Promotion Stage

The dictionary meaning of the word ‘promotion’ is ‘to help bring into being’. The term promotion of a company, therefore, means to help bringing a company into existence. A company is defined in the Companies Act, 1956 as “company means a company formed and registered under this Act or an existing company.” (Sec. 3(l)(i).

The term promotion nor the term promoter has been defined in the Companies Act. In fact, the word promotion is more a commercial term than a legal one.

For the promotion of a company a few persons, called promoters, desirous of forming into a company to achieve some purpose, whether with the intention of making profit or not, have to undergo several steps.

Such steps can be grouped into two parts:

Commercial and Legal. Once the commercial steps are over the legal steps begin. At the latter stage assistance of a person, conversant with Company Law becomes necessary.

Obviously the Company Secretary is that person, Any lawyer or a Chartered Accountant may serve the purpose but he, unless he is a qualified Company Secretary (i.e. who is a member of the Institute of Company Secretaries of India), cannot be appointed as Secretary to the Company if its Paid-up Capital is Rs. 25 lakhs or more.

Promotion Stage

Stage 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.

Stage 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.

Stage 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.

Stage 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.