Promoters are essential in setting up a company, starting right from its initial idea. A promoter can be an individual or a group who comes up with the concept of a business and takes the necessary steps to establish it.
Promoters play a key role in shaping a company, acting as the building blocks during its formation. However, it’s important to note that promoters are not the owners of the company. While they help establish and manage the company initially, the shareholders are the true owners.
Who Are the Promoters of a Company?
According to Section 2(69) of the Companies Act, 2013, a promoter includes:
- A person mentioned as a promoter in the company’s prospectus or identified in the annual return under Section 92.
- A person who directly or indirectly controls the company’s affairs, whether as a director, shareholder, or in any other way.
- A person whose directions, advice, or instructions the Board of Directors of a company generally follows.
In simple terms, promoters handle preliminary activities like issuing securities in the market, preparing the company’s prospectus, and completing other formalities necessary for starting the business. However, individuals performing these tasks professionally for others are not considered promoters.
Types of Promoters of a Company
A promoter is a person or entity that conceives the idea of forming a company. Promoters can be individuals, firms, associations, or even companies. Based on their role and involvement, promoters can be classified into the following types:
- Professional Promoter: A professional promoter is an expert who helps set up a business from its inception. Once the company is established, they transfer ownership to the shareholders.
- Financial Promoter: A financial promoter invests capital in the company and usually holds a significant share. They often promote banks or financial institutions and aim to launch a company at the right market opportunity.
- Managing Promoter: A managing promoter assists in forming the company and often acquires management rights once the company is operational.
- Occasional Promoter: An occasional promoter promotes companies only when needed, usually handling two or three enterprises. They are involved in crucial business decisions but do not work in promotion routinely.
Functions of a Promoter
Promoters perform multiple functions, guiding a company from the initial idea to its formal establishment. Key functions include:
- Conceiving and understanding the business idea.
- Assessing the feasibility and profitability of the business concept.
- Organizing and gathering resources to bring the business idea to life.
- Deciding the company name and drafting the Memorandum of Association (MOA) and Articles of Association (AOA).
- Choosing the location of the company’s head office.
- Nominating key personnel, including auditors, bankers, and the first directors.
- Preparing all necessary documents for company incorporation.
- Determining the company’s funding sources and capital requirements.
It’s important to note that a promoter is not a trustee, employee, or agent of the company. Their role typically ends once the company is established, after which the board of directors and company management take over.
Duties of a Promoter
Promoters have specific duties towards the company, which are crucial to ensure transparency, trust, and proper formation of the business:
- Disclose Hidden Profits:
Promoters must act loyally and avoid malpractice. If they earn any secret or hidden profits—such as buying property and selling it for a profit—they must fully disclose these earnings to all relevant stakeholders. Making profits is not prohibited, but transparency is mandatory. - Disclose All Material Facts:
Promoters have a fiduciary relationship with the company, meaning they must maintain trust and confidence. This includes disclosing all material facts related to the company’s business, formation, and financial dealings to the relevant stakeholders. - Act in the Best Interest of the Company:
Promoters should always prioritize the company’s interests above personal gain. Every decision made during formation and business dealings should focus on what benefits the company the most. - Disclose All Private Arrangements:
Any private transactions carried out during the company’s formation must be shared with the stakeholders. Promoters are required to disclose all such arrangements and any profits earned from them.
Rights of a Promoter
Promoters also enjoy certain rights during the process of establishing a company:
- Right of Indemnity:
Promoters are jointly and individually responsible for any hidden profits or false statements in the prospectus. If one promoter incurs compensation or damages, they can seek reimbursement from the other promoters. - Right to Preliminary Expenses:
Promoters are entitled to be reimbursed for expenses incurred while setting up the company, such as legal fees, advertising costs, or surveyor charges. - Right to Remuneration:
Promoters can receive remuneration for their services unless a contract states otherwise. The company’s Articles of Association may authorize payment to promoters, but they cannot demand payment unless a contractual agreement exists.
Liability of a Promoter
Promoters carry certain legal responsibilities and can be held liable in various situations during the formation and promotion of a company:
- Prohibition on Secret Profits:
Promoters cannot earn hidden or secret profits from company deals or transactions for personal gain. Any such profits must be returned to the company. - Liability for False Statements:
If a promoter makes false statements in the company’s prospectus, they can be held liable for any losses or damages suffered by investors who subscribe to shares or debentures based on those statements. - Criminal Liability:
Promoters are criminally accountable for including untrue or misleading statements in the prospectus. - Liability in Case of Fraud Reports:
If there are reports of fraud during the formation or promotion of the company, promoters may be required to allow public examination of company documents and can be held liable for discrepancies. - Breach of Duty:
Promoters are also liable to the company for breaching their duties, misappropriating company property, or violating their fiduciary responsibilities.
FAQ’s
What are the duties of a promoter?
Promoters have several key duties, including:
- Disclosing any personal interest in transactions related to the company.
- Acting in good faith for the benefit of the company.
- Ensuring all formalities for incorporation are properly completed.
- Avoiding any secret profits from deals made on behalf of the company.
- Providing accurate and complete information in the company prospectus or documents.
What are the liabilities of a promoter?
Promoters can be held liable in certain circumstances, such as:
- Making false statements in the company prospectus, which can lead to criminal liability.
- Suffering losses or damages to investors due to misrepresentation or negligence.
- Retaining secret profits obtained through personal deals involving the company.
Can a promoter be a director of the company?
Yes, a promoter can also become a director or hold another managerial position after the company is incorporated. However, while promoters can hold directorships, they cannot serve as independent directors, as per the Companies Act, 2013.
Do promoters get paid for their services?
Promoters may receive remuneration or reimbursement for expenses incurred during the company’s formation. However, any profits personally gained from company transactions must be returned to the company.
What is the difference between a promoter and a shareholder?
- Promoter: Initiates and organizes the formation of the company; may or may not invest capital.
- Shareholder: Owns shares in the company; may not have any role in forming or managing the company.
A promoter may become a shareholder after incorporation, but being a shareholder alone does not make someone a promoter.
Can a company have more than one promoter?
Yes, a company can have multiple promoters. Often, promoters are a group of individuals or entities who collectively bring the idea to life, arrange finances, and carry out pre-incorporation activities.
What is the difference between a promoter and a director?
- Promoter: Involved in the formation of the company and its preliminary activities.
- Director: Appointed after incorporation to manage day-to-day operations and strategic decisions.
While a promoter can later become a director, their roles before and after incorporation are distinct.
Can a promoter be held responsible for pre-incorporation contracts?
Yes. Promoters who enter into contracts on behalf of a company before its registration can be personally liable. Once the company is incorporated, it may choose to adopt these contracts and assume liability.
Are promoters required to disclose their interests?
Yes, promoters have a fiduciary duty to disclose any personal or financial interest in transactions involving the company to avoid conflicts of interest.
