Introduction

The meaning of the expression promoter, exclusively for the purpose of fastening civil
liability for misstatements in prospectus, is given in Section 62(6) of the Act, thus: a
promoter who was a party to the preparation of the prospectus or of the portion thereof
containing the untrue statement, but does not include any person by reason of his
acting in a professional capacity for persons engaged in procuring the formation of the
company; but, otherwise the term is not defined in the Act, nor precisely in any of the
decided cases. Rule 405(a) framed by the Security Exchange Commission in USA has it
that a promoter is a person who, acting alone or in conjunction with other persons
directly or indirectly takes the initiative in founding or organizing a business enterprise.
In Whaley Bridge Calico Printing Co. v. Green & Smith, Bowen, LJ, stated that the term
promoter connotes to sum up in a single word a number of business operations,
familiar to the commercial world, by which a company is generally brought into
existence. In Twycross v. Grant Cockburn, CJ, stated that a promoter is one who
undertakes to form a company with reference to a given project and to set it going, and
takes the necessary steps to accomplish that purpose.
In UK until about the 19th Century there used to be professional promoters engaged in
raising capital through public issues before the formation of companies, as a business in
itself and who used to make them over to the Boards of Directors of the Companies
after formation and vanish from the scene having filled their deep pockets, to repeat it,
and were quite notorious and hounded in law for it. This advance raising of capital is
referred to in connection with both a domestic company and a foreign company dealt in
Sections 56 (1)(b) and 605 of our Act, too, but it does not appear to have been put to
use. In the present day legal framework in our country, there is no advance raising of
capital by public offer permissible for proposed companies, as according the SEBI
Guidelines for a maiden offering, track record of the company s performance is a must
before going to the public even through the book-building route, and when it is done, the
promoters role is assumed by merchant bankers who handle the public offer in
collaboration with the Board of Directors of the company with greater transparency,
virtually banishing the erstwhile promoter to history so far as public offers are
concerned, as it might appear, but still the promoter is in place besides the Merchant
Bankers in IPOs and subsequent public offers.
But, the promoters as understood in law are not those: a priori it is they who get up the
company by promoting and forming it with a project on hand and bring it forward to the
initial public issue, who are the subject-matter of this discussion. However, even these
promoters do not really fit into the structure of the companies they bring forth unless
they are present as the subscribers or controllers which as professional promoters they
would not prefer to be in general, and they are therefore not amenable to the control of
the general body or the Boards of the companies for any misdeeds to be settled as
matters of indoor management without public disclosures or failing that with recourse to
the Courts, and whatever the nature of the public disclosures made the recourse to
Courts rarely happened in our country.
This project is a treatise on the role of promoters in the formation of a Company. The
cases cited have been from a secondary source that being a commentary on the
Companies Act, 1956.

Registration

The stamped copies of the memorandum and articles have to be signed by the
subscribers by themselves or their powers-of-attorney agents (DCA Circular No.
128/HCC/64 of 27-7-1964), or it could be as nominees of a single beneficial holder. If
any subscriber is illeterate, he shall affix his thumb impression mark with proper
description added below it, DCA letter No. 8/15/58/PR of 13-9-1958. Everyone of the
subscribers is required to write in his or her own hand his or her name,
fathers/husbands name, address, description of occupation, number of shares
subscribed it being not less than one share [Section13(4)(b) & (e)] in figures and words
and then sign against his or her name with date, Section 15. The signatures are to be
witnessed by a person who is a non-subscriber and who should also write his
particulars in a similar fashion and sign with date. It may in passing be noticed that the
subscription clause seems to be common to Tables A and B, as there is no clause such
as is provided at the end of Tables C, D and E (the articles part) provided at the end of
Table A, with the result that many Registrars insist on the number of shares taken by
each of the subscribers to be specified at the end of the articles corresponding to Table
A, which is strange and which it is not there as a requirement in the other Tables
providing the model articles given in Schedule I to the Act, much against the
requirement of the form and signature of articles specified in Section30.
The Documents required to be filed with Registrar for registration of a company are as
follows, together with the Memorandum and Articles of Association thus executed the
following documents and papers are required to be presented, accompanied by a
demand draft for the required fees to be paid as specified in Schedule X of the Act at
current rates (presently the range is from Rs. 4,000 to Rs. 2,00,04,000 at the top on the
Memorandum plus the filing fee for each of the other documents including the Articles
ranging from Rs.100 to Rs.500 per document, depending upon the authorized share
capital), to the Registrar :

1. Two spare copies of memorandum and articles of association identical with the
stamped ones for vetting;

2. Declaration in Form No.1 signed by a practicing Chartered Accountant or

Company Secretary or an Advocate of the High Court who is engaged in the
formation of the company, or a Director named in the Articles, declaring that the
requirements of the Act and the rules thereunder have been complied with in
respect of registration and the matters precedent and incidental thereto (this
needs to be pre-stamped, appropriately);

3. Registrars letter intimating the availability of name;

4. Power-of-attorney, if any, pursuant to which any person has signed as agent for
any subscribers (these need to be pre-stamped, appropriately);

5. One power-of-attorney signed by all the subscribers authorizing, any one of

themselves or the Chartered Accountant, Company Secretary or Advocate
 engaged by them in connection with the formation of the company, to carry out
the corrections, alterations, additions or omissions suggested by the Registrar in
the Memorandum and Articles of Association stamped, executed and presented
for registration, under the signature of the person authorized (this needs to be
pre-stamped, appropriately);

6. Notice of situation of the Registered Office of the Company in Form No. 18,
Section146 of the Act;

7. Any agreement entered into with any person for his or her appointment as the
managing or whole-time director or manager of the company (this needs to be
pre-stamped, appropriately);

The Notices pursuant to Regulation 11 of Companies Regulations, 1956 are required to

be published within a week before or after the submission of the application in one or
more local newspapers. In the case of a proposed company, the application should be
accompanied by the drafts of the memorandum and articles previously scrutinized by an
advocate of the Supreme Court or High Court/attorney/pleader entitled to appear before
the High Court or a CA or CS in practice in India engaged in the company s formation,
together with a declaration from him confirming his scrutiny of the application and the
accompanying documents and their conformity with the Act; and submitted to the
Registrar under Regulation 10 for his scrutiny and forwarding the same to the Regional
Director along with his list of modifications to the draft memorandum and articles and his
advice on the grant of the license having regard to the promoters, directors and
proposed members of the new company and the existence of other companies with
similar objects, within 15 days of the receipt of the same.

Statutory Requirements

Name of the Company

For a promoter intending to register a new company, choosing the name of the
proposed company is the first step, and, in fact, it is not just one name, it is one plus
three other alternate names, in the order of priority, to fill up the Form No. 1A of the
Companies (Central Governments) General Rules & Forms, 1956, to be sent to the
Registrar of Companies of the State where the registered office of the proposed
company is intended to be situated, giving the main objects and details of the names
and addresses of the promoters and/or directors as well as the proposed authorized
share capital and the fee of Rs. 500 through a demand draft obtained from any bank or
IPOs (Rule 4A). The Department of Company Law Administration through its Circular
No. 128/HCC/64 of 27th July, 1964 directed the Registrars to help and advise those
who approach them intending to form companies, to the extent possible. A company s
name is important and as observed in Osborn v. The Bank of US, the name of a
corporation is the symbol of its personal existence. A companys name is linked to its
objects to be chosen considering the Departmental instructions to the Registrars as a
general norm to be observed in new registrations: if the name reflects a specific class of
product like motors, paper, brewery or sugar or cement , the main object
should constitute only that class of product and business, whereas if the name in
addition also includes general words like industries or enterprises or it simply
consists of the proper name of a person with the addition of sons or brothers , there
will be no restrictions about the number or variety of the main objects to be included in
the memorandum. In any case, the main objects included in the memorandum cannot
miss out the objects given against column No. 5 in the Form No. IA sent to the Registrar
seeking his approval for the availability of the name. The name of a company to be
newly registered is always considered in the context of its main objects and the amount
of the authorized capital chosen by the promoters: mini-operation with small capital with
high sounding name suggestive of the presence of the company in the business arena
in a mega-size will not pass off the Registrars scrutiny.

Emblems and Names, Trade Marks

The Emblems and Names (Prevention of Improper Use) Act, 1950, prohibits registration
of any company, firm or other association or other body corporate which bears any
name, trade mark or design or patent containing any title, emblem or name specified in
the Schedule to the Act or any abbreviation or colourable imitation without permission of
the Central Government. The Schedule lists 26 kinds of names and emblems including
the National Flag, Ashoka Chakra etc. This is the Act pursuant to which promoters of
new companies are required to obtain the availability of the name of the proposed new
company from the Registrar of Companies, in advance as the first procedural step, by
filing the application in Form 1A, quite outside the conditions of Companies Act. Further,
under the Trade Marks Act, the name chosen for a new company or as a new name of
an existing company should not be a colourable imitation of the trade mark of another.

Drawing up of Memorandum and Articles

By the time the Registrars communication regarding the name being available is
received, the promoters have to get the drafts of the memorandum as well as the
articles of association and the agreement, if any, which it is proposed to enter into with
any individual entrepreneur for appointment as the proposed company s managing or
whole-time director or manager made ready in terms of Section 33 of the Act, if the
proposed company is an unlimited company, or a company limited by guarantee and/or
share capital, or a private company, or, even if it is a public company limited by shares
the application of Table A in the I Schedule to the Act is desired to be excluded.
Otherwise, if it is a public company limited by shares, adopting Table A as its articles,
the memorandum of association and the agreement, if any, with an entrepreneur for his
appointment as managing director or manager of the company, will do as the minimum
documents required to be drawn up for registration.

Articles of association

In framing the articles of association, which is a must for a company unlimited or a

company limited by guarantee or a private company limited by shares or guarantee or
both, as defined in Section 2(2) of the Act, the provisions contained in Sections 26 to 30,
and 3(1)(iii)(a) to (d), and the model sets of articles given in Tables A to E in the First
Schedule of the Act, as applicable, have to be kept in view. In respect of public
companies limited by shares, adoption of Table A avoids registration of articles
separately, but it is optional, though unless its application is specifically excluded in any
separate set made the provisions contained in its regulations will be applicable by
default to the extent not excluded or modified (Section28 of the Act) and it may hit clarity
or cause conflict.

Minimum paid-up capital requirement

`
Minimum capital norms - Consequent to the amendment to Section 3 of the Act by the
Companies (Amendment) Act, 2000, effective from the 13th of December, 2000, there is
a minimum paid-up capital requirement of Rs. 5 lakhs and Rs. 1 lakh, respectively, for
forming a new public or private company, and the Central Government is empowered to
raise these limits by such as may be prescribed. No company limited by shares can be
registered with a paid-up capital lower than those current limits. It has to be noted that
what the Act requires is paid-up capital, and therefore a mere subscription to the
memorandum and articles of association by the minimum number of seven members for
a public company and the minimum number of two members for a private company
agreeing to take the number of shares specified against their names, respectively, in
line with what is given in Table B in I Schedule to the Act, without payment, will not do,
strictly, though the wording of the subscription clause to be incorporated as the last
clause in the memorandum remains untouched to reflect the paid-up nature of the
capital required in Section3 of the Act as amended.

A new concept - This introduces one more imponderable in the understanding of the
meaning of the term capital in its presentation in our Company Law as authorised ,
issued on offer, subscribed, called up, uncalled , and paid-up . That is, a
company at its registration may have a higher amount, if the promoters like it to have,
as its authorized capital, in the Capital clause in the memorandum, or if they choose to
go by the statutory minimum capital adequacy norm for the company required they may
provide nothing more; and in that case, it is paid-up capital since birth of the company,
and if it remains so the rest disappear, as one might suppose, which they do not, and it
is all-in-one.

Payment up-front by subscribers - It would, however, appear necessary for the

subscribers to deposit the money for the shares intended to be subscribed by them
respectively up-front in a dedicated joint banking deposit account and produce the
banks confirmatory certificate to the Registrar along with the other documents and
papers for registration, in proof of the payment, as otherwise it is difficult to conceive
paid-up capital at the companys birth if such capital merely remains subscribed in
the memorandum without actual payment fully received, in accordance with the
definition of paid up capital that includes capital credited as paid up given in
Section2(32) of the Act.
In the event of the capital falling below the minimum by way of reduction of capital
covered by Sections 100-105 of the Act, in the absence of anything provided in the Act,
it will be for the Company Court to include a direction in its order whether a public
company becomes a private company thereby, and about the consequence of what it
could be in the case of a private company.

Pre-incorporation Contracts

Preliminary contracts may be pre-incorporation contracts or pre-commencement of

business certificate contracts better known as provisional contracts. Only the former are
important, as the latter are provisional contracts become binding on the company on the
issue of certificate of commencement of business, Section 149(4).

Position in English Law

Before the formation and registration of the company, it is not a person in the eye of law,
and because it is an artificial person even after it comes into being, it cannot act
otherwise than through some human agent acting for and on its behalf; and, when it is
not in existence in law, it can have no agent to accept on its behalf any proposals for
transactions in the nature of agreements brought up by the promoter or others.
Therefore, if the promoter accepts any proposals connected with the company under
formation though from third parties, it is only the promoter who is bound but not the
company even after ratification of the contracts on its registration, and no suit lies
against the company on the strength of such agreements, nor can the company enforce
such contracts for its benefit.
Some persons, who became directors of the company after its registration, gave
instructions to the Solicitors to prepare the memorandum and articles of association and
to register that very company, which the Solicitors did paying the registration fee from
their pocket. In a suit for the recovery of their costs laid against the company by the
Solicitors, it was held that the company was not liable, Re English & Colonial Produce
Co. Ltd. It is so because, where a contract is signed by one who professes to be
signing as agent, but has no principal existing, at the time, and the contract would be
inoperative unless binding on the person who signed it, he is bound thereby; and a
stranger cannot by a subsequent ratification relieve him from that responsibility. Kelner
v. Baxter. In that case, three persons signed a contract on behalf of a hotel company
under formation for purchase of 900 sterling worth of wine. The company was formed
and the wine was delivered to it and consumed, but the company was put to liquidation
before the payment. It was held that the three persons who signed the contract were
liable and no ratification could release them.
A company cannot by adoption or ratification obtain the benefit of a contract purporting
to have been made on its behalf before the company came into existence.-Natal Land
& Colonisation Co. v. Pauline Colliery Syndicate
When the promoter signed the contract in the name of the unborn company adding his
own name to it, it was held This Company was not in existence and.the signature on
that document, and indeed the document itself.is a nullity.-Newborne v. Sensolid
(Great Britain) Ltd. Simply signing the contract per pro or for and on behalf of the
proposed company does not make the person signing thus an agent and it depends
upon the intendment and purport evident in the contract, Phonogram Ltd. v. Lane.
Pre-incorporation Contracts: Position in India

These preliminary contracts are inevitable and invariably arise with almost every new
registration and incorporation of a company, and probably in recognition of this, our
legal system is pro-active so far as the procedure is concerned. These preliminary
contracts are governed, as discussed above, by the provisions of Sections 15(h) and
19(e) of the Specific Relief Act, 1963, and are enforceable by or against the new
company, respectively, subject to the fulfillment of the conditions specified in the said
Sections. As a general practice, these are novated after the company s incorporation,
often supported by a clause inserted in the objects clause of the company s
memorandum of association as providing the linkage beyond doubt. The other general
practices referred to above of reducing the operative terms in writing for clarity without
entailing any liability on the promoters, are also in vogue, alternatively.
Both the Sections 15(h) and 19(e) of Specific Relief Act, 1963, provide, in identical
wording, that when the promoters of a company have, before its incorporation, entered
into a contract for the purposes of the company, and such contract is warranted by the
terms of incorporation, the company may sue or be sued, respectively, for specific
performance, provided that the company has accepted the contract and has
communicated such acceptance to the other party to the contract. Accordingly, the
decision in Natal Land & Colonisation Co. v. Pauline Colliery Syndicate, to the effect that
A company cannot by adoption or ratification obtain the benefit of a contract purporting
to have been made on its behalf before the company came into existence is inoperative
in India.
Conclusion

The nomenclature of promoters and preferential allotments of shares to them is very

much in vogue in our country even decades after the companys formation and
successful working to such an extent as to give the impression that whoever are the
present controllers and managers of the company holding the shares that gave them
the edge are the promoters as successors not just by transmission or gift of the very
shares of the original archtypes but even when control changed hands by takeover for
valuable consideration, passing on the privilege as if it were annexed by law to the
chunk of shares held by the first acquirers of control over the company even if they had
nothing to do with the formation of the company, a super-class distinction of equity
shares which the Act has not conceded and not prohibited either to stop the subtle
operation of grabbing the shares pursuant to Section 81 (1A) of the Act whether by a
special resolution or an ordinary resolution coupled with the Central Government s
approval (and in the case of unlisted public companies, the procedure being in
conformance with the Unlisted Public Companies (Preferential Allotment) Rules, 2003,
while it is in conformance with the SEBI Guidelines, 2000, Ch. XIII for the listed
companies) at a coveted price and terms, thus, in a frenzy that happened till the year
2000 independent of any public issue, and what the SEBI has since officially conceded
subject to parity and lock-in in its Guidelines, 2000 with effect from 4.8.2000,
rendering the preferential allotment almost lustreless in itself otherwise than as
strengthening the controlling interest. The point is that the promoter-factor has come to
be recognized as pervasively present in connection with public offers long after the
company was promoted and formed to run with the company as a going concern, and
since the person owns it up and present there should be no hide and seek. That way or
otherwise, company world is not free from promoters whether original or rotated; and if it
were to be, perhaps big companies that matter and become admirable would not come
into being, for it is the promoter who in their creativity and flamboyance in risk-taking
bring them into being as in the past for corporate growth. Therefore, the role of
promoters is becoming all the more important in the present age and the question of
their remuneration and compensation must be settled once and for all.
BIBLIOGRAPHY

BOOKS:
D.S.R. Krishnamurti, Taxmann's Company Law, (Taxmann Allied
Serives, New Delhi, edn. 1, 2006)

AK Majumdar and Dr. GK Kapoor, Taxmanns Company Law and

Practice (Taxmann Publications (P.) Ltd., New Delhi, 11th edn., 2005 )

WEBSITES:
www.legalserviceindia.com/company%20law/com_1.htm

http://www.calfirstholdings.com/Part4.html

http://www.stamfordonline.com.my/courses/dca/dca212/DCA
%20212%20Chapter%206.pdf

http://www.sebi.gov.in/guide/dipamendguide.pdf