The idea of forming a company is conceived either by a person or by a group of persons known as promoters. The investors are so widely scattered that somebody has to take initiative of bringing them together for participating in an industrial venture. The promoters take a lead for bringing men, money, materials and machinery together for establishing an industrial enterprise.
According to L.H. Haney, “Promotion may be defined as the process of organizing and planning the finance of a business enterprise under the corporate form.”
C.W. Gernstenberg says, “Promotion may be defined as the discovery of business opportunities, and the subsequent organization of funds, property an managerial ability into a business concern for the purpose of making profits therefore.” Promotion is considered as putting an idea into practice.
Guthmann and Dougal consider that ‘promotion starts with the conception of the idea from which the business is fully ready to being operation as going concern.”
Stages of Promotion
There are four stages in the promotion of a Company. These stages are:
- Discovery of an idea.
- Detailed Investigation
- Assembling the requirements.
- Financing the proposition.
Discovery of an Idea:
The first stage in company promotion is the conception of a new idea. A person visualizes that there are opportunities for a particular type of business and it can be a profitability run. The idea may be to exploit a new area of natural resources or more profitable ventures in an existing line of business. He develops this idea with the help of technical experts in that field. If they are convinced that profitable avenues are available in that line of business the idea is taken forward for more exhaustive analysis.
At the second stage various factors relating to that business are studied from a practical point of view. The promoters will estimate total demand for the product. There may be certain concerns already in that type of business and so he will determine his share of demand. After determining the prospective demand for goods he will think of arranging finances for the ventures. The availability of power, labor, raw materials and machinery is also considered. The cost structure of the product is analyzed to find out profitability from the venture. An expert opinion is sought of the viability of the project.
The work of estimation becomes more difficult if the proposed line of business is new. The estimates should be based on proper analysis of different factors. A guess work creates problems later on.
Assembling the Requirements:
After making sure that the propositions are practical and profitable, the promoter proceeds to assemble the requirements. He persuades some more persons to join hands with him by becoming directors or founder members. If he has invented something new, he should get it registered in his name. He may also acquire some patent rights. The promoter selects the factory site, decides about plant and machinery and contacts suppliers of raw materials, etc. he does not purchase all these things because it involves huge sums of money. Instead of going for outright purchase he uses option methods. The contracts are finalized by paying option money and the ultimate purchase is done only when the company is incorporated. If the company fails to come up, the promoter only loses option money.
Financing the Proposition:
The promoter decides about the capital structure of the company. The requirements of finances are estimated first. Then the sources from which this money will come are determined. How much share capital will be issued, the type of shares to be issued, and the nature of loans, whether debentures or borrowing from financial institutions for a long period all are finalized. Generally, commercial banks are helpful only in financing working capital requirements. The financial requirements fort short period and long period are estimated separately so that the capital figures may be given in the memorandum of association. The mode for issuing shares and debentures is also decided by the promoter. Whether the issue is to be under written through some agency or the company is to issue securities it is decide after considering money market position and the expected response form the public.
A promoter conceives an idea for setting up a particular business at a given place and performs various formalities required for starting a company. A promoter may be an individual, firm, association of persons or a company. The persons who assist the promoter in completing various legal formalities are professional people like Counsels, Solicitors, accountants etc. and not promoters.
Definitions of Promoters
Following definitions of a promoter clarify his status and role:
Justice C. J. Cokburn: “A promoter is one who undertakes to form a company with reference to a given object and set it going and takes the necessary steps to accomplish that purpose.”
Arthur Dewing: “ A promoter is the person conscious of the possibility of transforming an idea into a business capable of yielding a profit; who brings together various persons concerned and who finally superintendents the various steps necessary to bring the new business into existence.”
Sir Francis Palmer: “A person, who originates the scheme of the promotion of a company, has the memorandum and articles prepared, executed and registered and find the first directors, settle the terms, preliminary contract, and prospectus if any, and make arrangements for advertising and circulating the prospectus and raising the capital.
Lord Justice Bowen: “The term ‘promoter’ is not a term of law but of business usually summing up in a single word, a number of business operations familiar to the commercial word, by which a company is brought into existence.”
Characteristics or Features of a Promoter
The above given definitions bring out the following characteristics or features of a promoter:
- Promoter conceives an idea for setting up a business.
- He makes preliminary investigations and censures about the future prospects of the business.
- He bring together various persons who agree to associate with him and share business responsibilities.
- He prepares various documents and gets the company incorporated.
- He raises the enquired finances and gets the company going.
Kinds of Promoters
The promoters may be the following types:
These are the persons who specialize in promotion of companies. They hand over the companies to shareholders when the business starts. In India, there is lack of professional promoters. In many other countries professional promoters have played an important role and helped the business community to a great extent. In England, Issue Houses; in U.S.A., Investment banks and in Germany, Joint Stock Banks have played the role of promoters very appreciably.
These promoters take interest in floating some companies. They are not in promotion work on a regular basis but take up the promotion of some company and then go to their earlier profession. For instance, engineers, lawyers etc. may float some companies.
Some financial institutions may take up the promotion of a company. They generally take up this work when financial environment is favorable at the time.
Managing Agents as Promoters:
In India Managing Agents played an important role in promoting new companies. These persons used to float new companies and then got their Managing Agency rights. Managing Agency system has since long been abolished in India.
Government as a Promoter:
Since independence Government of India has promoted a number of public sector undertakings in different sectors of economy. The state governments have also promoted many undertakings under state control. The government has come up as an important promoter.
Specialized Institutions as Promoters:
In order to promote new industrial and commercial venture government has set up a number of institutions for this purpose. National Industrial Development Corporation (NIDC), Industrial Development Bank of India (IDBI,) Industrial Finance Corporation (Ifc0, state level financial corporations etc. are established for the purpose of promoting new units and also for helping the existing units.
Some persons set up their own units after making required investigation and completing legal formalities. In India most of the entrepreneurial promoters are covered in this category.
Function of a Promoter
- A promoter is required to perform the following functions:
- A promoter has first to select a particular line of business where the company has to be promoted.
- He should investigate the possibilities of setting up a business in a particular line and the future possibilities of it.
- The name of the company, objects of the company and the place for registered office are to be selected by the promoter.
- The promoter has to prepare documents like memorandum of Association, Articles of Association for getting the company incorporated with the Registrar of companies.
- He also makes necessary arrangements for raising initial capital of the company.
- The first directors of the company are also selected by the promoter.
- Promoter has also to select bankers, auditors, brokers and legal advisors for the proposed company.
- He has to make necessary arrangements for allotment of shares and securities.
Remuneration of Promoters
The promoters undertake the work of promoting new companies and bear the initial risks. They do this work with a view to get some gains for them. In India promoters try to become managing directors of the companies promoted by them; so they do not charge anything separately for this work. In other cases, the promoters may be remunerated in the following ways:
- They may be given lump sum amount for their services. They may also be allotted shares or debentures too.
- The promoters may purchase some property and then transfer it to the company at inflated rates and pocket the difference.
- They may be given some commission on the purchase of business taken over by the company.
Legal Position of a Promoter
The company law has not given any legal status to promoters. A prompter is neither an agent nor a trustee of the company because it is a non-entity before incorporation. Some legal cases have tried to specify the status of a promoter. He stands in a fiduciary position. The promoter moulds and creates the company and under his supervision it comes into existence. It is the duty of the promoter to get maximum benefits for the company. He should not get secret profits from the company. If he sells his property to the company, then he should explain his interest I such property.