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 company’s needs during the stages 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 individuals who are professionalised or experts in company formation. Such individuals do not manage or control the company’s operations but aid in the formation of businesses for others and charge for their services, typically 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 themselves. 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. Additionally, they can also help in securing additional financial resources for the company.
5. Institutional Promoters – For instance, a large organization, such as a public sector company, a commercial company, or even the government, can be a promoter. These institutions, hence, promote the establishment of a business for specific economic or strategic objectives.
6. Technical Promoters – They are specialised promoters with expertise in a particular technical area, promoting businesses that utilise their technical knowledge in spheres such 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 representative,s receiving benefits for their services.

Functions and Duties of a Promoter

Promoters play an integral part in establishing a company by performing a multitude of activities that are essential for creating its legal and operational structure. They not only act within the confines of the company’s inception, but also establish legal structures that meet ethical standards. Although the promoters cannot be considered agents or trustees of the company, as there is no law governing their promotion of the company, the promoters will have fiduciary duties and are responsible for their actions once the company is formally formed. The company is thus established, and their efforts are therefore brought to a close, thereby transferring all management to the Board of Directors. Promoters are the backbone of a business and have been the most significant aspect in successfully incorporating and establishing a business. 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 conduct market research to determine the feasibility of this business idea. Resources, technology, and partners are needed to serve most efficiently to achieve optimal 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 responsible for acting responsibly by ensuring due process and adhering to all 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 the company and its shareholders incur.

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 the company has authorised one, 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 the tenets of good faith and honesty. Promotion must prioritize everything that concerns the interests of the company and its shareholders, thereby avoiding situations involving conflicts of interest and adhering to the 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 documents, 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 legally and adequately while setting up a business. They must protect assets and ensure their effective utilisation.
6. Lawful Non-Compliance: Personal liability for losses resulting from the company or its members may be enforced against promoters who violate the law or commit any kind of fraudulent or misleading 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 must abide by to ensure the company and all its stakeholders are on safe ground. These obligations entail several responsibilities, and failing to fulfill 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. Additionally, the organisation can initiate a lawsuit for damages if it finds that the promoter has acted with malice or gross negligence, 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 entitled to reimbursement of expenses, including rent for the business establishment, 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 offer favourable rates or special terms for subscribing to the company’s shares.

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 resulting. 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 result in personal liability and other penalties as permitted 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 essentially establishes and grounds a business into existence by taking the initiative to form it, managing and channeling resources into the company, and ensuring 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 the managing board of directors has taken over management. Thus, the contribution of the promoter to the establishment of the company is quite important.

Related Services

• Private Limited Registration
• LLP Registration
• OPC Registration