for fraud under section 447.

Order of the National Company Law Tribunal (NCLT)

If a company is incorporated by furnishing false or incorrect information or representation or suppressing material facts or information in the documents furnished, the Tribunal can pass the following orders (if an application is made and the Tribunal is satisfied with it):

• Pass an order to regulate the management of the company. It can include changes in its Memorandum and Articles if required. This order is either in public interest or in the interest of the company and its members and creditors.
• Make the liability of its members unlimited
• Order removal of the name of the company from the Registrar of Companies
• Order the company to wind-up
• Pass any other order as it deems fit

Before passing an order, the Tribunal has to give the company a reasonable opportunity to state its case. Also, the Tribunal should consider the transactions of the company including obligations contracted or payment of any liability.

Effect of Registration of a Company

According to Section 9 of the Companies Act, 2013, these are the effects of registration of a company:

• From the date of incorporation, the subscribers to the Memorandum and all subsequent members of the company are a body corporate.
• A registered company can exercise all functions of a company incorporated under the Act. Also, the company has perpetual succession with power to acquire, hold, and dispose of property of all forms. Also, it can contract, sue and be sued by the said name.
• Further, the company becomes a legal person separate from the incorporators from the date of incorporation. Also, a binding contract comes into existence between the company and its members as mentioned in the Memorandum and Articles of Association. Until the company dissolves or the Registrar removes it from the register, it has perpetual existence.