Promotion of a Company

Meaning. Promotion is the first stage in forming a company, and in many ways the most creative one. It covers everything that happens between the birth of a business idea and the actual registration of the company: sensing an opportunity, verifying that it can genuinely work, and gathering together the people, the property, and the capital needed to turn it into a functioning company.

Who is a Promoter? Section 2(69) of the Companies Act, 2013 identifies a promoter as a person who:

• has been named as a promoter in the company's prospectus or in its annual return; or
• controls the affairs of the company, whether directly or indirectly, in the capacity of a shareholder, a director, or otherwise; or
• gives advice, directions or instructions that the Board of Directors is accustomed to act upon.

A person advising the promoters in a purely professional capacity — for example, a Company Secretary, an advocate, or a chartered accountant drafting the incorporation papers — is not treated as a promoter simply because of that professional role.

Types of Promoters. Promoters are commonly classified, by the nature of their involvement, as:

• Professional promoters — persons who make promotion itself their profession: they float a company, hand over control to the shareholders once it is running, and move on to promote the next venture.
• Occasional promoters — persons who take up company promotion only now and then, alongside their regular business or profession, usually to launch one particular venture they have a personal stake in.
• Financial promoters — banks and financial institutions that promote a company mainly to study or exploit favourable financial-market conditions.
• Managing promoters — promoters who not only float the company but also go on to take charge of its management once it is formed.

Functions of a Promoter. In the course of promoting a company, a promoter typically:

• identifies a promising business opportunity and carries out a preliminary study of its technical, financial and commercial feasibility;
• decides on a suitable name for the proposed company and has it reserved with the Registrar of Companies;
• arranges for the Memorandum of Association and Articles of Association to be drafted;
• appoints the company's first directors, and settles arrangements with its bankers, auditors and legal advisers;
• signs preliminary (pre-incorporation) contracts on behalf of a company that does not yet legally exist; and
• arranges the initial funds needed to get the company registered and on its feet. …