Promoter under Companies act, 2013:
Section 69(2) of Companies act, 2013 defines a promoter as a person -
1. Who has been mentioned in the prospectus or annual return of the company referred to in section 92; or
2. Who holds a position of power and has a say in the functions of the company, directly or indirectly, as a shareholder, director or otherwise; or
3. In line with whose advice, directions or instructions, the Board of Directors is familiar to act.
Provided that nothing in sub-clause 3 is carried forward by any person in their professional capacity.
In simple words, a promoter is anyone who helps in the transformation of an idea into a business by taking basic steps towards said transformation and getting it going.
Types of Promoter:
1. Professional promoter: gives up control of the company to the stakeholders when the company is running.
2. Financial promoter: those promoters who promote financial institutions or banks and whose main aim is to promote the market’s financial situation and form a company at the appropriate time
3. Managing promoter: along with aiding the formation of the company, they also get managing agency rights in the company.
4. Occasional promoters: they do not usually participate in the promotion of a company, but may indulge in the process of floating the company and other preliminary work before going back to their original profession.
5. Institutional promoters: government set institutions such as Finance Corporation of India.
Functions of a Promoter:
1. To create an idea and explore its horizons and practicality
2. To conduct integral negotiation for the purchase of a business, if it is the intention to purchase an existing business. Expert help may be taken if found necessary.
3. To ensure the existence of a required number of people to sign the ‘Memorandum of Association’ and ‘Articles of Association’ of the company who also accept to act as first directors of the company.
4. To make solid decisions regarding the following:
(i) The name of the Company,
(ii) The location of its registered office,
(iii) The quantity and sort of its share capital,
(iv) The brokers or underwriters for the capital issue, if necessary,
(v) The bankers,
(vi) The auditors,
(vii) The legal advisers.
5. Drafting and printing of Memorandum of Association (M/A) and Articles of Association (A/A)
6. Formation of preliminary contracts with vendors, underwriters, etc.
7. Arranging the preparation of the prospectus, it’s filing, advertisement, and issue of capital.
8. To make arrangements for the registration of the company and obtain the certificate of incorporation.
9. Defraying of preliminary expenses.
10. To ensure minimum subscription.
Rights of a Promoter:
1. Right of Indemnity: promoters severally and jointly hold liability for any false/ untrue statements mentioned in the prospectus or for any secret profits. In the case of multiple promoters, one promoter can claim compensation and damages borne by him from another.
2. Right to receive the legitimate preliminary expenses: although not contractual, the promoters are entitled to receive the legitimate preliminary expenses incurred by them in the process of formation of the company which entirely depends upon the discretion of the board of directors.
3. Right to receive remuneration: unless specified in a contract, a promoter holds no right to remuneration. Articles of the company may provide for the payment of a specified amount to a promoter but this doesn’t give any contractual right to the promoter to sue the company, it is just an authority vested in the directors of the company.
However, the promoters usually end up being the directors, so in reality, the promoters will receive their remuneration.
Methods of payment of remuneration:
1. commission on the purchase price of business or property that was taken over through him.
2. a lump sum amount.
3. fully or partly paid shares
4. fixed-rate commission on shares sold
5. The promoter may purchase the business or other property and sell the same to the company at an inflated price. He must disclose this fact.
6. option to subscribe within a fixed period for some of the company’s unissued shares at par.
Independent of the nature of remuneration, it must be disclosed in the prospectus if paid two years preceding the prospectus.
Duties of a Promoter:
1. Disclosure of secret profits: the promoter is not in a position to keep profits confidential. All profits made by the promoter must be disclosed and no secret profits should exist. He has the right to reimburse the reasonable expenses he might have incurred.
2. Disclosure of all material facts: the promoter is expected to disclose all facts material to the situation at hand.
3. The promoter must compensate the company for whatever he has made as a trustee: a promoter has a fiduciary relationship with the company which obliges him to help make the company successful for whatever he has made as a trustee.
4. Duty to disclose private arrangements: the promoter is obliged to give full disclosure of all private arrangements in which he participates which results in him earning a profit while promoting the company.
5. Against future allottees: when it is stated that the promoters have a fiduciary position towards the company it is not only limited to the company but also extends to the future allottees of shares.
Liabilities of a Promoter:
1. To Account for All Profits: in case of failure in full disclosure of profits, the company can sue the promoter for the amount of profit and recover it with interest. Hence, the promoter is liable to account for all secret profits earned by him.
2. Personal Liability: liability of all contracts entered into by the promoter on behalf of the company rests with the promoter himself until the discharge of these contracts takes place or the company takes over such liability.
3. Liability of the misstatement in the prospectus: section 62 (1) states that the promoters would be held liable to compensate all shareholders and debenture holders for any loss or damage incurred by them due to incorrect information on the prospectus.
4. Liability at the time of winding up the company: in the process of winding up the company, the court may make a promoter liable for misfeasance or breach of trust on an application made by the official liquidator. Further, where fraud has been carried out by the liquidator against the promoter, the court may order for his public examination.
By- Prabhnoor Khurana
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