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Functions of Promoters

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Neha is a Post Graduate from Delhi University in Commerce. Loves to write a verity subjects.

Promoters of a Company

Promoters of the company plays a vital role in the formation of a new company

Promoters of the company plays a vital role in the formation of a new company

Importance of Promoters

The formation of a company is a lengthy process. It involves several stages. The first stage in the process of formation is promotion. At this stage, the idea of carrying on a business is conceived by a person or by a group of persons called promoters. For incorporating a company various formalities are required to be carried out. The promoters perform these functions and bring the company into existence.

Promoter: Meaning and Importance

A company is an artificial person by law. A company is born only when it is duly incorporated. For incorporating a company various documents are to be prepared and other formalities are to be completed. All these works are done by promoters.

Gerstenberg has defined promotion as the discovery of business opportunities and the subsequent organization of funds, property, and managerial ability into a business concern for the purpose of making profits therefrom. After the idea is conceived, the promoters make a detailed investigation to find out the weakness and strong points of the idea, determine the amount of capital required, and estimate the operating expenses and probable income. On being satisfied with the economic viability of the idea, the promoters take all the necessary steps for incorporating the company.

The Companies Act does not define the term promoters anywhere, it only refers to the liabilities of the promoters. A number of judicial decisions have defined the term promoter.

According to L. J. Bowen, the term promoter is a term not of law but of business, usefully summing up in a single word a number of business operations familiar to the commercial world by which a company is generally brought into existence.

Another definition given by Lord Blackburn states that "the term promoter is a short and convenient way of designating those who set in motion the machinery by which the Act enables them to create an incorporated company".

Justice C. Cockburn described a promoter as "one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose".

A Company may have more than one promoter. The promoter may be an individual, firm, and association of persons or a body corporate. Even if a person has taken a very minor part in the promotion activities, he may still be a promoter.

But a person cannot be held as promoter merely because he has signed at the foot of the memorandum or that he has provided money for the payment of formation expenses.

Everyone who is associated with the process of the formation of a company cannot be called a promoter. For example, a solicitor who draws up the documents of the proposed company in his professional capacity is not a promoter in the eye of law. Similarly, an engineer who advises on the selection of a site or a valuer who helps with drawing the estimates would not be regarded as a promoter. Section 62(6) makes it clear that persons assisting the promoters by acting in a professional capacity e.g. solicitors, accountants, and other experts are not promoters.

From the above, it should be clear that a promoter is one who performs the preliminary duties necessary to bring a company into existence. Thus, the true test to describe a person as a promoter lies in finding out whether he is keen to form a company and take steps to give it a concrete shape.

The promoters, in fact, render very useful services in the formation of a company. They render a very useful service to society and they play an important role in the industrial development of countries. A promoter has been described as a creator of wealth and an economic prophet. The promoters carry considerable risk because if the idea sometimes goes wrong then the time and money spent by them will be a waste.

Functions of a Corporate Promoter

A promoter plays a very important role in the formation of a company. A promoter may be an individual, an association, or a company. In their capacity as promoters, they perform the following functions in order to incorporate a company and to set it going.

Originate the scheme for the formation of the company.

Promoters are generally the first persons who conceive the idea of business. They carry out the necessary investigation to find out whether the formation of a company is possible and profitable. Thereafter they organize the resources to convert the idea into a reality by forming a company. In this sense, the promoters are the originators of the plan for the formation of a company.

Secure the cooperation of the required number of persons willing to associate themselves with the project.

The promoters, in accordance with whether they want to incorporate a private or public company, try to secure the co-operation of persons needed to form the company. The minimum number of members required to form a public company is seven and that for a private company the minimum number is two. Depending upon the form chosen, the promoters may decide upon the number of primary members.

Seek and obtain the consent of the persons willing to act as the first directors of the company.

The company has a system of representative management and is managed by individuals appointed as directors. The first directors of the company are, however, generally appointed by the promoters. The promoters seek the consent of some individuals whom they seem appropriate so that they agree to be the first directors of the proposed company.

Settle about the name of the company.

The promoters have to seek the permission of the Registrar of companies for selecting the name of the company. The promoters usually give three names in order of preference. The promoters should ensure that the name of the company should not be identical with or should not too closely resemble the name of another existing company.

Get the documents of the proposed company prepared.

Certain documents like the Memorandum of Association and the Article of Association are required to be filed with the Registrar of Companies before the company is registered and brought into existence. As the company itself does not exist before incorporation, this work of preparation of these documents has to be undertaken by the promoters. The promoters, on the advice of legal experts, get the Memorandum and Articles of Association prepared and arrange for their printing. In case the proposed company is a public limited company, intending to issue shares on incorporation, the promoters must also arrange to get the prospectus prepared and printed.

Appoint bankers, brokers, and legal advisers for the company.

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The incorporation of a company involves a lot of legal formalities. The promoters may need to consult the legal experts on several of these matters. They, therefore, appoint solicitors to assist them in the process of formation of the company. The company is formed for the purpose of carrying out business and as such deals with funds and their management. The promoters must, therefore, also appoint bankers for the company who will receive share application money. If the proposed company is a public limited company, the promoters must also ensure the success of the first capital issue made by the company by appointing underwriters and brokers.

Settle preliminary agreements for the acquisition of assets.

The promoters may be required to acquire a suitable site for the factory, make arrangements for plant and machinery, and may even make tentative arrangements for key personnel. Sometimes in order to run the business, the company may be required to take over the property of running a business. Promoters fulfill the function of seeing that such property and business are acquired by the proposed company on justifiable terms.

Enter into preliminary contracts with the vendors.

In respect of the properties and assets mentioned above, the promoters would need to settle the terms of contracts with the third parties from whom these properties are to be bought. These contracts are called preliminary contracts.

Arrange for the filing of the necessary documents with the Registrar.

The promoters are required to pay the stamp duty, filing fee, and other charges for registration of the company. The promoters are to see that the various legal formalities for incorporating the company are complied with.

These are the primary functions of a promoter. The duties of promoters vary from person to person and company to company.

This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.

© 2010 Neha J


Neha J (author) from Delhi on December 19, 2018:

Thanks all for your visit and comments.

Sunil Borchate on February 08, 2012:

It is very helpfull for me

nosa on October 28, 2011:

please do give information on the books where these references emanated from

prerana on May 01, 2011:

amazing contnt with clarity..have chosen this article for my presentation tmrw..thanks:)

Neha J (author) from Delhi on July 30, 2010:

Thanks drcrischasse for your visit and comment.

Cristopher Chasse from Boston on July 30, 2010:

never thought of it this way, nice job!

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