ROLE OF A PROMOTER

In accordance with section 2(69) of the Companies Act of 2013, a “Promoter” is someone who:

(a) A person who has been identified as such in a prospectus or by the company in the annual report under Section 92; 

 (b) A person who has direct or indirect control over the affairs of the company, whether as a shareholder, director, or in another capacity; or

(c) A person under whose advice, directions, or instructions the company’s Board of Directors is customarily acting.

A promoter is “a person who, working alone or in concert with other persons directly or indirectly takes the responsibility in starting or organizing the business enterprise,” according to Securities Exchange Commission Rule 405(a) in the USA.

Categories of promoter

A promoter is someone who settles on a concept for beginning a specific type of business in a specific location and completes a number of formalities necessary for doing business. A promoter is someone who settles on an idea for establishing a specific business at a certain location and completes a number of formalities necessary for business establishment. A promoter could be a single person, a business, a group of people, or a corporation.

The promoters could be regular, professional, managerial, financial, or other types of promoters. When a business first starts, a seasoned promoter gives the firm to the investors. Unfortunately, these promoters are terribly insufficient in poor nations.

They have greatly benefitted the corporate community and played a vital role in many nations. German investment banks, British issue houses, and American investment banks.

  • Joint Stock Banks have played the promoters’ role very significantly and successfully.
  • Occasional promoters are people whose primary focus is in helping firms go public. They don’t regularly work in promotion, but they do it for a few companies before returning to their own line of work. For instance, engineers, attorneys, and others might perhaps flog some companies.
  • The task of promoting financial institutions is carried out by financial promoters. When the financial environment is favorable, they typically begin this task.

A promoter is neither an agent nor a trustee of the company as it is a non-entity before incorporation. Some legal cases have attempted to spell out the standing of promoters.

Characteristics of a promoter

An enterprise promoter might have many different traits. Several significant ones are listed below:

  • In the mind of a promoter, the idea for launching a business first appears.
  • He performs study on an enterprise’s potential for success and future growth.
  • A person or group of people who come together to accomplish a specific goal can be a company’s promoter.
  • The promoter takes care of the paperwork and other incorporating requirements.
  • The promoter is responsible for managing all of the employer’s important concerns.

Functions of a promoter

In an agency, a promoter is trusted with carrying out a number of responsibilities that frequently begin even before the company is formally established. These activities include of:

1. Recognizing Business Opportunities

The promoter is looking for opportunities in a particular industry that could be lucrative in the near future. The possibility might also have to do with developing new natural resource areas or incorporating something fresh into the existing design. The promoter is assisted in determining the opportunity by the technical expert in that particular subject. The idea is developed further when a promoter realizes that this particular business venture has the potential to flourish.

2. Detailed investigation

To determine the enterprise’s profitability and long-term viability, various aspects are investigated and analysed from a variety of angles. Considerations include market demand, the availability of raw materials, securing adequate financing, transportation hubs, the route of supply, and a host of other factors. The market share of the product is calculated based on the anticipated demand. The choice is taken after consulting with an expert to analyze the cost structure.

3. Approval name

It’s time to register the firm under a specific name after defining the shape of the commercial enterprise. The “registrar of companies” is responsible for approving the business name. When choosing a name, it’s crucial to keep in mind that it shouldn’t sound similar to any other names already in use and that no adjectives like national, state, king, or queen should be included.

4. Signatories of memorandum

A company’s charter is contained in its Memorandum of Association (MOA). The names of the individuals who may sign this constitutional report are chosen by the promoters. Typically, the first signer of the MOA becomes the corporation’s director. The director would want to express his written consent in the manner required by the Law.

5. Appointment of professionals

Without sufficient funding, a firm cannot survive. Making the required financial arrangements is therefore crucial. The promoter decides on the amount of funds needed and the potential sources for funding. Bank loans, private equity, initial public offerings, and other funding options are among the many sources. Professionals in finance and law are hired to help with the capital arrangement.

6. Preparing important documents

A business enterprise must deposit additional important documents with the registrar of organizations in addition to the Memorandum of Association (MOA). It comprises of the Articles of Association (which cover all business operations internally), the prospectus, the certificates of incorporation, etc.

Rights of a Promoter

According to the Companies Act of 2013, a promoter has been given certain rights. These are discussed below: 

1. Right of Indemnity

In the event of a contract breach involving numerous promoters, one of them has the right to claim payment or damages from the others. It is important to keep in mind that each promoter is individually and equally liable for all business affairs.

2. Right to receive legal expenditures

A promoter is legally entitled to compensation for any out-of-pocket legal fees he incurred in connection with the formation of the company. These expenses cover items like licencing, documentation, marketing, attorney fees, etc.

3. Right to compensation

If the promoter is employed by the business in a managerial capacity, he will also be qualified to receive pay from it. However, a contract of this kind indicating the aforementioned truth must be present.

Liabilities of a Promoter

The company’s promoter is additionally saddled with the following strict liabilities: 

  • The promoters may be held liable under Section 7 of the Company Act if the information relevant to the first director is false, erroneous, or omits some material information. The above-mentioned offence carries a six-month term, but serious breaches could result in an increase to ten years.
  • The structure for filing a prospectus is specified under Section 26 of the 2013 Companies Act. All information relating to secretaries, auditors, legal counsel, bankers, trustees, remarks made by the Board of Directors, etc., must be mentioned. However, the promoter is responsible and subject to punishment under Section 447 of the 2013 Companies Act if any significant information is omitted by the prospects.
  • Any incorrect or misleading information in the prospectus shall subject the promoter to criminal prosecution under Section 35. The promoter shall be responsible for the deception and any losses if they make false promises to persuade someone to invest money in the company, in accordance with Section 36 of the Act. The promoter will be directly liable for any mistakes that are found during the company’s winding-up procedures.

Legal Position of a Promoter

Promoters are not trustees or agents of the Company. He acts in the Company’s best interest as a fiduciary. He follows the necessary steps to establish the business and pays the initial expenses related to incorporation, including registration fees, stamp duty, and professional fees.

Types of Promoters

The four categories of promoters are as follows: 

  1. Professional Promoters

The task of promoting the firm during its beginning or at the time of its establishment is one that the promoters are skilled in. Once the company is well-established in the market, they hand over control to the stockholders. Such seasoned promoters were rare in our country. In the early stages of the company’s development, they are essential.

  • Occasional Promoters

These are individuals who occasionally but not consistently promote a business. They oversee two to three businesses simultaneously, and they only get involved in the most important ones.

  • Financial Promoters

Financial promoters are those who invest money or resources and own a sizeable portion of the business. They were able to vote and had a big influence on how the business ran. For instance, financial organizations like SBI, LIC, etc. support a variety of well-known companies.

  • Managing Agents as Company Promoters

In India, these agents used to start up new businesses and were compensated with managing agency rights. It’s important to keep in mind that our country has almost entirely lost this marketing mechanism.

Managers vs Directors

Directors and promoters have different responsibilities.

Promoters are either the people who founded the company themselves or a group that asks the public to invest in it in order to raise money, in contrast to directors, who are employees of the company and typically report to the chairman to run the organization. He reports to the chairman and is responsible for both the company’s management and the board of directors.

The director is in charge of leading and directing the business. However, directors will only receive salaries and have no right to any of the business’s profits. Businesses regularly use this phrase and frequently have a large number of directors doing various company duties or positions.

Conclusion

In conclusion, a promoter in India is somebody who takes on the responsibility of a firm from the pre-Incorporation stage up till it is registered, as per the Companies Act of 2013. They are required to uphold specific legal stances as well as certain rights, obligations, and stringent liabilities.

Case laws

  • In D.R. Patel vs A.S. Dimellow AIR 1961 MP 4, Madhya Pradesh High Court stated that “A promoter, even although he expressly purports to act as agent or trustee, is personally liable upon all contracts made on behalf of the intended company, until the contract has been performed or rescinded by either party under some power in the contract Or by consent of al parties, or until the company has, with the consent of the other contracting party, undertaker the liability of the promoter under the contract But where there is a contract to pay out of a specific fund, the personal liability only exists to the extent of the fund, if any.”
  • In Weavers Mills Ltd. v. Balkis Ammal AIR 1969 Mad 462 the Madras High Court clearly held that section 19(e) of the specific relief act carves out an exception from the common law of England, stating: that while we accept the position that a promoter is neither an agent nor a trustee of the company under incorporation, we are inclined to think that in respect of transactions on behalf of it, he stands in a fiduciary position. For the plaintiff Company sections 92 and 94 of the Indian trusts act, 1882, were relied upon.

References-

  1. D.R. Patel vs A.S. Dimellow AIR 1961 MP 4
  2. Weavers Mills Ltd. v. Balkis Ammal AIR 1969 Mad 462
  3. https://digest.myhq.in/who-is-a-promoter-of-a-company-roles-duties-and-rights/
  4. https://www.indiafilings.com/learn/promoters-of-a-company/#:~:text=starting%20a%20business.-,A%20promoter%20is%20the%20one%20who%20decides%20an%20idea%20for,of%20persons%20or%20a%20company.
  5. Companies act 2013
  6. Dr. Avtar Singh, “Company Law”, 7 th Edition (2016), Eastern Book Company Publications.
  7.  N. D. Kapoor, “Elements of Company Law”, 30 th Edition (2016), Sultan Chand & Sons. Publications

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