This article on ‘Promoters Of A Company: All You Need To Know‘ was written by an intern at Legal Upanishad.
A promoter is a person who selects a notion for the formation of a specific business at a given place and executes the numerous processes required to launch a firm. A promoter is a person who determines the concept for establishing a certain business in a given area and completes the numerous formalities required for starting a business. A promoter is also the individual who establishes the business. A promoter may be a person, a business, a group of people or a business, or any combination of the three.
The promoters may be professionals, occasional promoters, financial promoters, or management promoters. A professional promoter will transfer ownership of the company to the stockholders upon the company’s inception. Unfortunately, these kinds of boosters are in extremely scarce supply in developing nations.
This article covers the definitions, legal positions, and obligations of the promoters of the company.
Meaning of the term “promoter”
The term “Promoters” has been defined under:
- Section 2(69) of the Companies Act of 2013,
- SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009,
- Regulations 2(1) (za) and (z) Rule 405(a) of the United States Securities and Exchange Commission.
To summarise the definitions, The term “promoter” refers to a person who has authority over the operations of a firm, either directly or indirectly, in some capacity, such as that of a shareholder, director, or other position. However, a person, a director, or an officer of the issuer, shall not be regarded as a promoter if they are simply acting in their professional capacity at all times. It is necessary to acknowledge financial institutions, scheduled banks, and foreign institutional investors as promoters of any subsidiaries or enterprises that they promote, as well as any mutual fund sponsors.
How do promoters work?
Many of a promoter’s tasks begin before the organization is legally registered. Functions include:
- Selling to a market
The promoter wants to know if a given company activity will be successful soon. The chance might also be to use recently discovered natural resource-rich places or add something new to the system. The specialist helps the promoter see the opportunity. When a business idea’s creator recognizes it can grow, the idea is developed further.
- An in-depth examination
Before determining if a business can produce money and last, many aspects must be examined. Consider the market size, raw material availability, funding, transportation hubs, and product delivery. Determine how much of the market the product will take up depending on client interest. After discussing prices with a specialist, the decision is taken.
- Correct name
After selecting what kind of business, it will be, register it so it can start operating. “Company registrar” approves a business’s name. It can’t be the same as another name or include “national,” “state,” “king,” “queen,” etc.
- Contract signers
A company’s founding document is called a “Memorandum of Association” (MOA). The report’s backers determine who will sign it. The individual who signs the MOA is often the first company director. The director wants to grant legal consent in writing.
- Qualified people
A company can’t survive without money. Setting up the correct financial arrangements is crucial. The promoter decides how much and where to get the money. Bank loans, private equity, IPOs, and other funding options are available. Finance and law professionals ensure a smooth capital arrangement.
A company’s starting document, the Memorandum of Association (MOA), must be filed with the registrar of organizations. The prospectus, articles of incorporation, and other documents are included. Articles of association explain how the company works.
The following duties are under the ambit of a promoter:
- The Promotion of a Potentially Commercially Successful Concept
- A Comprehensive Analysis of Potential Business Opportunities
- Verification that the reports and comments provided by experts do not contain any biased information.
- Vigorously search for the First Directors and First Subscribers to the Memorandum to progress the planned enterprise.
- Formulate some financing strategies for the proposal.
- Ensure that the terms of the Companies Act are strictly adhered to, utilizing the assistance of legal professionals as needed.
The legal position of a promoter
In spite of the fact that he is neither a trustee nor an agent of the firm, a promoter is considered to have a “fiduciary connection” with the organization. A relationship characterized by trust and confidence is referred to as a fiduciary relationship. As a result, he has a responsibility to provide all of the pertinent facts, as well as any hidden profits he may have made in connection with the establishment of the company.
What obligations are placed on the promoter by the company?
The founders of the company have certain fundamental responsibilities toward the organization. This bond of confidence and trust between a promoter and a corporation is known as a fiduciary relationship. Due to the fiduciary duty that exists between the promoter and the investors, the promoter is expected to provide all relevant facts pertaining to the establishment of the company.
Whenever the promoter is engaged in marketing activities, such as buying a property and then selling it to the firm for a profit without disclosing the transaction, the promoter is required to desist from making any hidden profits. It is not prohibited for a promoter to generate a profit while negotiating with many parties. The only need is that he complies with his commitment to report such revenues and refrain from earning any concealed profits.
- The promoter is in a position of fiduciary responsibility, it is unethical for him to make hidden gains or profits that are kept a secret. Because of this, the promoter is not permitted to make any kind of covert profit at the expense of the firm, either directly or indirectly. In the event that the promoter receives an undisclosed profit, the company that contracted with him has the right to terminate the agreement;
- It is the responsibility of the promoter to secure the most possible benefits for the company.
- He will not be able to sell his own property to the corporation and make a profit from it unless he reveals all of the details that are pertinent to the transaction.
The company’s promoter also has these tight liabilities:
- Section 7 of the Company Act holds promoters accountable for any misconduct if information concerning the first director is inaccurate, incorrect, or omits crucial data. This offense carries a six-month jail sentence, while more serious infractions could result in ten years behind bars.
- Section 26 of the 2013 Companies Act describes the prospectus structure. All relevant facts, including secretaries, auditors, legal counsel, bankers, trustees, Board of Directors’ remarks, etc., must be included. Section 447 of the 2013 Companies Act requires the promoter to take action if prospects omit crucial information. They will be held liable for their activities and may face a penalty.
- Section 35 holds the promoter legally accountable for any false or misleading prospectus information. If a promoter uses misleading statements to get someone to invest in the company, they will be held liable under Section 36 of the Act for the deception and any damages. Any errors found during the company’s winding-up are the promoter’s responsibility. The prospectus, articles of incorporation, and other documents. The bylaws explain the company’s inner workings.
So, a promoter is someone who takes on the responsibility of a business from the time before it is registered until the time it is registered. They have to uphold certain legal positions in order to protect the rights, responsibilities, and strict liabilities that come with those positions.
Corporate governance is getting more attention, and the board of directors and management are taking on more of the company’s responsibilities and liabilities. At the moment, shareholders rely on the board of directors and management to protect their rights, increase the value of their shares, and do their jobs while also meeting their expectations. As more and more attention is paid to the quality of boards and management, the idea of a “promoter” is becoming less important.
The Securities and Exchange Board of India (SEBI) said that the concept of “promoter” should be changed to “person in control,” and that this change should take place over the course of three years so that it doesn’t cause any problems. SEBI said that this was needed because investors are becoming more and more different.
- Sharma, C.S.J. (2021) Symbolic changes for promoters under listing regulations, TaxGuru. Available at: https://taxguru.in/sebi/symbolic-promoters-listing-regulations.html#:~:text=SEBI’s%20ICDR%20Regulations%20define%20a,issuer%20is%20accustomed%20to%20act. (Accessed: October 28, 2022).
- Bhardwaj, S. (2018) All about being a promoter in India, LinkedIn. Available at: https://www.linkedin.com/pulse/all-being-promoter-india-shruti-bhardwaj (Accessed: October 28, 2022).
- Mukherjee, D., Gandhi, T. and Sankrityayan, M. (2022) Who is a promoter of a company? roles, duties and rights, myHQ Digest. Available at: https://digest.myhq.in/who-is-a-promoter-of-a-company-roles-duties-and-rights/ (Accessed: October 28, 2022).