The concept of “promoter” is unique to our country “India”. Due to closely held family businesses and their strict equity structures, the ownership of the business mainly lies in the hands of one or two individuals who take the core decisions of the company. These individuals not only conduct the task of promotion, but they are responsible for each and every affair of the business; thereby, known as promoters of a company.
“A promoter is the one, who forms a company with a given object and sets it going by taking the necessary steps.
-Justice C.J. Cokburn
Table of Contents
Who are the promoters of a company?
A promoter of a company is a person or a group of persons who came together with the objective of setting up a business. The promoter can be an individual, a firm or an association of artificial legal persons. For being a promoter, it is not necessary to be a founder of a business; the person who arranges capital and assists in other important works can be equally regarded as a “promoter of a company”.
Characteristics of a Promoter
There are various characteristics of a promoter of a company. Some of them are as follows-
- The seed of starting a business emerges in the mind of a promoter.
- He conducts an investigation regarding the viability and future prospects of a business.
- A promoter of a company can be an individual or a group of individuals who come together for attaining a particular purpose.
- The documentation and other incorporation formalities are conducted by the promoter.
- The promoter is liable for all the important affairs of the company.
Types of promoters in company law
The promoters can be broadly divided into 4 categories:
These promoters are specialists in the work of promoting the company in the initial stage or at the time of the formation of a company. After the company makes its position in the market, they hand over the company to the shareholders. Our country had a paucity of such professional promoters. They are very important for the growth in the starting days of the business.
It involves those persons which are not very active in promoting the business on a day to day basis. They carry responsibilities of 2-3 companies simultaneously and they only involve themselves in the important affairs of the business.
This category involves those promoters who invest money or capital and hold a substantial stake in the business. They got voting rights and they strongly influenced the working of the business. For example- Financial institutions such as SBI, LIC, etc. are promoters of some well-renowned companies.
Managing Agents as Promoters of a company
These agents used to float new companies in India, and in return got their managing agency rights. However, it is important to note that this system of promotion has almost vanished from our country.
Functions of Promoters of a Company
In a company, a promoter needs to conduct numerous tasks which even start before the business comes into existence. These functions involve-
Identification of Business Opportunity:
At the outset, the promoter needs to identify the opportunity in a particular type of business that may prove fruitful in the upcoming period. The opportunity may relate to exploiting a new area of natural resources or bringing something new into the existing structure. The promoter can figure out this opportunity with the help of the technical expert of that particular field. When a promoter realises that this particular business venture has the potential to grow, then the idea is taken further.
At this stage, various factors are thoroughly studied and analysed from various points of view to assess the profitability and long term sustainability of the business. The market demand, availability of raw material, arrangement of finance, transportation facilities, mode of supply, etc are taken into consideration. On the basis of the prospective demand, the market share of the product is computed. After analysing the cost structure with an expert, the decision is taken.
Approval of Name:
After deciding the structure of the business, now it is time to get the business registered with a particular name. The name of the business is approved by the “registrar of companies”. While deciding a name, it is important to note that it shouldn’t resemble an existing name and it should avoid words like national, state, king, queen, etc.
Signatories to Memorandum:
The memorandum of association (MOA) is the constitution of a company. The promoters decide the names of the person who will be the signatories of this constitutional document. Normally, the first signatory of the MOA becomes the director of the company. The director needs to provide his written consent for the same as per the format prescribed by the Law.
Appointment of Professionals:
Just like a human body can’t survive without food and water, similarly, a business can’t survive without adequate capital. So, it is very essential to make the necessary arrangements of capital. The promoter decides the capital requirement and the source from which this money can be obtained. The various sources include bank loans, private equity, Initial public offering, etc. For the successful arrangement of capital, various financial and legal professionals are appointed.
Preparing necessary Documents
Apart from the Memorandum of Association (MOA), a business needs to deposit certain other important documents with the registrar of companies. It includes Article of Association (deals with all the internal affairs of the business), prospectus, incorporation certificate, etc.
Legal Position of Promoter in a Company
In India, the promoters are governed by the provisions of the Companies Act, 2013 and SEBI Regulations. The definition of promoter is given under Section 2(69) of the Companies Act, 2013. It states that a promoter is a person-
- Who has been named as a promoter in the prospectus or the annual returns filed under Section 92 of the Companies Act, 2013.
- Who has control over the affairs of the business, directly or indirectly.
- Under whose advice, directions or instructions, the board of directors of a company is accustomed to Act.
The first and the third provision are quite straightforward and no such ambiguity appears therein. But, the interpretation of the 2nd provision has always been subject to dispute. “Control” is a very subjective term and it can’t be defined exclusively.
The definition of control is given under 2(27) of the Act. The control includes the right to appoint the majority of directors or the right to influence the managerial or policy decisions of the company. The Security Appellate Tribunal (SAT) in the matter of Subhkam Venture vs SEBI held that the control is an only affirmative right and not a restrictive one. So, the rights by which an individual restrict the other party from doing something can’t be termed as exercising “control”.
Liabilities of Promoters
The promoter of the company is also burdened with some strict liabilities which are as follows-
- As per Section 7 of the Company Act, the promoters will be liable if the information relating to the first director is false, incorrect, or there is some suppression of the material facts. The punishment for the said offence is 6 months, which can be extended upto 10 years in case of a serious breach.
- The format of filing a prospectus is given under Section 26 of the Companies Act, 2013. All the information relating to secretaries, auditors, legal advisors, bankers, trustees, statements given by the Board of Directors, etc must be mentioned therein. However, if any of the important information is omits from the prospects, the promoter shall be held liable and will entail punishment as per Section 447 of the Companies Act, 2013.
- As per Section 35, if any of the information mentioned in the prospectus is untrue or misleading, the promoter will be held criminally liable for the same.
- Section 36 of the Act states that if a promoter makes false promises and induces any person to invest money in the company, then the promoter will be held liable for the deception and for the subsequent loss.
- If during the winding up of the company proceedings, any fault appears, the promoter of the company will be directly liable for the same.
Duties of Promoter in a Company
In a business, a promoter is one of the most important parties. So, he is subject to some duties which are expected on his part to abide by them with utmost honesty and bona fide intention.
Disclose the Hidden Profit
It is the first and foremost duty of the promoter to be loyal to the business and doesn’t involve in any malpractice. He shouldn’t earn any hidden or secret profits. All the information relating to the earnings and the profitability should be shared with all the relevant stakeholders of the company.
Disclose all the Material Facts:
A promoter has a fiduciary duty toward the company and it is his moral duty to disclose all the relevant information relating to the business.
Must Make Good to the Company:
In each and every possible condition, he should prioritise the company’s interest over his personal interest. In all the dealings, he should give utmost consideration to the best interest of the company.
To Disclose Private Arrangements:
In a business, a large number of private transactions also took place. But, it is the duty of the promoter to disclose all such private transactions and the profit earned therefrom.
Rights of Promoters in a Company
There are various rights of promoters given under the law:
Right of Indemnity
If in a business more than one promoter is involved, then one promoter can claim compensation or the damages from the others, in case of a breach of contract. It is important to note that all the promoters are jointly and severally liable for all the affairs of the company.
Right to Receive Legitimate Expenses
It is the legitimate right of a promoter to receive all those expenses which he incurred from his pocket during the formation of the company. These expenses include – registration, documentation, advertisement, legal expenses, etc.
Right to Receive Remuneration
If the promoter is handling a managerial position in the company, he will also be entitled to receive remuneration from the company. However, there must be a contract of employment to that effect.
A promoter is a person who conducts all the activities ranging from the pre-incorporation stage to all the important affairs after getting it registered. In India, the promoters are governed by the Companies Act, 2013. They have numerous rights including the right to indemnity, the right to receive expenses, etc. However, they are also troubled with strict liabilities if they fail to perform their duty diligently.