The stages in the formation of a
• Incorporation or Registration
• Capital Subscription
• Commencement of Business
• 1 st stage in the formation of a company
• Promotion is defined as the discovery of
business opportunities and the subsequent
organization of funds , property and
managerial ability into a business concern for
making profits from there from.
• Where does promotion start from?
• Who is a promoter
Definition of promoter
• No statutory definition provided
• Section 62,69,76,78 use this term expressly.
• One who undertakes to form a company with reference to
a given project and sets it going, one who takes necessary
steps to accomplish a purpose.
• A promoter ,with the help of his team brings a company
• He selects the signatories to AOA, MOA,appoints solicitors
to prepare documents, finds funds.
• Locates the office, factory etc.
• A person assisting a promoter are not promoters (section
Legal Position of Promoter
• Neither trustee nor an agent of the company.
• There is trust or principal in existence at the time of his efforts.
• Certain fiduciary (a position of trust and confidence)duties towrads
the company and the original allotee of shares are imposed on him
by companies act.
• Must make full disclosure of relvant facts , including profits.
• Must not make secret profits out of transactions he makes on
behalf of the company.
• Making of profits is not forbidden, not disclosing the same is.
• Must be made to full board or share holders body.
• Board of directors should not be his own nominees.
• If profit made out of a transaction to which
company is a party, is not disclosed by a
promoter, two options are available.
• 1. May sue promoter and recover the same.
• 2. It may set aside the transaction or contract
with the promoter
May be made liable to the original allottee
In the course of winding up an application, the
promoter may be made liable for breach of trust.
• May be paid in cash or in shares and debentures.
• But in absence of an agreement a promoter cannot
recover his remuneration and initial expenses.
• A public company having a share capital is not liable
even for contracts entered into after incorporation
because they are treated as provisional contracts in
the eyes of law, till it gets the certificate of
commencement of business.
• Thus inspite of a contract after incorporation a public
company is legally bound to pay remuneration only
after getting certificate to commence business.
Pre in corporation contracts
• Pre incorportaion contracts are not legally binding and
called preliminary contracts.
• Company can neither be sued nor sue.----WHY?
• The promoter will continue to be personally liable for
pre incorporation contracts unless new contacts
embodying the terms of the old one is made afresh by
company after its incorporation.
• The contracts cannot even adopt the pre incorporation
contracts by ratification., because it requires the
presence of principal competent to contract.
• Section 15 (h) and 19 E of the specific relief act, 1963.-
Acceptance and communication necessary.
Incorporation and registration
• To find if name is available
• To get letter of intent under IDRA, if business
within purview of act.
• To fix up underwriter, brokers, bankers,
• To get MOA, AOA prepared.
Documents with application
• The agreement
• A written consent of directors
• A notice of address of registered office
• A statutory declaration
• Applicable fees (schedule x of companies act)
• Registrar issues certificate of incorporation.
• CIN – Corporate Identity number given by the ROC as
per instruction of Department Company affairs
• To follow guidelines of SEBI
• File a copy of prospectus
• Application of shares received
• If minimum subscription achieved – 90 % of
• Directors pass resolution to allot shares.
• If minimum subscription not obtained – to return
money within 60 days to all investors.
• Statement in lieu of prospectus can also be filed.
Commencement of business
• A public co., issuing prospectus will have to
file some docs, with registrar to secure
commencement of business.
• Docs: Shares payable in cash have been
• Every director has paid cash for the allotment
• No money is liable to become refundable
• Declaration by director the secretary has been