Establishing a company is not a one-day task. Before a firm may take its ultimate form, it must complete many processes. Promoters play an important role right from the start of the process. The process of forming a corporation is extensive and involves several steps. The ‘promotion’ stage of the formation process is the first step. An individual or a group of people known as promoters comes up with the concept of starting a business at this stage. Various processes must be completed to incorporate a firm. The promoters carry out these functions and establish the firm. The term has been used frequently in Indian company matters. The Indian Companies Act, 1956 used it to fix liability on promoters, but did not define it and accepted their established position under the common law principle. Subsequently, the Indian Companies Act, 2013 defined the term for the first time. It is a common misconception that the promoters’ job continues until the business has purchased the property, raised initial money, and the board of directors has taken over control of the company’s activities. However, a review of the different provisions of the Companies Act of 2013 demonstrates that the promoters’ role cannot be overlooked even when the board of directors assumes control of the company’s business. This can be carried over to the period when the firm is operating as a going concern and even to the time when the company’s affairs are being wound up.
Definition of promoter
The definition of the phrase “promoter” has been defined in Section 2 (69) of Companies Act, 2013. The term has been used specifically in Sections 35, 39, 40, 300 and 317 of the Act. Section 2 (69) of the Act states that promoter is a person whose name has been mentioned in the prospectus of the company or is identified in the annual returns of the company, or any person who has direct or indirect control over the affairs of the company, whether as a stakeholder or as a director, or on whose direction the Board of Directors act. In simple words, a promoter is a person who performs the various preliminary steps like making the prospectus of the company, floating the securities in the market, etc. but if a person is doing this in a professional capacity, he wouldn’t be considered a promoter. In Bosher v. Richmond Land Co. (1892), the term Promoter has been defined as a person who brings about the incorporation and organization of a corporation. He brings together the persons who become interested in the enterprise, aids in procuring subscriptions, and sets in motion the machinery which leads to the formation itself.
Who Are The Promoters of a Company?
As per Section 2(69) of the Companies Act, 2013, promoter means any of the following persons:
- A person named as a promoter in the prospectus or identified by the company in its annual return in Section 92.
- A person who controls the company affairs, indirectly or directly, whether as a director, shareholder or otherwise.
- A person in accordance with whose directions, advice or instructions the Board of Directors of a company are accustomed to act.
In simple words, promoters perform the preliminary steps, like floating the securities in the market, making the prospectus of the company, etc., for establishing the company’s business. However, if a person is doing these things professionally, they will not be considered a promoter.
Types of Promoters of a Company
- Professional promoter: A professional promoter is an expert in promoting the business during its formation or inception. They transfer the ownership of the business to shareholders when it is established in the market.
- Financial promoter: A financial promoter is a promoter who invests capital or money and has a sizable company share. They promote banks or financial institutions. They aim to assess the market’s financial situation and start a company at the right moment.
- Managing promoter: A managing promoter helps in company formation. They also get the managing rights in the company after it is formed.
- Occasional promoter: An occasional promoter is a promoter whose main job is to float the company. They do not promote the business routinely since they are in charge of two to three enterprises, and they get involved only in the crucial matters of the business.
Functions of a promoter
- One of the main functions of a promoter is to comprehend the idea of formation of the company
- The promoter looks into the viability and feasibility of the idea that whether the formation of the company will be profitable and practicable or not.
- After the idea has been conceived, the promoter collects and organizes the resources available to convert the idea into a reality.
- The promoter decides the name of the Company and also settles the content regarding the Articles of Association and the Memorandum of Association of the Company.
- The promoter is the one who decides where the head office of the company will be situated. The promoter also nominates people or associations for vital posts. For instance, the promoter may appoint the bankers, auditors and Directors of the company for the first time.
- The promoter also prepares all the other necessary documents which are required to incorporate a company.
- The promoter must undergo a detailed investigation, and after analyzing all the concepts related to the idea discovered, the promoter must think about the cost, profitability, production, demand of the product, supply of such product in the market, etc.
- The promoter has to enter into a preliminary contract with the third parties on behalf of the company to collect all the resources necessary to form a company. The promoter makes contracts for the purchase of material, land, and machinery, and he also recruits staff for the initial functioning of the company.
- The promoter decides who can be the signatories to both the MoA and AoA of the company. The signatories are those who become the directors of the company, and the promoter gets written consent from such signatories that they will act as the directors.
- The promoter makes all the publicity for the company by way of advertisement and marketing strategies during the period of promotion of the company
Rights of a Promoter
Right of indemnity
Promoters are jointly and severally accountable for any hidden profits made by any of them and false statements made in the prospectus. All the promoters are individually and equally responsible for the company’s affairs. Thus, one promoter can claim the compensation or damages paid by him/her from the other promoters.
Right of preliminary expenses
A promoter is entitled to reimbursement for preliminary expenditures incurred for the company’s establishment, such as solicitors’ fees, advertising costs and surveyors’ fees.
Right of remuneration
A promoter has the right to receive remuneration from the company unless a contract to the contrary. The company’s Articles of Association can also provide that the directors can pay an amount to the promoters for their services. However, the promoters cannot sue the company for remuneration unless there is a contract.
Duties of a Promoter
Disclose hidden profits
The first duty of the promoters is to be loyal to the business and not involve in malpractice. They should not earn secret or hidden profits while carrying out promoting activities such as buying a property and selling it for a profit without disclosing it. They are not barred from making such profits, but the only condition is that they must disclose it. They must share all the information regarding their profitability and earnings with all the relevant company stakeholders.
Disclose all material facts
A promoter has a relationship of trust and confidence with the company, i.e., a fiduciary relationship. Under this fiduciary relationship, the promoter has the duty to disclose all material facts relating to the company’s business and formation with the relevant stakeholders.
Act in the best interest of company
In all situations, promoters should prioritise the company’s interest over their personal interests. They must give utmost consideration to the company’s best interest in its formation and all business dealings.
Disclose all private arrangements
While forming and establishing a company, many private transactions take place. However, such transactions must be disclosed by the promoters to the stakeholders. It is the duty of the promoters to disclose all private transactions and the profit earned from them to the stakeholders.
Case law
Probir Kumar Misra v. Ramani Ramaswami (2009)
The question of whether the signatures of the promoters in the Memorandum and Articles of Association were required in order to make them liable arose. The Madras High Court held that, before the incorporation of the company, there is no need for the promoter to be either a signatory of the Memorandum or Articles of Association, or shareholder or the Director of the Company. The High Court of Madras further stated that the promoters are called “midwives” of the business, as coined by Henry in the Law of Corporations. It is the promoter who does all the major roles for the purpose of bringing the corporate person into existence, like proposing the objectives of the company, forming the original scheme, making arrangements to get the company registered, preparing a prospectus, Memorandum and Articles of Association, etc., which are crucial for the company to come into existence. Thus, the promoters can be held liable even though they may not be either signatories to the Memorandum or Articles of Association or a shareholder or the Director of the company, as they are so connected to the company and its incorporation.
FAQs
Can a promoter of a company be the independent director?
As per the Companies Act, 2013, an independent director is a director other than the whole-time, managing or nominee director. An independent director should not be or have been a promoter of the company. A person related to the promoters or directors of the company, its subsidiary, holding, or associate company cannot be a director. Thus, a promoter of a company cannot be the independent director.
How to become promoter of a company?
Any person or set of individuals who come together collectively to establish a business or idea can become promoters. Any person in whose mind the seed of starting a business emerges can be a promoter. To be a promoter, it is not essential to be a business founder. A person who arranges for capital and assists in crucial work part-time can also be a promoter. However, a person must have an understanding of the industry, marketing or sales knowledge to be a promoter.