Promotion and Formation of a Company - Commerce PDF Download

Meaning of Promotion:

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.

Step of Promotion:

(1) Discovery of an Idea:

At first the promoters will find out what shall be the purpose of forming the company. Such an idea can be formulated out of experience of their own or of others. The purpose must be meaningful having a practical basis otherwise all the efforts will be futile.

(2) Investigation:

They have to make enquiries in the market about the potentiality of the proposed business. Various facts, data and information shall have to be collected and the market has to be studied.

(3) Planning:

After proper deliberation and computation of the facts, information, etc., a plan for the proposed business has to be prepared with details. Opinions of management consultants may be sought and a Project Report may be obtained. In advanced industrial countries there are professional promoters who do the promotional job.

(4) Financing:

Finance is necessary from the early stage till formation of the company is complete. The initial money comes from the promoters themselves and also from underwriters, if any, to be reimbursed by the company out of its capital. Expenses relate to legal obligations, stationery, conveyance and communication with the Government, the financial institutions (if any), the share brokers, etc.

Remuneration payable to the Secretary already appointed comes under such expenses. Sometimes arrangement for getting a license under Sec. 11 of the Industries (Development and Regulation) Act, 1951 may be a pre-requisite before forming a company. There are expenses for that purpose. The commercial steps being over, the promoters will now proceed for the legal steps and take the assistance of legal experts like a Secretary.