Who is the Promoter of a Company?

Promoter is the term which in Indian company law refers to any person, group or corporate entity who commences the incorporation of a company or does other acts or things for the formation of the same. The duty of the promoter is to create a business idea, procure initial funds, and fulfil all legal requirements, which include drafting a memorandum and articles of association and registering the company with the ROC. The Companies Act, 2013, through Section 2(69) elaborates it as including anyone defined as such in the prospectus of the company or the annual returns or someone generally causing to exercise control over the management of the company or even advice whose effect influences the decisions of the Board of Directors. During this period, they make contributions relevant to the foundation of a company or a nucleus or initial stages of it and decide the later direction. All promoters owe fiduciary duties to the company and its shareholders in the sense that they need to be open and act in good faith during the pre-incorporation stage.

Section 2(69) of the Companies Act 2013 defines a promoter as “a person —

• who has been named as such in a prospectus or is identified by the Company in the annual return referred to in Section 92 or
• who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; or
• in accordance with whose advice, directions or instructions the Board of Directors is accustomed to act.

Provided that nothing in clause (c) shall apply to a person who is acting merely in a professional capacity.”

Types of Promoters

Promoters are the people or organisations responsible for establishing the company and its operation. Every type of promoter has a unique role to play according to the needs of the company during the stage of formation and initial growth. Based on their roles and the extent of their involvement, promoters are broadly classified as follows:

1. Professional promoters – These are the people who are professionalised or are experts in company formation. Such individuals do not manage or control the running of the company but aid in the formation of businesses for others and charge for their services, usually with a fee or commission. Such promoters often appear more in banking, legal services and business consultancy.
2. Casual or Occasional Promoters – These are individuals who cannot be involved with the company on a permanent basis; they promote sporadically, usually when they see a good opening, and then tend to other affairs once the company is founded.
3. Entrepreneurial Promoters – They are basically those who think of the idea of a business and are willing to take risks and form the company to manage and operate it by itself. Most of the time, they play a significant role in the long-term development and management of the business.
4. Financial Promoters – Financial promoters are essentially banks, venture capitalists or financial institutions providing the necessary cash to finance the initiation of a business. Besides this, they can also help in getting additional financial resources for the company.
5. Institutional Promoters – For instance, a large organisation, such as a public sector company or a commercial company, or even the government, can be a promoter. These institutions, hence, promote the establishment of a business for certain economic or strategic objectives.
6. Technical Promoters – They are specialised promoters with expertise in a particular technical area and promoting businesses that use their technical knowledge in such spheres as manufacturing, information technology, and engineering.
7. Nominal Promoters – Nominal promoters may just lend their names for the purpose of endorsing the activities of a company without being engaged in its formation. They would then act as symbolic representatives receiving benefits for their services.

Functions and Duties of a Promoter

Promoters play an integral part in establishing any company by doing a plethora of activities that are essential for creating its legal and operational structure. They do not only act from within the confines of the company’s inception primarily but also establish legal structures up to ethical standards. Though the promoters cannot be called agents or trustees of the company, as there is no law in the promotion of that company, the promoters will have fiduciary duties and are responsible for their actions once the company is segmentally formed. The company is thus made, and their efforts are thus put to an end, thereby passing on all management to the Board of Directors. Promoters are the backbone of a business and have been the most significant aspect in incorporating and establishing a business successfully. Hence, their roles and activities are critical in the future advancement of the company.

Functions of a Promoter

1. Framing the Plan of Business: The promoter is the person who conceives the business idea and tests its viability. They assess the scope, risks and financial requirements of the venture.
2. Conducting Preliminary Investigations: Promoters will then begin market research to determine how feasible this business idea may be. Resources, technology, and partners are needed to serve in the most efficient means of operational performance.
3. Managing Funds and Resources: Initial capital is raised through personal savings, investment, or loans. Plans for gross areas of the office are set up. Equipment and other necessities are also provided.
4. Responsibility for Undisclosed Profits: Promoters are disclosed to and pay over to the company any unaccounted profits or benefits accruing therefrom through such promotion.
5. Duty of Care and Diligence: Promoters are to act responsibly by ensuring due process and adhering to all the legal requirements involved in the formation of the company. They should take care of the company’s properties and utilise every available resource cautiously.
6. Responsibility for Default: Where the promoters fail to comply with such legal obligations or indulge in fraud, they may face personal liabilities for losses which are incurred by the company and its shareholders.

Duties of a Promoter

1. Obligation of Disclosure: The promoters must disclose to the company all personal interests, profits or other benefits obtained from the promoter process. It even includes reporting transactions with the company along with the duty to be transparent.
2. Fiduciary Obligation: Considering the fact that one has been authorised by the company, a promoter is to keep the interests of the company and its shareholders above those of such promoters as well as avoid any situation of conflict of interest while adhering to tenets of good faith and honesty. Promotion must put first everything that concerns the interests of the company and its shareholders so as to avoid situations involving conflicts of interest and remain tied to tenets of good faith and honesty.
3. Duty to Avoid Misrepresentation: The promoters should not give any false or distorted statement in the prospectus or other document as any kind of misrepresentation may mislead the investor.
4. Accountability for Profits: The promoters must account for and pay for any profit or advantage arising out of the promotion that was not disclosed to the company.
5. Care and Diligence: The promoters must conduct themselves properly and legally while setting up a business. They must protect assets and ensure their effective utilisation.
6. Lawful Non-Compliance: Personal liability for losses resulting to the company or its members may be enforced against promoters who violate the law or commit any kind of fraudulent maddening activity.

Rights and Liabilities of a Promoter

Specific rights have been attached to the office of promoters, who form the main driving force for the creation of a company under Indian company law. With such privileges come strict legal and fiduciary standards that they have to abide by to put the company and all of its stakeholders on safe grounds. These obligations bring a few responsibilities to them, and merely overlooking such duties may have significant legal and financial implications. The organisation has the right to cancel any agreements concerning the promoter if it thinks that such agreements are sham or not in the company’s best interest. Besides, the organisation can initiate a lawsuit for damages as well if it finds the promoter has acted in malice or gross negligence by causing harm to the organisation or its stakeholders. The Companies Act 2013 also holds promoters liable to pay compensation to any investors or creditors for such improper conduct. Their rights and liabilities, as defined in the statute, are explained below:

Rights of a Promoter

1. Right to Remuneration or Commission: Promoters have a right to receive compensation for work they do in their promotional activities for the company, which includes fees, commission or shares from the company, as provided by an agreement with the company. This is not a right as such but must be mentioned in the Articles of Association of the company or will otherwise be approved by the board or shareholders.
2. Right to Reimbursement of Expenses: The promoters shall be allowed reimbursement of expenses such as rent for the business establishment established, such as legal fees, registration fees, and other start-up expenditures.
3. Right to Indemnity: A promoter, at the time of entering the contract or creating any liability on behalf of the company when it has not come into existence, will be able to indemnify the corporation against the antecedent agreement.
4. Right for Reimbursement for Breach by the Corporation: In the event that the corporation shall not perform its duties relating to the performance of a promoter, it shall receive damages.
5. Right to Apply for Shares: Generally, promoters would offer favourable rates or special terms for subscribing to the shares of the company.

Liabilities of a Promoter

1. Liability for Negligent Omission or Misrepresentation: The Companies Act 2013 provides that a promoter is liable for misrepresentation that may be present in the prospectus. He is to pay compensation to any person who incurs loss by such misrepresentation or due to misleading statements under Section 35 of the Companies Act 2013.
2. Liability for Breach of Fiduciary Duty: A promoter owes both the company and its shareholders a duty of reasonable care. A misbehaving promoter, failing to disclose a source of personal income or a personal interest in a private transaction, can be held liable to account to the company for profits he has made or personal benefits created.
3. Liability for Secret Profits: A promoter shall be held to account to a company for profits resounding. Failure to do so would result in penalty consequences.
4. Liability for Contracts Before a Company Comes Into Existence: A promoter personally incurs the liability for any contract made by him on behalf of the company before its incorporation, but the company indemnifies him against that agreement.
5. Liability for Failing to Comply with Mandatory Provisions of Law: Promoters should comply with all the legal provisions concerning the incorporation of the business. Non-compliance may attract personal liability and such other penalties as are available under the Companies Act, 2013.
6. Criminal Liability: They can become liable under the Companies Act of 2013 of their country for fraudulent activity or for any false representation made while registering a company or while promoting.
7. Common Law Liability: They can also be liable in an action for negligence, breach of fiduciary duty or misrepresentation.

Conclusion

The promoter basically manifests and grounds a business into existence by taking the initiative to form it, managing and channelling resources into the company, and observing necessary compliance with legal mandates. Being the catalyst of its creation, such fiduciary duties weigh heavily on the shoulders of the promoter regarding the best interests of the company and its stakeholders. Although a promoter enjoys certain rights, like the right to remuneration and the right to reimbursement of expenses, he is also liable for acts of misrepresentation, fraud, or breach of trust. His liabilities are terminated after the company has been established and management has been taken over by the managing board of directors. Thus, the contribution of the promoter to the establishment of the company is quite important.

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