Promotion of a Company

Promotion is the first stage in the formation of a company. It involves conceiving a business idea and taking the initiative to form a company so that a practical shape can be given to exploiting an available business opportunity. It therefore begins with somebody discovering a potential business idea.

Who are promoters?

• The opportunity may be discovered by a single person, a group of persons, or even an existing company. Whoever then proceeds to form a company to exploit it is called a promoter.
• A promoter is one who undertakes to form a company with reference to a given project, takes the steps needed to set it going, and accomplishes that purpose.
• Beyond conceiving the opportunity, promoters analyse its prospects and bring together the men, materials, machinery, managerial ability and financial resources needed to set the organisation going.

Definition under Section 69 of the Companies Act, 2013 — a promoter is a person:

• (a) who is named as a promoter in a prospectus, or is identified by the company in its annual return (Section 92); or
• (b) who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; or
• (c) in accordance with whose advice, directions or instructions the Board of Directors is accustomed to act.
• Exception: a person acting merely in a professional capacity (for example, a lawyer or accountant advising the promoters) is not treated as a promoter.

Functions of a Promoter

• (i) Identification of business opportunity: the promoter's first task is to spot a business opportunity — a new product or service, a new channel to make a product available, or any other opening with investment potential — and then analyse it for technical and economic feasibility.
• (ii) Feasibility studies: not every identified opportunity can be turned profitably into a real project, so promoters undertake detailed feasibility studies, taking help from specialists such as engineers and chartered accountants. Depending on the project, these include:
  • Technical feasibility: an idea may be sound but technically impossible to execute — for instance, if the required raw material or technology is not easily available (e.g. a metal not produced in the country and not importable), the project is technically unfeasible until an alternative source is arranged.
  • Financial feasibility: every activity needs funds, so promoters estimate the fund requirement. If the outlay is so large that it cannot be arranged within available means (e.g. a township needing several crores), the project is dropped for lack of financial feasibility.
  • Economic feasibility: a project may be technically viable and financially feasible yet have very little chance of being profitable; in such cases too the idea may have to be abandoned.
  • Experts help conduct these studies, but they do not become promoters merely by assisting. Only when the investigations give positive results do the promoters decide to actually launch the company.
• (iii) Name approval: having decided to incorporate, promoters select a name and apply to the Registrar of Companies of the state where the registered office will be situated. Since the preferred name may clash with an existing company's name or be misleading, three names in order of priority are submitted so an acceptable one can be approved.
  • When a name is undesirable (Name Clause): a name is refused if — (a) it is identical with or too closely resembles the name of an existing company; (b) it is misleading (suggesting the company is in a particular business, or is a particular type of association, when it is not); or (c) it violates The Emblem and Names (Prevention of Improper Use) Act, 1950 — which protects, among others, the names, emblems and seals of the UNO and its bodies (WHO, UNESCO, etc.), the Government of India, State Governments, the President/Governors, and the Indian National Flag. The Act also bars any name suggesting the patronage of the Central Government, a State Government or a local authority.
• (iv) Fixing up signatories to the Memorandum of Association: promoters decide who will sign the Memorandum. These signatories are usually the first directors of the company, and their written consent to act as directors and to take up qualification shares is obtained.
• (v) Appointment of professionals: professionals such as merchant bankers and auditors are appointed to help prepare the documents required by the Registrar. (The names and addresses of shareholders and the shares allotted to each are later filed with the Registrar in a statement called the return of allotment.)
• (vi) Preparation of necessary documents: the promoter prepares the legal documents that must be submitted to the Registrar to get the company registered — chiefly the Memorandum of Association, Articles of Association and consent of directors.

Documents Required to be Submitted

A. Memorandum of Association (MOA)

• The most important document, because it defines the objectives of the company. No company can legally undertake any activity not contained in its Memorandum.
• Under Section 2(56) of the Companies Act, 2013, "memorandum" means the memorandum of association as originally framed or as altered from time to time.
• It contains the following clauses:
  • Name clause: states the company's name, already approved by the Registrar.
  • Registered office clause: states the name of the state in which the registered office is proposed to be situated. The exact address is not needed at this stage but must be notified to the Registrar within thirty days of incorporation.
  • Objects clause: probably the most important clause; it defines the purpose for which the company is formed. The company cannot lawfully undertake any activity beyond these objects. The main objects are listed here, and any act essential or incidental to attaining the main objects is treated as valid even if not stated explicitly.
  • Liability clause: limits members' liability to the amount unpaid on the shares they hold. For example, if a shareholder holds 1,000 shares of ₹10 each and has already paid ₹6 per share, liability is limited to ₹4 per share — at most ₹4,000.
  • Capital clause: specifies the maximum (authorised) capital the company can raise through shares, and its division into shares of a fixed face value — e.g. authorised capital of ₹25 lakh divided into 2.5 lakh shares of ₹10 each. The company cannot issue capital beyond this amount.
• The signatories state their intention to be associated with the company and undertake to subscribe to the shares set against their names.
• The Memorandum must be in the appropriate form from Tables A, B, C, D and E of Schedule I (A = company limited by shares; B and C = company limited by guarantee not having share capital; D = unlimited company not having share capital; E = unlimited company having share capital).
• It must be signed by at least seven persons for a public company and two persons for a private company.

B. Articles of Association (AOA)

• These are the rules for the internal management of the company. Being subsidiary to the Memorandum, they must not contradict or exceed anything stated in it.
• Under Section 2(5) of the Act, "articles" means the articles of association as originally framed, altered, or applied under any previous or the present company law.
• Articles must be in the appropriate form from Tables F, G, H, I and J of Schedule I (F = company limited by shares; G and H = company limited by guarantee with/without share capital; I and J = unlimited company with/without share capital). However, a company is free to frame its own articles contrary to these Tables, and in that case the company's own articles apply.
• Matters generally contained in the Articles include: exclusion (wholly or partly) of Table F; adoption of preliminary contracts; number and value of shares; issue of preference shares; allotment of shares; calls on shares; lien on shares; transfer and transmission of shares; nomination; forfeiture of shares; alteration of capital; buy-back; share certificates; dematerialization; conversion of shares into stock; voting rights and proxies; meetings and committee rules; directors' appointment and delegation of powers; nominee directors; issue of debentures and stocks; audit committee; managing director, whole-time director, manager, secretary; additional directors; the common seal; remuneration of directors; general meetings; directors' meetings; borrowing powers; dividends and reserves; accounts and audit; winding up; indemnity; and capitalisation of reserves.

C. Consent of proposed directors — a written consent from each person named as director, confirming that they agree to act as director and undertake to buy and pay for their qualification shares as mentioned in the Articles.

D. Agreement — the agreement, if any, that the company proposes to enter into with any individual for appointment as its Managing Director, whole-time Director or Manager, must also be submitted to the Registrar. …