Promoter of A Company – Meaning, Characteristics, Rights, Duties And Legal Position

DEFINITION

A promoter is a person or group of people who comes together with an idea for setting-up a business at a particular place and incorporates a company to achieve it. By the process called incorporation, a company comes into existence. A promoter can be an individual, an association or people, a company or a firm. After the idea to start a business, detailed investigations are done by the promoters to find out the weakness and the strength of the idea and also determines the capital needed to start the business and also estimates operating expenses and income.

The first step to form a company or a business is the process known as ‘promotion’ which the promoter encourages the others to contribute capital to a proposed company or a business before the incorporation of the company. A promoter, before or after getting the certificate of incorporation can enter into a contract on behalf of the company and can arrange the share issues in the name of the company.

According to section 2(69) of the Companies Act, 2013 the term ‘Promoter’ can be defined as the following:

1. A person who has control over the affairs of the company, directly or indirectly as a shareholder, director or otherwise; or
2. A person who has been named as such in a particular or is identified by the company in the annual return referred to in section 92; or
3. A person 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.

CHARACTERISTICS OF A PROMOTER

1. A promoter comes up with an idea for setting up a business or a company.
2. He initially investigates and makes sure about the future prospects of the company.
3. Various people are brought by the promoter who wants to associate with him to share the responsibilities of the company.
4. The documents for the incorporation of the company are prepared by the promoter.
5. Funds and capitals are raised by him, which lets the company going.

FUNCTIONS OF A PROMOTER

1. Promoter has to form ideas for the formation of the company and explore the possibilities for the company.
2. Promoter conducts negotiation for the purchase of the business.
3. Promoter collects the number for signing of the AOA and MOA.
4. Promoter decides the name of the company, the location of the registered office and the amount and the form of the share capital.
5. Promoter gets the MOA and AOA drafted and printed.
6. He arranges the minimum subscription for the company.
7. He also arranges the certificate of incorporation and the registration of the company.

KINDS OF PROMOTERS

1. Professional Promoters

Professional Promoters are the specialists in the promotion of a company. When the business starts, they give up companies to the shareholders. We lack professional promoters in India. Other countries are highly helped by professional promoters in the growth of the companies.

2. Occasional Promoters

They take interest in promoting only some companies and they doesn’t involve in promotion on regular basis and take up promotions of some company and then go back to their previous profession.

3. Financial Promoters

Some financial institutions take up the promotion of the company when the financial situation or environment is favorable.

4. Managing Agents as Promoters

The Managing Agents played an important role in promoting new companies in India. They used to float new companies and then got their Managing Agency rights. But Managing Agency system of promotion of a company has been abolished in India since a long time.

LEGAL POSITION OF A PROMOTER

According to company law, promoters don’t get any legal position. A promoter is a non-entity before its incorporation so they are neither an agent nor a trustee of the company.

Under the guidance and the supervision of a promoter, a company comes into existence. A promoter molds and creates the company. A promoter’s duty is to get the maximum benefits for the company and he himself should not get any hidden profits from the company. A promoter has to explain his interest in such property if he sells his property to the company.

TERMINATION OF DUTIES OF PROMOTER

The promoter can be terminated when the Board of Directors takes over the management of the company’s affairs from him. Promoter’s duty continues until the company has acquired the property or business which was formed to manage and has raised its initial share capital.

LIABILITIES OF A PROMOTER

1. A promoter should not make any hidden profits by dealing with the company.
2. All the capital or money received on the behalf of the company should be deposited by the promoter.
3. While performing the work of a promoter he must take utmost care and due diligence.
4. A promoter is responsible for all the initial contracts till the approval by the company.
5. A promoter has to compensate for all the investments made by any untrue statements made by the promoter.

STEPS INVOLVED DURING THE PROMOTION OF A COMPANY

1. Discovery of an Idea

Initially the promoter has to discover an idea and has to find out the purpose of the formation of the company. They formulate their own ideas and experiences. The purpose of the formation of the company should be meaningful.

2. Investigation

The promoter should enquire about the market and the survival of the company. The promoter shall collect all the data, facts and information about the market.

3. Planning

After proper investigation of the facts and information, the promoter has to prepare detailed planning for the business.

4. Financing

From the initial stage of the company, formation finance plays a vital role. The money at first comes from the promoters themselves and also from the underwriters and if any money can be reimbursed by the company out of its capital.

5. Approval of name

Promoter has to get the name of the company approved by the Registrar of the Companies which is done to avoid any duplication of the name. Generally, a company submits a list of names to the Registrar of the Companies in its preference order. The Registrar assigns and approves the name of a company by matching the name of the company by the existing companies.

6. Signatories to Memorandum

The promoter decides the names of persons who become the signatories to the memorandum of association and usually the first signatories to the memorandum become the first directors of the company.

7. Preparing necessary Documents

The promoter collects various important legal documents of the company which have to be submitted to the Registrar of Companies at the time of incorporation.

DUTIES OF A PROMOTER

A promoter has a significant position and has a wide range of powers in the formation of a company. But it is very interesting to know that a promoter do not hold any legal position as it is neither an agent nor a trustee of the company. However, it doesn’t signify that he does not have any legal relationship with the company. A promoter has a financial relation to the company they support and to those persons, whom they persuade to become shareholders in it.

1. Disclose the hidden profit: The promoter should not make any hidden or secret profits. If he has any hidden profit he has to disclose the same.
2. Disclose all the material facts: He must disclose all the material facts and information.
3. Must make good to the company: The promoter must make his best for the company. He has a fiduciary relationship with the company.
4. To disclose private arrangement: The promoter must disclose all the private arrangement that results him profit by the promotion of the company.

RIGHTS OF A PROMOTER

1. Right of indemnity

When there is more than one person as a promoter of the company then one promoter can claim compensation or damages paid by him against the other. Promoters are jointly liable for any false statement issues in the prospectus and for any hidden profits.

2. Right to receive legitimate expenses

A promoter is entitled to receive all the preliminary legitimate expenses which had been incurred by him in the process of the formation of the company such as cost of advertisement, fee of solicitor etc.

3. Right to receive remuneration

A promoter doesn’t have any right against the company for his remuneration unless there is a contract to that effect.

POSITION OF A PROMOTER IN COMPANIES ACT, 2013

The ‘promoter’ has been defined in Section 62, 69, 76, 478 and 519 of the Companies Act, 1956. According to Section 62 of the Companies Act, 1956 ‘promoter’ is defined for the limited purpose of that section only.

When an individual has an idea for a new business venture then he or she invites and motivates others to invest in the company and contribute capital to the company to be incorporated for the purpose of carrying on the business.

This article has been written by Manisha Singh, 4th year BALLB student at Heritage Law College, Kolkata (Calcutta University).

Also Read – What Is A Company? Advantages And Disadvantages Of The Company