by 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
- 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.
- 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.
- 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.
- 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.
