Promoters Of Company

This Article is written by Megha Pant & this article discuss the concept of Promoters of Company.

Introduction

The term “promoter” is distinctive to India, attributed to the prevalence of closely held family businesses with rigid equity frameworks. In such enterprises, a small number of individuals, usually one or two, predominantly hold ownership and make pivotal decisions for the company. These individuals, referred to as promoters, not only oversee promotional activities but also assume responsibility for all aspects of the business, making decisions that impact every facet of its operations.

“A promoter is the one, who forms a company with a given object and sets it going by taking the necessary steps.”

– Justice C.J. Cokburn

MEANING OF PROMOTER

A company’s promoter is an individual or a collective of individuals who came together with the aim of establishing a business. The promoter may take the form of an individual, a firm, or a group of legal entities. It is not obligatory for a promoter to be the founder of the business; anyone who arranges capital and contributes to essential tasks can be considered a “promoter of a company” as well.

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.

CHARACTERISTICS OF A PROMOTER IN A COMPANY 

• The initiation of a business often starts with an idea, and the promoter is the individual or group of individuals who conceive this idea. The seed of the business germinates in their minds.
• Before moving forward, a promoter conducts thorough research and investigation to assess the viability and future prospects of the business idea. This involves analyzing market conditions, potential competitors, and other relevant factors.
• A promoter can be an individual or a group of individuals who join forces to achieve a specific business objective. This collaboration allows for the pooling of resources, skills, and expertise.
• The promoter is responsible for the legal and administrative aspects of establishing the business. This includes preparing necessary documentation, complying with legal requirements, and overseeing the incorporation formalities to create the legal entity of the company.
• In the initial stages, the promoter often assumes responsibility for critical company affairs. This may include decision-making, strategic planning, and ensuring that the company operates in compliance with relevant laws and regulations. 

It’s worth noting that while promoters play a fundamental role in the formation and early stages of a business, their involvement may evolve over time. In some cases, they may continue to lead the company as its founders or take on different roles within the organization. In other situations, after the business is established, professional managers may assume day-to-day operations, and the promoters may shift to advisory or strategic roles. The level of involvement can vary based on the business’s growth and the preferences of the promoters.

KINDS OF PROMOTERS

Professional Promoters : Professional Promoters are individuals with specialized skills in promoting companies. They play a crucial role in initiating businesses by offering shares to shareholders as the company takes off. In India, the presence of professional promoters is limited, unlike other nations where their expertise significantly contributes to the development of companies.

Occasional Promoters : These individuals engage in promoting specific companies sporadically and do not participate in promotion activities regularly. They may take up the promotion of a particular company and subsequently return to their previous professional pursuits.

Financial Promoters : Certain financial institutions undertake the promotion of a company during favorable financial circumstances or a conducive economic environment.

Managing Agents as Promoters : Managing Agents played a significant role in the promotion of emerging companies in India. They would establish new companies and subsequently secure their Managing Agency rights. However, the system of promoting a company through Managing Agencies has been discontinued in India for quite some time.

RIGHTS OF A PROMOTER

1. Right of indemnity : Promoters share both joint and several responsibility for undisclosed profits obtained by any of them and for inaccuracies present in the prospectus. Each promoter bears individual and equal accountability for the company’s affairs. Consequently, a promoter has the right to seek compensation or damages from fellow promoters for amounts paid by them in this regard.
2. Right to Obtain Lawful Expenses : A promoter has the right to receive all the justified initial expenses incurred during the formation of the company, including expenses such as advertising costs and solicitor fees. 
3. Right of remuneration : A promoter is eligible to receive compensation from the company unless a different agreement is in place. The company’s Articles of Association may also stipulate that directors have the authority to allocate a sum to promoters for their services. Nonetheless, promoters cannot legally pursue remuneration from the company without a contractual arrangement.

LEGAL POSITION OF A PROMOTER

In accordance with company law, promoters lack any legal standing. Prior to its incorporation, a promoter is considered a non-entity, making them neither an agent nor a trustee for the company. With the guidance and oversight of a promoter, a company is established, as the promoter shapes and brings the company into existence. It is the duty of a promoter to secure the optimal advantages for the company, while refraining from obtaining undisclosed profits personally. If a promoter sells property to the company, they are obligated to disclose their interest in that property.

LIABILITY OF A PROMOTER 

The liability of a promoter encompass the following :   

• They are prohibited from making undisclosed gains from company profits or transactions for personal advancement. Promoters are obligated to remit such profits to the company if they accrue such gains.  
• Accountability for compensating individuals who subscribe to debentures or shares and incur losses due to false statements present in the company prospectus.
• Criminal liability for incorporating untrue statements in the prospectus.
• Potential liability for public examination of private company records in instances where allegations of fraud arise in the company’s formation or promotion activities.
• Accountability to the company in cases of breached duties, misappropriation of company assets, or acts constituting a breach of trust by the promoter.

POSITION OF PROMOTERS IN COMAPNIES ACT, 2013

The Companies Act, 1956 does not provide a specific definition for the term ‘promoter,’ despite its explicit use in sections 62, 69, 76, 478, and 519. Section 62 of the Companies Act, 1956, offers a limited definition of ‘promoter’ exclusively for the purposes outlined in that section. In the case of Twycross v. Grant, a promoter was characterized as “one who undertakes to form a company with reference to a given project, and to set it going, and who takes the necessary steps to accomplish that purpose.”

REFERENCE: 

http://www.legalindia.in/promoters–of–company https://www.yourarticlelibrary.com/company/promoters–of–a–companydefinitions–characteristics–and–other–details/42057