Promotion of a Company

Bookmark added to your notes.
View Notes

Introduction to Need of Promotion

A company when formed requires a head start in regard to finance and resources, in this view the company needs to be promoted. So, the entire process involved in this method of promotion by the promoters of the company is known as ‘Promotion of a Company’. 

Students are required to grasp this content to know the details about the formation of a company, as promotion is a crucial step in the formation and structuring of a company extra detail study is required to be invested here. 

Idea Behind the Formation of Company

With the entire process by which a company is brought into existence, the birth a company and determining its purpose of its formation is too studied vividly, and the persons who conceive the idea of the formation of the company and invest their initial funds in the growth of the company are known as the promoters for that particular company. 

The promoters enter into the preliminary contracts with legal personalities and make arrangements, advertisement and the circulation of the company’s prospectus is also done at the expenses and the efforts of the promoters. 

Define Promoters of a Company

Promoter is a person who conceives or catches the idea, studies the prospects of the business critically and analytically, chalks out a scheme for the organisation, brings together the required workforce, materials, machinery, finance and managerial ability and then launches the enterprise.


Promoter is a firm or a person who does the preliminary work which is incidental to the formation of a company, incidental works includes – promotion, incorporation, floatation also the promoters encourage the investors to invest their funds in the company at the time of their promotion. 


Role of a Promoter

The role of a promoter can be performed by an investment banker, underwriter, or even by a stock promoter, who can perform the role in full or partially. 

  • Promoters owe a duty of utmost good faith, so as to not mislead the potential investors. 

  • They disclose all material facts about the company's business.

  • Promoters have a fiduciary relationship with the company and the investors or the shareholders of the company, they must not hold any type of conflicts in decisions and. 

  • Any gain they acquire from the property of the company must be submitted to the company only. 

  • The promoters are cautious and abandon themselves from unfair advantage of their position as a promoter. 

  • A promoter can be a shareholder in a particular company. If the promoter is the only shareholder, the company may have to disclose such information prior to selling shares in compliance with the Securities and Exchange Rules

Function of Promoter

The function of a Promoter can be that of an investor as well as of a shareholder and also of the sole task of a promoter who personally put the company in action. The functions of the promoter are listed below:

  • Promotion of an Idea

The promoter conceives the idea of forming the company. This is the initial step towards the formation of a company.

  • Detailed Investigation

The promoter, after generating an idea, has to make a thorough and detailed investigation of the prospects and the capability of the business which is to be done with the sources of supply, nature of demand, extent of competition and the capital requirements.

  • Verification

The promoter also is required to verify the reports made by the experts are free from bias. 

  • Assembling

After verifying the idea, the promoter needs to launch the projected company.

  • Financing the Proposition

At this stage, the promoter needs to plan about setting out the mode of getting the required finance, to negotiate with the vendors, check availability of loans etc.  

  • Presentation of the Proposition

After making necessary arrangements and modes of raising the required finance, he needs to print the documents like the Memorandum and file with the registrar and then kick start their publication, all this has to be done in accordance with the provisions of the Companies Act.


Promotion Stage of Company Formation

There is a defined stage to the promotion of company’s formation, the stages include as hereunder:

Stage 1. Promotion Stage:

Promotion is the foremost stage in the formation of a company. He performs aggregated activities to design and to bring an enterprise to operate as a business. 


Stage 2. Incorporation:

This is a registration stage, where the registration of the company brings it to existence. A company is correctly constituted only when this is duly registered under the Act.


Stage 3. Capital Subscription Stage:

This ‘capital subscription stage’ and ‘commencement of business stage’ are only relevant in case of a public company having a share capital. In this stage necessary capital is to be acquired for the company. 


Stage 4. Commencement of Business Stage:

After receiving the certificate of incorporation, a private company can start its business, while a public company can start its business after getting the ‘certificate of commencement of business’.

FAQ (Frequently Asked Questions)

1. What are Preliminary Contracts Performed by the Promoters?

Ans. Pre-incorporation Contracts are actually the preliminary contracts that are made by promoters who act as an agent or trustee of the company before its incorporation. Such contracts cannot bind the company because the company has no legal status prior to its incorporation, this includes contracts with the investor, legal force and others.

2. Can Lawyers and Chartered Accountants be Promoters?

Ans. A lawyer or a Chartered Accountant is a person who merely acts in his professional capacity or on behalf of the promoter, for drawing up the agreement or other documents or he who prepares the figures on behalf of the promoter and is paid by the promoter, they cannot be a promoter.

3. What is a Memorandum?

Ans. A Memorandum is a preliminary document that is prepared by the Promoters, Memorandum of Association is the full form of the Memorandum which consists of the purpose of the business, why it is formed, what it attempts to serve etc.

This is actually the document which is analyzed by the investor to make their plan for investing in the company. The memorandum consists of all the details of the company.

4. Define ‘Companies Act’?

Ans. The Companies Act 2013 is an Act of the Parliament of India, this is implemented on the Indian company law which regulates - incorporation of a company, responsibilities of a company, directors, and dissolution of a company. This Act relates all other matters incidental to the formation, conduct and the closure of the company.