Unit-2 FORMATION OF COMPANY

PROMOTERS
Promoters are the persons engaged in the formation of a company. At very first the idea of
carrying on a business is perceived by them. They make detailed study about the feasibility of
the business idea and the amount of financial and other resources required. When they are
satisfied about feasibility of the business idea, take necessary steps for assembling the required
resources including provision of the funds required to start the business enterprise. The law does
not specify any qualification for the promoters. They stand in a fiduciary position (Trustee)
towards the company to be formed. The Promoter need not be an individual, a firm, a company
or an association can be the promoter of a company. Even two or three persons can also act as
the promoters of the same company.
DEFINITION OF PROMOTER
According toHaney“Promoter is a person who conceives the idea, studies the prospects of
the business critically, chalks out an attentative scheme of organisation, brings together the
requisite men, materials, machinery, money and managerial ability and float the enterprise”.
In the words of Justice C.J. Cokburn“A promoter is the one, who undertakes to form a
company with reference to a given object and sets it going and takes the necessary steps to
accomplish that purpose.”
Arthur Dewin defines Promoter as “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.”
As per Sec 2 (69) of the companies Act, 2013 defines “Promoter” as under:
“Promoter” means a person
a) Who has been named as such in a prospectus or is identified by the company in the
annual return referred to in sec 92; or
b) Who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
c) in accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act.
 Provided that sub-clause (c) shall not apply to a person who is acting merely in a professional
capacity.

From the above definition, a person with whose advice, directions or instructions the
Board of Directors of the company is used to act are also treated as promoters. However, if a
person is merely acting in a professional capacity i.e. giving only professional advice to the
Board of directors, shall not be treated as a promoter.

In addition, according to SEBI (Issue of Capital and Disclosure Requirements)

Regulations, 2009, “promoter” includes:

(i) the person or persons who are in control of the issuer;

(ii) the person or persons who are instrumental in the formulation of a plan or programme
pursuant to which specified securities are offered to public;

(iii) the person or persons named in the offer document as promoters.

LEGAL POSITION OF A PROMOTER

The legal position of a promoter is not specific because the law is very silent about the
status of promoter.Legally a promoter is neither an agent nor a trustee for the company.The
reason is obvious. An agent can act only for an existing principal. As the company is not in
existence at the time when the promoter started his work, he can’t be considered as an agent of
the company. As such, a promoter stands in a fiduciary relation to it.Therefore,he required to
make full disclosure of the relevant facts, including any profit made by him as held by Lord
Cairns in Erlanger v. New Sombrero Phosphate Co. (39 LT 269).
FUNCTIONS OF A PROMOTER
The definitions cited above clearly brings out the peculiar functions of a typical promoter. They
are as follows:
1. Promotion of an Idea: This is the first step towards the formation of a company. It is the
promoter who has to conceive the idea of forming a company. With his experience, the promoter
discovers the field of gainful investment and judge the soundness of a particular proposal.
Sometimes, he has to judge the chances of success in exploiting an invention for business
purpose.
2. Investigation: After forming an idea, the promoter should make a thorough and detailed
investigation of the prospects of the business. It should be done with reference to the sources of
 supply, nature of demand, extent of competition, capital requirements of the present and future
etc. He can also take the help of technical experts. Depending upon the nature of the project, the
following feasibility studies may be undertaken, with the help of experts like engineers,
chartered accountants to examine whether the perceived business opportunity can be profitably
exploited.
There are three kinds of feasibility studies:
a. Technical Feasibility. Sometimes, an idea may be good but technically not possible to
execute because of non-availability of either raw material or technology.
b. Financial Feasibility. The promoters should identify the financial requirements in the
beginning of the project.
c. Economic Feasibility. Sometimes, the project is technically and financially viable, but they
may not be profitable.
3. Verification: The promoter should also verify whether the advises or comments or reports made
by the experts are free from bias. He should also consult with other impartial and disinterested
experts and should see whether the idea is commercially viable.
4. Assembling: After verification of the idea, the promoter should go ahead with the promotion of
the projected company. He should find out the first directors and the subscribers to the
Memorandum.
5. Financing the Proposition: The promoter, at this stage, has to prepare a plan setting out the
mode of getting the necessary finance. He should arrange for finance to meet the preliminary
expenses. He should negotiate with the vendors if it proposes to buy an existing business. He
should also arrange for underwriting contracts. He should estimate the required capital and the
availability of bank loan etc., and also the cost of raising the capital.
6. Presentation of the Proposition: Finally, after making necessary arrangements and modes of
raising finance, he gets the necessary documents such as Memorandum etc. printed, filed with
the Registrar and then arranges for their publication. He should take the aid of legal experts in
preparing the documents and should see that the documents are strictly in accordance with the
provisions of the Companies Act.
RIGHTS OF PROMOTERS
According to Indian Companies Act, 1956. The promoters have the following rights. They are:
1. Right to Receive Preliminary Expenses
 A promoter has no legal right to claim promotional expenses for his services unless there is
a valid contract. Without such a contract he is not even entitled to recover his preliminary
expenses.[Re. English & Colonial Produce Company (1906) 2 Ch. 435 CA].
The promoters are entitled to receive all the expenses incurred for in setting up and
registering the company, from Board of Directors. The articles will have provision for payment
of preliminary expenses to the promoters. The company may pay the expenses to the promoters
even after its formation, but such payments should not be Ultra Vires the articles of the
company. The Articles may have provision regarding payment of fixed sum to the promoters.
2. Right to recover proportionate amount from the Co-promoters
The promoters are held jointly and severally liable for the secret profits made by them in
the formation of a company. Therefore, if the entire amount of secret profits is paid to the
company by a single promoter, he is entitled to recover the proportionate amount from co-
promoters. Likewise, if the entire liability arising out of mis-statement in the prospectus is borne
by one of the promoters and he is entitled to recover proportionately from the co-promoters.
3. Right to remuneration
The promoter has the right to paid remuneration for the efforts. It may be fully or partly
paid shares. If there is no agreement, the promoter will not be entitled to receive remuneration.
Disclosure of remuneration paid to promoter
The remuneration or benefit paid to the promoter must be disclosed in the prospectus, if it
is paid within two years preceding the date of the prospectus.
DUTIES OF A PROMOTERS
The Companies Act, 2013, contains some provisions regarding the duties of promoters. The
fiduciary duties of a promoter include:
1. Duty to Disclose all the material facts
As per section 102(4) the promoter is under a duty to disclose fully all the material facts
relating to the formation of a company. This provision is based on the principle that a promoter
cannot enjoy either directly or indirectly, any benefit at the expense of the company he promotes,
without the knowledge and consent of the company. If he does so, by ignoring this provision, the
company can compel him to account for it.
In relation to disclosure it may be noted that part disclosure will also attract the same
consequences. A promoter is not forbidden to make profit but he is prohibited from making any
hidden profit. He may make a profit out of promotion with the consent of the company in the
same way as an agent may retain a profit obtained through his agency with his principal's
consent.
In the case of default in complying with above provisions, the prompter shall be punishable
with fine which may extend to 50,000 rupees or five times the amount of benefit accruing to the
promoter, whichever is more. [Sub-section (5) of Section 102]
2. Not to derive a profit
A promoter is not allowed to derive a profit from the sale of his own property to the
company unless all material facts are disclosed. If a promoter contracts to sell his own property
to the company without making a full disclosure, the company may either repudiate the sale or
affirm the contract and recover the profit made out of it by the promoter. Either way the
dishonest promoter is deprived of his advantage.
Therefore, the promoter wishes to sell his own property to the company, he should either
disclose the fact:
(a) to an independent Board of directors; or
(b) in the articles of association of the company; or
(c) in the prospectus; or
(d) to the existing and intended shareholders directly.
In addition to disclosing secret profits, a promoter has the duty to disclose to the company any
interest he has in a transaction entered into by him.
3. Duty to Give Benefits of Negotiations to the Company
The promoter, as soon as he starts to act for the formation of the proposed company
should give to the company the benefit of all negotiations or contracts entered into by him in
respect of the company.
4. Not to make Unfair Use of his Position
The promoter enjoys extensive powers. Therefore, he should not make unfair use of his
position or the powers vested in him. Any unfair exercise of power shall render him liable to the
company.
5. Not to contract with the Company
Promoters’ duties cannot depend on a contract because at the time the promotion begins,
the company is not incorporated, and so cannot contract with its promoters. The promoter's
 duties must be the same as that of a person acting on behalf of another individual without a
contract of employment. If he does make any misrepresentation in a prospectus he may be held
guilty of fraud under Section 17 of the Indian Contract Act, 1872 and would be held liable for
damages.

Termination of Promoters' Duties

It is a general opinion that a promoter completes his duty the moment the company, that
he promotes, is incorporated or when the Board of directors is appointed. But, in reality it
continues until the company has acquired the property for which it was formed to manage and
has raised its initial share capital, [Lagunas Nitrate Co. v. Lagunas Syndicate Ltd. (Supra)] and
the Board takes over the management of the affairs of the company from the promoters.

LIABILITIES OF PROMOTERS
A promoter is subject to the following liabilities under the various provisions of the
Companies Act, 2013:-
1. Furnishing false information at the time of incorporation: under sec 7(6) provides that, if it is
found that the company has been registered by furnishing any incorrect information or by
suppressing any material facts in any documents or any wrong declarations filed or any
fraudulent action, the promoters or any other person for making such false activities shall be
liable for fraud U/S 447.
2. Non-compliance with prospectus: The promoters are held liable for non-compliance of the
matters stated in or reported in the prospectus. Sec 26 of the Act specify that the promoters are
held liable for the fail to comply with provisions stated in prospectus, and as per section 26(1)(a)
(xiv) failed to disclose about sources of promoter’s contribution in the prospectus.
3. Civil Liability for misstatements in prospectus: - As per section 35(1), promoters are liable for
any misleading statement in the prospectus. where a person has subscribed for securities of a
company acting on any statement included, or the inclusion or omission of any matter, in the
prospectus which is misleading and has sustained any loss or damage as a consequence thereof,
the company and the promoter of the company shall be liable to pay compensation to such
person who has sustained such loss or damage.
 However promoter shall not be liable under this section, if he proves that the prospectus
was issued without his knowledge or consent, and that on becoming aware of its issue, he
forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
4. Punishment for fraudulently inducing persons to invest money:- As per section 36, any promoter
(person), either knowingly or unknowingly makes any statement, promise or forecast which is
false, deceptive or misleading, or deliberately conceals any material facts, to induce another
person to enter into, or to offer to enter into, (a) any agreement for, or with a view to, acquiring,
disposing of, subscribing for, or underwriting securities; or (b) any agreement, the purpose or the
pretended purpose of which is to secure a profit to any of the parties from the yield of securities
or by reference to fluctuations in the value of securities; or (c) any agreement for, or with a view
to obtaining credit facilities from any bank or financial institution, shall be liable for punishment
for fraud under section 447.
5. Contravention of provisions relating to private placement: under Section 42(10) If a company
makes an offer or accepts monies in contravention of the provisions of private placement as
stated in section 42, the company and its promoters shall be liable for a penalty which may
extend to the amount involved in the offer or invitation or two crore rupees, whichever is higher,
and the company shall also refund all monies to subscribers within a period of thirty days of the
order imposing the penalty.
Note: the expression “private placement” is defined under the explanations of section 42 of the companies act, 2013
which means “any offer of securities or invitation to subscribe securities(other than by way of public offer ) to
a selected group of persons through issue of a private placement offer letter and which satisfies the
conditions specified in this section.”
6. A company may proceed against a promoter on action for deceit or breach of duty under Section
340, where the promoter has misapplied or retained any money or property of the company or is
guilty of misfeasance or breach of trust in relation to the company.
7. Criminal Liability for misstatement in prospectus: Besides civil liability, the promoters are
criminally liable under Section 34 for the issue of prospectus containing untrue or misleading
statements in form or context in which it is included or where any inclusion or omission of any
matter is likely to mislead. Section 447 imposes severe punishment for fraud on promoters who
make untrue or misleading statements in prospectus with a view to obtaining capital.

8. Misrepresentation of facts: A promoter will be responsible for any misstatement as to an existing

fact. A calculation of future profits is not a statement of fact [Bentley v. Black, (1893) 9 TLR
 580 (CA)]. But a misstatement as to purposes for which the money to be raised and is to be
applied is a misrepresentation of a present fact. [Edgington v. Fitzmaurice, (1885) 29 Ch D 459:
(1991-5) All ER Rep 59 (CA)].
9. Misstatements of Names of directors: If a director's name is misstated in the prospectus, it is an
important misrepresentation and the promoter can be held to be liable, [Metropolitan Coal
Consumer's Association Ltd., Karberg's case, (1892) 3 Ch 1 (CA)].
10. Representation true only at time of issue: Sometimes representations which were true when the
prospectus was issued, become false before the allotment is made. In such cases, the fact ought
to be communicated to the applicant otherwise the applicant will not be able to rescind the
contract. A promoter/director who knows that a statement has become false is under a duty to
disclose the truth and if he fails, he may be guilty of fraud. [Brownliey v. Campbell, (1880) 5
App. Cas 925; RajagopalaIyer v. The South Indian Rubber Works, AIR 1942 Mad 656; (1942)
12 Com Cases 203].
11. Pre-Incorporation Contracts: It is the promoter’s duty is to bring the company in the legal
existence and to ensure its successful running, and in order to accomplish this he may enter into
some contract on behalf of prospective company. These types of contract are called ‘Pre-
incorporation Contract'.
Nature of Pre-incorporation contract is slightly different to ordinary contract. In this type
of contract, the promoter furnishes the contract with interested person; and it would be bilateral
contract between them. But the remarkable part of this contract is that, this contract helps the
perspective company, who is not a party to the contract.Promoters are generally held personally
liable for pre-incorporation contract. If a company does not ratify or adopt a pre-incorporation
contract under the Specific Relief Act, then the common law principle would be applicable and
the promoter will be liable for breach of contract.

STAGES OF FORMATION OF A COMPANY

Company formation is the term for the process of starting of a company.Generally a company
comes into existence by a process referred to as incorporation. Once a company has been legally
incorporated, it becomes a separate legalentity from those who invest their capital and labour to
run the company. The persons who wish to start a company is called promoters. They take
necessary steps to form a company. The whole process of formation of a company is divided into
four stages. They are:
A. Promotion of Company
B. Incorporation or Registration of Company
C. Subscription of Capital
D. Commencement of Business
PROMOTION OF COMPANY
Promotionis a term of business and not of law as it is frequently used in business. The
term Promotion refers to the process of by which a company is ‘incorporated’ or brought into
existence. Usually ‘promotion’ is the first step to form a company.
Haney defines promotion as “the process of organizing and planning the finances of a
business enterprise under the corporate form”.
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.”
Very first the idea of forming a company is conceived by promoters. They are persons
engaged in the formation of a company. Before a company is actually being started (i.e., formed
and registered under the Companies Act), first they have to decide about the following issues
such as
(a) Which business to start,
(b) Whether to form a new company or take over the business of existing company,
(c) If new company is to be formed, whether it should be a private company or pubic company,
(d) What should be the amount capital of the company etc.
After deciding the above issues, promoters take necessary steps, for assembling the
business elements and making provision of the funds required to launch the business enterprise.

INCORPORATION
It is the second stage in the company formation. It is the incorporation or registration that
brings a company into existence. A company is legally formed only on being registered under the
Act and after the issue of Certificate of Incorporation by the Registrar of Companies. For the
incorporation of a company the promoters take the following preparatory steps:
1. Application for Availability of Name: To find out whether the name by which the new
company is to be started is available or not, an application has to be made in the prescribed
form along with requisite fee. Because company cannot be registered in the name of an
existing company. It also cannot be registered in a name, which is undesirable in the opinion
of the Central Government. Therefore, it is necessary for the promoters to find out the
availability of the name of the company from the Registrar of Companies. This approval is
provided subject to certain conditions. For instance, there should not be an existing company
by the same name. Further, the last words in the name are required to be “Private Ltd.” in the
case of a private company and “Limited” in the case of a Public Company.
2. Filing an application: By filing an application with the Registrar of Companies of the State
in which the registered office of the company is to be situated, registration of a company can
be obtained.
The application should be accompanied by the following documents:

a. Memorandum of association properly stamped, duly signed by the signatories of the

memorandum and witnessed.
b. Articles of Association, if necessary.
c. A copy of the agreement, if any, which the company proposes to enter into with any
individual for his appointment as managing or whole-time director or manager.
d. A written consent of the directors to act in that capacity, if necessary.
e. A statutory declaration stating that all the legal requirements of the Act prior
toincorporation have been complied with.
3. Payment of Stamp Duty and Filing Fee: The Company has to pay the necessary stamp
duty and filing fee, according to the authorized share capital of the company.
4. Declaration of Compliance of Act and Rules: A declaration that the requirements of the
Act and the rules framed there under have been complied. This declaration is to be signed
by an advocate of the Supreme Court or High Court or attorney or a pleader having the
right to appear before High Court. Alternatively, this declaration can be signed by a
Company
Secretary or Chartered Accountant in whole time-practice, who is engaged in the formation
of a company or a person named in the articles as a director. This declaration is also to be
 filed with the Registrar of Companies, where the registered office of the company would be
located. - Section 33(2).
5. Other documents: In case of a Public Companythe following documents s are to be
complied with:
(i) A list of persons who have consented to act as directors.
(ii) Written consent of the directors to act in that capacity.
(iii) An undertaking by the directors to take up and pay for the qualification shares.
6. Certificate of Incorporation or Registration: After receiving all the required documentsthe
Registrar will scrutinize these documents. If the Registrar finds the document to be
satisfactory, he registers them and enters the name of the company in the Register of
Companies and issues a certificate called the certificate of incorporation (Section 34).
The certificate of incorporation is the birth certificate of a company. The company comes
into existence from the date mentioned in the certificate of incorporation. Once the company
is created it cannot be got rid-off except by resorting to provisions of the Act which provide
for the winding up of company. The certificate of incorporation, even if it contains
irregularities, cannot be cancelled.
Advantages of incorporation
Incorporation offers certain advantages to a company as compared with all other kinds of
business organizations. They are:
1. Independent corporate existence: After certificate of incorporation, company obtains
independent existence. The outstanding feature of a company is its independent corporate
existence. By registration under the Companies Act, a company becomes vested with
corporate personality, which is independent of, and distinct from its members.
2. Liability: limitation of liability is another major advantage of incorporation.The liability of
the members is limited to the extent of the nominal amount of theshares subscribed. In the
case of a company limited by guarantee, the liability of the member is limited to the amount
guaranteed by him. The liability of partners in a partnership firm is unlimited. However, the
liability of the members in a limited company is limited to the face value of the shares held
by him.
3. Transferability of Shares:The greatest advantage of incorporation of company is
transferability of shares. Shares in a company can be transferred easily, without theconsent of
 other members of the company in themanner provided by the Articles Association of the
company. However, there are certain restrictionson the transferability of shares, in a private
limited company. Certain restrictions can be imposed ina private limited company, but not in
a public limited company about the transferability of shares.
4. Perpetual Existence and Succession: An incorporated company live forever. Members may
come and go, but the company will go on. The death or insolvency of the members does not
affect the existence of the company. Only on winding up of the company, it ceases to exist.
5. Separate property: The property of an incorporated company is vested in the corporate
body. The company is capable of holding and enjoying property in its own name. The
members do not have any ownership right on the property of the company.
6. Members and the Company: As an incorporated company enjoys separate legal entity
distinct from its members, it can enter into contracts with its members and sue them in the
ordinary way.
7. Capacity to Sue and be sued: A company being a body corporate, it can sue and be
sued in its own name.
8. Professional management: A company is capable of attracting professional managers. It is
due to the fact that being attached to the management of the company gives them the status
of business or executive class.

CAPITAL SUBSCRIPTION

Once the Certificate of Incorporation is received, then the next step is to raise the
required finances for running the company. In other words, the company can go ahead, with
raising capital sufficient to commence the business and carry on it, satisfactorily.
In case of private company it can start business immediately after receiving of certificate
of incorporation but public limited company has to further go through ‘capital
subscription stage’ and ‘commencement of business stage’. In the capital subscription
stage, the company makes necessary arrangements for raising the capital of the company.
With a view to ensure protection on investors, Securities and Exchange Board of India
(SEBI) has issued ‘guidelines for the disclosure and investor protection’. The company
making a public issue of share capital must comply with these guidelines before making a public
offer for sale of shares and debentures. If the capital has to be said through a public offer of
shares, the directors of the public company will first file a copy of the prospectus with the
Registrar of Companies.
On the scheduled date the prospectus will be issued to the public. Interested Investors are
required apply for shares along with application money to the company’s bankers mentioned in
the prospectus. The bankers will then forward all applications to the company and the directors
will decide the allotment of shares. If the subscribed capital is at least equal to 90 percent of the
capital issue, and other requirements of a valid allotment are fulfilled the directors pass a formal
resolution of allotment. However, if the company does not receive applications which can cover
the minimum subscription within 120 days of the issue of prospectus, no allotment can be made
and all money received will be refunded.
If a public company having share capital decides to make private placement ofshares,
then, instead of a ‘prospectus’ it has to file with the Registrar of Companies a ‘statement in lieu
of prospectus’ at least three days before the directors proceed to pass the first share allotment
resolution. The contents of a prospectus and a statement in lieu of a prospectus are almost same.
Prospectus & ‘Statement in lieu of Prospectus’: Generally the public companies may
raise the funds from the public or through private sources. In case, it decides to invite the public
to subscribe to its capital, the public limited company has to issue prospectus. In case, the funds
are arranged privately,the public company has to file a ‘Statement in lieu of Prospectus’ with the
Registrar of Companies.

BUSINESS COMMENCEMENT
Unlike private company a public limited company will have to undergo some
more formalities before it can start business. The certificate of commencement of business can be
obtained, only after completing the formalities.
In other words, a public limited company has to comply with the required legal requirements,
relating to the capital requirements. Thereafter only, Certificate of Commencement of Business is
issued by Registrar of Companies. However the certificate for commencement of business is
issued subject to the following conditions.
1. Shares payable in cash must have been allotted up to the amount of minimum
subscription.
2. Each director of the company should paid in cash application and allotment money on shares
held by them in the same proportion as others.
3. No money should have become refundable for failure to obtain permission for
shares or debentures to be dealt in any recognized stock exchange.
4. A declaration duly verified by one of directors or the secretary that the above
requirements have been complied with which is filed with the Registrar.
After fulfillment of the above requirements the certificate to commence business granted. This
certificate is a conclusive evidence of the fact that the company has complied with all legal
formalities and it is legally entitled to commence business. It may also be noted that the court has
the power to wind up a company, if it fails to commence business within a year of its
incorporation [Sec. 433 (3)]

CORPORATE SOCIAL RESPONSIBILITY(CSR)

The new Companies Act 2013 has introduced several new provisions, one of such new
provisions is Corporate Social Responsibility (CSR). The concept of CSR is based on the
ideology of give and take. Companies take resources in the form of raw materials, human
resources etc. from the society. By performing the task of CSR activities, the companies are
giving something back to the society.
Ministry of Corporate Affairs has recently notified Section 135 and Schedule VII of the
Companies Act as well as the provisions of the Companies (Corporate Social Responsibility
Policy) Rules, 2014 (CRS Rules) which has come into effect from 1 April 2014.
MEANING:
The term "Corporate Social Responsibility (CSR)" can be referred as corporate initiative
to assess and take responsibility for the company's effects on the environment and impact on
social welfare. The term generally applies to companies efforts that go beyond what may be
required by regulators or environmental protection groups.
According to Section 135 of the Companies Act, 2013, "CSR is the process by which an
organization thinks about and evolves its relationships with stakeholders for the common good,
and demonstrates its commitment in this regard by adoption of appropriate business processes
and strategies. Thus CSR is not charity or mere donations. CSR is a way of conducting business,
by which corporate entities visibly contribute to the social good. Socially responsible companies
do not limit themselves to using resources to engage in activities that increase only their profits.
They use CSR to integrate economic, environmental and social objectives with the company's
operations and growth.”
Thus, CSR is a commitment of a company to manage its various roles in society, as
producer, employer, customer and citizen in a responsible manner.
DEFINITIONS:
Philip Kotler and Nancy Lee define CSR as “a commitment to improve community wellbeing
through discretionary business practices and contributions of corporate resources”
Mallen Baker refers to CSR as “a way companies manage the business processes to produce an
overall positive impact on society.”
The act defines CSR as “activities that promote poverty reduction, education, health,
environmental sustainability, gender equality, and vocational skills development”.
Companies can choose which area to invest in, or contribute the amount to central or state
government funds earmarked for socioeconomic development. While this definition of CSR is
broad and open to interpretation, it clearly emphasizes corporate philanthropy rather than
strategic CSR. The act does, however, specify that companies “shall give preference to the local
area and areas around where it operates.”
Thus, CSR is a concept with many definitions and practices. The way it is understood and
implemented differs greatly for each company and country. Moreover, CSR is a very broad
concept that addresses many and various topics such as human rights, corporate governance,
health and safety, environmental effects, working conditions and contribution to economic
development.
While the definitions of CSR may differ, there is an emerging consensus on some
common principles that underline CSR:

 CSR is a business imperative: Whether pursued as a voluntary corporate initiative or for legal
compliance reasons, CSR will achieve its intended objectives only if businesses truly believe
that CSR is beneficial to them.

 CSR is a link to sustainable development: businesses feel that there is a need to integrate
social, economic and environmental impact in their operation.
  CSR is a way to manage business: CSR is not an optional add on to business, but it is about
the way in which businesses are managed.
Applicability: Section 135 of the Companies Act provides the threshold limit for applicability
of the CSR to a Company. As per the said section, the companies having
(a) Net worth of the company to be Rs 500 crore or more;
(b) Turnover of the company to be Rs 1000 crore or more;
(c) Net profit of the company to be Rs 5 crore or more.
Further as per the CSR Rules, the provisions of CSR are not only applicable to Indian
companies, but also applicable to branch and project offices of a foreign company in India.

SCOPE OF CSR Activities

CSR is a business approach that contributes to sustainable development by delivering
economic, social and environmental benefits for all stakeholders.The Policy recognizes that
corporate social responsibility is not merely compliance, it is a commitment to support initiatives that
measurably improve the lives of underprivileged by one or more of the following focus areas as
notified under Section 135 of the Companies Act 2013 and Companies (Corporate Social
Responsibility Policy) Rules 2014:
i. Eradicating hunger, poverty & malnutrition, promoting preventive health care & sanitation &
making available safe drinking water;
ii. Promoting education, including special education & employment enhancing vocation skills
especially among children, women, elderly & the differently unable & livelihood enhancement
projects;
iii. Promoting gender equality, empowering women, setting up homes & hostels for women &
orphans, setting up old age homes, day care centers & such other facilities for senior citizens &
measures for reducing inequalities faced by socially & economically backward groups;
iv. Reducing child mortality and improving maternal health by providing good hospital facilities
and low cost medicines;
v. Providing with hospital and dispensary facilities with more focus on clean and good sanitation
so as to combat human immunodeficiency virus, acquired immune deficiency syndrome,
malaria and other diseases;
 vi. Ensuring environmental sustainability, ecological balance, protection of flora & fauna, animal
welfare, agro forestry, conservation of natural resources & maintaining quality of soil, air &
water;
vii. Employment enhancing vocational skills
viii. Protection of national heritage, art & culture including restoration of buildings & sites of
historical importance & works of art; setting up public libraries; promotion & development of
traditional arts & handicrafts;
ix. Measures for the benefit of armed forces veterans, war widows & their dependents;
x. Training to promote rural sports, nationally recognized sports, sports & Olympic sports;
xi. Contribution to the Prime Ministers National Relief Fund or any other fund set up by the
Central Government for socio-economic development & relief & welfare of the Scheduled
Castes, the Scheduled Tribes, other backward classes, minorities & women;
xii. Contributions or funds provided to technology incubators located within academic institutions,
which are approved by the Central Government;
xiii. Rural development projects, etc.
xiv. Slum area development.
Explanation — For the purposes of this item, the term ‗slum area shall mean any area declared
as such by the Central Government or any State Government or any other competent authority
under any law for the time being in force.
The Above list is illustrative not exhaustive. All activities under the CSR activities should
be environment friendly and socially acceptable to the local people and Society. Contribution
towards C.M relief fund shall be a part of CSR activities above 2% of Net profit other than the
activities mentioned above.
Although some companies may achieve remarkable efforts with unique CSR initiatives, it
is difficult to be on the forefront on all aspects of CSR. The below is the list of all activities
which covered under the CSR Rules.
A. Education.
(i) Support to Technical /Vocational Institutions for their self -development.
(ii) Academic education by way of financial assistance to Primary, Middle and Higher
Secondary Schools.
(iii) Adult literacy amongst those belonging to BPL.
(iv) Awareness Programmes on girl education.
(v) Counseling of parents
(vi) Special attention on education, training and rehabilitation of mentally & physically
challenged children/persons.
(vii) Spreading legal awareness amongst people and disadvantageous sections of the society about
their rights & remedies available.
(viii) Promotion of Professional Education by setting up educational Institutions offering courses
in Engg, Nursing, Management,
(ix) Medicine and in Technical subjects etc.
(x) Provide fees for a period of one year or more to the poor and meritorious, preferably girl
students of the school in the operational area of the Company to enable them to get
uninterrupted education.

B. Water Supply including Drinking Water:

(i) Installation/Repair of Hand Pumps/Tube Wells.
(ii) Digging/Renovation of Wells.
(iii) Gainful utilization of waste water from Under -ground Mines for Cultivation or any other
purpose.
(iv) Development/construction of Water Tank/Ponds.
(v) Rain water-harvesting scheme.
(vi) Formation of a Task Force of Volunteers to educate people regarding
(vii) Proper use of drinking water.
(viii) Empowerment to the villagers for maintenance of the above facilities for availability of
water.

C. Health Care organizing, health awareness Camps on

i) AIDS TB and Leprosy
ii) Social evils like alcohol, smoking, drug abuse etc.
iii) Child and Mother care
iv) Diet and Nutrition.
v) Blood donation camps.
vi) Diabetics detection & Hypertension Camps
vii) Family Welfare.
viii) Senior Citizen Health Care Wellness Clinics.
ix) Fully equipped Mobile Medical Vans.
x) Tele medicine
xi) To supplement the different programme of Local/State Authorities.
xii) Along with De addiction centers

D. Environment
i) Organizing sensitizing programmes on Environment Management and
ii) Pollution Control.
iii) Green belt Development
iv) A forestation, Social Forestry, Check Dams, Park.
v) Restoration of mined out lands.
vi) Development of jobs related to agro product i.e., Dairy/Poultry/farming and others.
vii) Plantation of saplings producing fruit.
viii) Animal care.

E. Social Empowerment.
i) Self /Gainful Employment Opportunities – Training of Rural Youth for Self Employment
(TRYSEM) on Welding, Fabrication, and other Electronic appliances.
ii) To provide assistance to villagers having small patch of land to develop mushroom farming,
medicinal plants, farming & other cash crops to make them economically dependent on their
available land resources.
iii) Training may be provided by agricultural experts for above farming.
iv) Organizing training programmes for women on tailoring Embroidery designs,
v) Home Foods/Fast Foods, Pickles, Painting and Interior Decoration and other
vi) Vocational Courses.
vii) Care for senior citizens.
viii) Adoption/construction of Hostels (especially those for SC/ST &girls)
ix) Village Electricity/Solar Light
x) To develop infrastructural facilities for providing electricity through Solar Lights or
alternative renewal energy to the nearby villages. Recurring expenditure should be borne by
the beneficiaries.
xi) PawanChakki as alternative for providing electricity in villages, etc.

F. Sports and Culture

i) Promotion of Sports and Cultural Activities for participation in State and National level.
ii) Promotion/Development of sports activities in nearby villages by conducting Tournaments
like Football, Kabaddi and Khokho, Cricket etc.
iii) Providing sports materials for Football, Volleyball, Hockey sticks etc. to the young and
talented villagers.
iv) Promotion of State level teams.
v) Sponsorship of State Sports events in Bihar.
vi) Sponsorship of Cultural event to restore Indian Cultural Traditions and Values.
vii) Possibility of providing facilities for physically handicapped persons may be explored.
viii) Medias for preparing of documentary films.
ix) Guide-lines to be followed to promote sports activities by way of granting financial
assistance/donation/sponsorship etc.
x) Registered Clubs/Institutions which promote Sports activities may be granted financial
assistance/donations/sponsorship based on the following norms: -
1) Sports talent development programme by Clubs/Institutions may be encouraged provided
the proposal is routed through the respective Government Authorities/Block
Development Office/Sub-Divisional Office/District Office/State Associations/ local
people representatives i.e. Panchayat, Pradhan/Mukhiya/MLA/MP/ Minister etc., to
ascertain bonafide objective, status of activities and contribution to the society.
2) Helping State Government in promotion of sports by providing them proper training
facilities, grounds, construction of fields, etc.
3) While sanctioning financial assistance/donation/sponsorship for State/
National/International events, Company could send its representatives to ensure proper
utilization of fund for the specific purpose, as well as, to ensure publicity/coverage for
corporate image building.
 4) As per the Government policy for payment of financial assistance/donation/ sponsorship
Registered Clubs/Institution will furnish details as required by Company. i.e. their
Registration, PAN No. etc. to establish their authenticity.
xi) Generate self-employment.
xii) Infrastructure Support – construction, repair, extension etc. of: -
i. Auditorium,
ii. Educational Institutions
iii. Rural Dispensaries initiated by reputed NGOs.
iv. Mobile Crèches.
v. Bridges, Culverts & Roads,
vi. Check Dam
vii. Shopping Complex to facilitate business/self-employment for local people
viii. Community Centre,
ix. SulabhSouchalaya,
x. Yatri Shed in Bus Stand,
xi. Burning Ghat/Crematorium
xii. Development of Park
xiii. Playground/Sports complex/Good Coaches.
xiv. Old Age Home.

CSR COMMITTEE
Every qualifying company will be required to constitute a CSR Committee consisting of
3 or more directors. The CSR Committee shall formulate and recommend to the Board, a policy
which shall indicate the activities to be undertaken as CSR, recommend the amount of
expenditure to be incurred on the activities referred and monitor the CSR Policy of the company.
The CSR Committee will consist of four Directors, who shall meet at least twice in a year
to discuss and review the CSR activities and policy. The quorum shall be two members are
required to be present for the proceeding to take place. The Board shall take into account the
recommendations made by the CSR Committee and approve the CSR Policy of the company.
 The CSR committee will recommend a particular CSR Policy for the organisation, and
may recommend particular CSR activities, set forth a budget, describe how the company will
implement the project, and establish a transparent means to monitor progress.
Administration of CSR Projects
The Company can carry out its CSR obligations by directing its activities on its own or
through a third party, such as a society, trust, foundation or a company with charitable purposes
that has an established record of at least five years in CSR-like activities. Companies may also
collaborate and pool their resources, which could be especially useful for small and medium-
sized enterprises. Managing Director will have the power to sanction any project for CSR up to a
limit of 7.5 lakhs, above which Boards approval will be required to sanction the amount.

CSR Expenditure
As per the regulations the company has to spend for its annual CSR activities, an amount
equal to 2% of the average net profits of the Company made during the three immediately
preceding financial years.Any unused CSR allocation fund of a particular year, will be carried
forward to the next financial year. The tax treatment of CSR spent will be in accordance with the
Income Tax Act, 1961 as may be notified by the Central Board of Direct taxes.
Net profit‖ means the net profit as per the financial statement of the company prepared in
accordance with the applicable provisions of the Act, but shall not include the following:
a. Any profit arising from any overseas branch or branches of the company, whether operated
as a separate company or otherwise, and
b. Any dividend received from other companies in India which are covered under and
complying with the provisions of section 135 of the Act.
c. As per section 135 of the Companies Act, the Company will report reasons for under
spending of the allocated CSR budget of the current financial year in the template provided
by the Ministry of Corporate Affairs. This reporting will be done Annual Report and signed
off by the Board of Directors.
d. In case of any surplus arising out of CSR projects the same shall not form part of business
profits of the Company.
 Keywords
Prospectus
Any document inviting deposits from the public or inviting offers from the public for the
subscription or purchase of any securities of a body corporate.
Preliminary Expenses
The expenses incurred at the time of incorporation of a company.
Certificate of Incorporation
A certificate issued by the Registrar of Companies of a State indicating that a company's
memorandum of association and articles of association have been accepted for filing and that the
company is incorporated.
Conclusive Evidence
Preponderant evidence, that may not be disputed and must be accepted by a Court as a definitive
proof of a fact.
Preliminary Contract
It refers to those agreements or contracts entered into between different parties on behalf and for
the benefit of the company prior to its incorporation.

Questions
1. Who is a Promoter? “Promoter plays a fiduciary role”. Discuss.
2. What are the duties and liabilities of the promoter?
3. Define the company? What are the stages of formation of a company?
4. When a public limited company can commence its business?
5. What are the various documents to be filled with the Registrar for incorporation of a
company?
6. “Under section 149, there are many formalities have to fulfill to obtain this certificate which
is different for company issuing a prospectus and for a company that does not issue
prospectus”. State.
7. State the legal position of a promoter?
8. What are the remedies available to the company against the promoter?
9. What steps are required to be taken for the formation of a public limited company?
10. What is the punishment for incorporation of companies by furnishing false or incorrect
information?
11. Explain the process of formation of a company under the Companies Act, 1956.
12. Write the advantages of Incorporation of Company. What is the effect on incorporation of a
company?
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