The Promoter of Company

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A number of persons come together to exploit some business opportunity and incorporate a company to achieve it are called promoters. A company comes into existence generally by a process referred to as incorporation. Once a company has been legally incorporated, it becomes a distinct entity from those who invest their capital and labour to run the company.  Such an incorporated company may be a company. A promoter can be an individual, a corporate, a syndicate, an association or a partnership which has taken all the necessary steps to create and mould a company and set it going.

Usually, the first step to form a company is the process known as ‘promotion’ where a person persuades others to contribute capital to a proposed company before it is incorporated. Such a person is called the promoter of the company. Promoters also can enter into a contract on behalf of a company before or after it has been granted a certificate of incorporation, and arrange share issues in the name of the company.

Promoter of Company

In Bosher v. Richmond Land Co.,  Va 455:16 SE 360 case, the term Promoter has been defined as: “A Promoter is a person who brings about the incorporation and organization of a corporation. He brings together the persons who become interested in the enterprise, aids in procuring subscription, and sets in motion the machinery which leads to the formation itself.”

Section 2 (69) of the Companies Act, 2013

“Promoter” means a person—

(a) 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

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

Provided that sub-clause (c) shall not apply to a person who is acting merely in a professional capacity.

According to the sub-clause (c) of Section 2(69) of the Company Act, a persons in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act are also treated as promoters and if a person is merely acting in a professional capacity i.e. giving only professional advice to the Board of directors, he shall not be treated as a promoter

SEBI Guidelines:

According to SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, “promoter” includes:

(i) the person or persons who are in control of the issuer;

(ii) the person or persons who are instrumental in the formulation of a plan or programme pursuant to which specified securities are offered to public;

(iii) the person or persons named in the offer document as promoters.

A director/officer/employee who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise is considered as a promoter. However, a director or officer or employee of the issuer or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter. But a person may be a promoter even if he has undertaken a lesser active role in the formation of a company.

In Twycross v. Grant, 1872 2 C.P.D. 469 case,  the Court described a ‘Promoter’ 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”.

In Lagunas Nitrate Co. v. Lagunas Syndicate [1889] 2 Ch. 392 (p. 428, C.A.) case, the Court observed: “to be a promoter one need not necessarily be associated with the initial formation of the company; one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter.”

Functions of Promoter:

To Identify a Business Opportunity

The promoter first identifies a potential business opportunity in form of the production of a new product or service, substitute to existing product or service with a better alternative or updated features or any other such opportunity having investment potential.

To Perform Feasibility Studies

Once the business opportunity is identified, the promoter analyzes and investigate the feasibility of the opportunity. First technical feasibility is carried out. Whether technology and the raw material is available to execute the project. Whether it is available locally or it requires importing. Then financial feasibility is done. Whether necessary finance is available and how fast can it be raised? The last step is economic feasibility study, which includes checking profitability of the project on various parameters. If the project is not able to give the required profit, it is unviable.

To Collect Required Number of Persons to form a Company:

Next step of the promoter is to collect the requisite number of persons (i.e. seven in case of a public company and two in case of a private company) who can sign the ‘Memorandum of Association’ and ‘Articles of Association’ of the company and also agree to act as the first directors of the company. Usually, the signatories of the memorandum are the first Directors of the Company. However, the written consent of the persons signing the memorandum is required to act as Directors and to take up the qualification shares in the company.

To Take Decisions on Following Matters:

In this stage the decision regarding the name of the company. the location of its registered office, the amount and form of its share capital, the brokers or underwriters for the capital issue, if necessary, the bankers, the auditors and the legal advisers are taken.

To Get Name Approved:

Next step after a feasibility study of the project, and a decision of a launch a company is made then, the next step is to select a name for the company and get it registered with the registrar of companies of the state in which the registered office of the company is to be situated. An application with three names, in the order of their priority, is filed with the registrar to get the name approved.

To Appoint Professionals:

Appointments of the brokers or underwriters for the capital issue, if necessary, the bankers, the auditors and the legal advisers are important because they help promoters in the preparation of necessary documents that are required to be filed with the Registrar of Companies.

To Prepare Necessary Documents:

The documents to be submitted to Registrar of Companies for getting the company registered are Memorandum of Association, Articles of Association, consent of Directors and statutory declaration. In this stage, the promoter has to get these documents prepared and printed with the help of professionals.

Other Functions:

Other functions include to settles the terms of preliminary contracts with vendors and agreement with underwriters; to make arrangement for preparation, advertisement and circulation of the prospectus and placement of the capital; to arrange for the registration of the company and obtain the certificate of incorporation; to defray preliminary expenses; to arrange the minimum subscription.

Duties of Promoter:

Duty to Disclose Secret Profits:

A promoter is not forbidden to make a profit but to make secret profits. He may make a profit out of promotion with the consent of the company, in the same way as an agent may retain a profit obtained through his agency with his principle’s consent. For example, one of the promoters owns a good property in a business hub. He had purchased in for rupees twenty lakhs 10 years back. He asks his friend to pretend as the owner of the property and get it sold in a pre-incorporation contract to the company being incorporated at rupees 40 lakhs. This is the secret profit made by the promoter. If the promoter directly offers his property to the company and convinces other promoters that it worths rupees forty lakhs now and if they accept to buy at that price, then it is a profit by the promoter with the consent of other promoters.

If the company comes to know about the secret profit made by the promoter, the company can rescind such a pre-incorporation contract after its incorporation. If a promoter makes a secret profit or does not disclose any profit made, the company has a remedy against him. The company can recover the secret profit also.

Duty of Disclosure of Interest:

A promoter must disclose to the company any interest he has in a transaction entered into by it. He should also give the particulars of his interests in other firms or bodies corporate.

Termination of Duties of Promoter:

Promoter’s duties continue until the company has acquired the property or business which it was formed to manage and has raised its initial share capital and the Board of directors has taken over the management of the company’s affairs from the promoters.

Liabilities of Promoter:

In Prabir Kumar Misra v. Ramani Ramaswamy [2010] 104 SCL 174 case, the Court held that to fix liability on a promoter, it is not necessary that he should be either a signatory to the Memorandum/Articles of Association or a shareholder or a director of the company. Promoter’s civil liability to the company and also to third parties remain in respect of his conduct and contract entered into by him during the pre-incorporation stage as agent or trustee of the company.

Liability of Promoter Under Prospectus:

Section 35 holds the promoter liable to pay compensation to every person who subscribes for any share or debentures on the faith of the prospectus for any loss or damage sustained by reason of any untrue statement included in it. The liability of the promoters will be unlimited in such a case. The Act amounts to fraud and is punishable under Section 447 of the Act. Section 447 of the Act lays down that any person who is found to be guilty of fraud shall be punishable with imprisonment for a term which shall not be less than six months but which may extend to ten years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to three times the amount involved in the fraud: Provided that where the fraud in question involves public interest, the term of imprisonment shall not be less than three years.

Liability of Promoters in Respect of Allotment of Shares:

When company issues prospectus, all the money received by it from the applicants for the shares is to be kept deposited in a scheduled bank. If entire amount payable on applications for shares in respect of minimum subscription amount as stated in the prospectus has not been received by the company within the prescribed period, all money received by it from the applicants is to be returned to such applicants in the stipulated period.

Default to this becomes punishable under S. 39 with fine which may extend to rupees 1 lakh or rupees 1000 for each day of default, whichever is less.

Liabilities of Promoter at the Time of Winding Up:

In the course of winding up of the company on order of Tribunal, on an application made by the official liquidator, the court may make a promoter liable for misfeasance or breach of trust. (Section 300). Further, where fraud has been alleged by the liquidator against a promoter, the court may order for his public examination.

Types of Promoters:

Professional Promoters:

These persons take up promotion as a part of their occupation. There are persons who specialize in company promotion, including its incorporation and flotation. They float new companies and dispose of them off when the companies are well established and come to a position of making profits.

Occasional Promoters:

They are already engaged in some other business. They are not engaged in promotion work on a regular basis. Whenever they find some good opportunities, they take up the promotion of some company and once it is over they go to their original profession.  They may even decide to retain the companies with them by managing their affairs. Generally engineers, lawyers etc. act as professional promoters.

Entrepreneur Promoters:

They are both promoters and entrepreneurs. They conceive the idea of a new business unit, do the groundwork to establish it and may subsequently become a part of the management.

Financier Promoters:

Some financial institutions, like investment banks or industrial banks, may take up the promotion of a company with a view to finding opportunities for investment.

Institutional promoters. 

The institutions set up by the government such as the Industrial Finance Corporation of India. They are known as institutional promoters.

Legal Position of Promoters:

A promoter is a person who brings a Company into existence. As such, a promoter occupied an important position in formation of the Company. The legal position of the Promoter is that he is neither an agent nor a trustee of the proposed Company, But he occupied a very fiduciary position in the Company. For this fiduciary position, the promoter can’t make either directly or indirectly any profit at the expenses of the Company he promotes.

Remuneration of the Promoter:

A promoter has no legal right to claim proportional expenses or his service unless, there is a valid contract. With such contract, the promoter is not entitled to claim any expenses even his preliminary expenses. When a promoter makes a proper disclosure, he may expect to be rewarded for his effort. Therefore when the Company is registered, it may pay or agree to pay.

some remuneration for the service he rendered. Practically, a promoter is remunerated in the following ways:

  • He may sell his own property to the Company for cash or against fully paid shares in the Company at an over valuation after making full disclosure to an independent Board of Directors or to the intending shareholders.
  • He may be given an option to buy further shares in the Company at par.
  • He may take commission on share sold.
  • He may take a grant of some shares in the Company.
  • He may be paid a lump-sum by the Company. Whatever the remuneration may be, it should be disclosed in the prospectus fully.

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