A promoter of a company is an individual or a collection of people who come together with the objective of setting up an enterprise. The promoter can be an individual, a company or an association of artificial legal entities.
In order to be a promoter, it isn’t vital to be a founder of a business. The person that arranges capital and assists in different crucial works can be equally regarded as a “promoter of a company.”
Why are Promoters a Uniquely Indian Concept?
The idea of the promoter is unique to Indian agencies, as most of the businesses here are family owned and thus the ownership lies at the hands of one of two family members who are responsible for taking core decisions of the company. However, it should be kept in mind that the persons assisting the Incorporation of the company are not the promoters.
Promoter of a Company: Definition
According to the Companies Act of 2013, the term ‘Promoter’ of the company can be described as the following:
- A man or woman who has been named as such in a prospectus of the company in the annual return;
- An individual who has control over the affairs of the enterprise;
- A man or woman who advices, directs, or commands the Board of Directors of the enterprise.
Characteristics of a Promoter
There are numerous characteristics of a promoter of an enterprise. A few important ones are noted below:
- The seed of starting a business emerges inside the mind of a promoter.
- He conducts research concerning the viability and future possibilities of an enterprise.
- A promoter of a company may be a person or a set of individuals who come collectively for achieving a specific purpose.
- The documentation and different incorporation formalities are conducted by way of the promoter.
- The promoter is chargeable for all the vital affairs of the employer.
Functions of a Promoter
In an agency, a promoter is trusted with carrying out several duties, which typically start even before the business comes into legal existence. These functions include:
1. Identification of Business Opportunity
The promoter wishes to discover the possibility in a selected kind of business which could show fruitful in the approaching duration. The opportunity may additionally relate to exploiting recent areas of natural sources or bringing something new into the present structure. The technical expert of that certain field helps the promoter to figure out the opportunity. When a promoter realises that this specific enterprise venture has the potential to grow, then the idea is taken further.
2. Detailed Investigation
Different factors are studied and analysed from diverse points of view to assess the profitability and the long term sustainability of the enterprise. The market demand, availability of raw materials, arranging proper finance, transportation centers, mode of supply, and many others are taken into consideration. On the basis of the prospective demand, the market share of the product is computed. After analysing the cost structure with an expert, the decision is made.
3. Approval of Name
After determining the shape of the commercial enterprise, now it is time to get the business registered under a specific name. The name of the commercial enterprise is permitted by means of the “registrar of companies”. While determining a name, it’s important to observe that it shouldn’t resemble an existing name and it needs to avoid words like national, state, king, queen, etc.
4. Signatories to Memorandum
The Memorandum of Association (MOA) is the charter of a company. The promoters decide the names of the person that may be the signatories of this constitutional report. Normally, the first signatory of the MOA turns into the director of the corporation. The director wishes to offer his written consent for the same according to the format prescribed by the Law.
5. Appointment of Professionals
A business can’t survive without adequate capital. So, it’s very important to make the necessary arrangements of capital. The promoter makes a decision about the capital requirement and the source from which this money may be received. The various sources include bank loans, private equity, Initial public offering, and so forth. For the successful arrangement of capital, financial and legal professionals are appointed.
6. Preparing Important Documents
Apart from the Memorandum of Association (MOA), a commercial enterprise needs to deposit other crucial files with the registrar of organizations. It consists of Article of Association (which offers all the internal affairs of the commercial enterprise), prospectus, incorporation certificates, etc.
Rights of a Promoter
According to the Companies Act of 2013, a promoter has been given certain rights. These are discussed below:
1. Right of Indemnity
If there are multiple promoters involved in a business, one of them has the right to demand compensation or damages from the others in the event of a contract breach. It is significant to remember that all of the promoters are equally and individually responsible for all company affairs.
2. Right to Receive Legal Expenditures
A promoter is legally entitled to reimbursement for any legal expenses he incurred during the company’s creation out of pocket. These costs include things like registration, paperwork, advertising, legal fees, etc.
3. Right to Compensation
The promoter will also be eligible to collect compensation from the company if he holds a managerial position there. However, a contract of this nature has to be present stating the aforementioned fact.
Liabilities of a Promoter
The company’s promoter is additionally saddled with the following strict liabilities:
- If the information pertaining to the first director is untrue, inaccurate, or there is some omission of significant facts, the promoters may be held accountable under Section 7 of the Company Act. The sentence for the aforementioned offence is six months, but in cases of major violations, it may be increased to ten years.
- The Companies Act of 2013‘s Section 26 specifies the format for filing a prospectus. There must be mention of all information pertaining to secretaries, auditors, legal counsel, bankers, trustees, comments made by the Board of Directors, etc. However, the promoter must take action if any crucial information is left out by the prospects and be accountable and subject to penalty in accordance with Section 447 of the 2013 Companies Act.
- According to Section 35, the promoter will be held criminally accountable for any information in the prospectus that is false or deceptive. According to Section 36 of the Act, the promoter will be held accountable for the deception and any losses if they make false promises to entice someone to invest money in the company. Any errors that are discovered during the company’s winding-up processes will be directly the responsibility of the promoter.
Legal Position of a Promoter
Promoters are not the Company’s trustees or agents. He behaves in a fiduciary capacity for the Company. He takes action to create the company and pays the preliminary costs associated with incorporation, such as registration fees, stamp duty, and professional fees.
Types of Promoters
The four categories of promoters are as follows:
1. Professional Promoters
The promoters are experts in the task of promoting the business during its inception or at the time of its formation. They transfer ownership of the business to the shareholders once it has established itself in the market. There weren’t many such experienced promoters in our nation. They are crucial to the development of the company in its early stages.
2. Occasional Promoters
These are people who occasionally promote a company but aren’t highly active at it every day. They are in charge of two to three enterprises at once, and they only get involved in the crucial business matters.
3. Financial Promoters
Promoters who invest money or capital and have a sizable share in the company fall under the heading of financial promoters. They had the ability to vote and had a significant impact on how the company operated. For instance, a number of well-known businesses are promoted by financial institutions like SBI, LIC, etc.
4. Managing Agents as Company Promoters
These agents used to launch new companies in India and received their managing agency rights as payment. It’s crucial to remember that our nation has nearly completely lost this promotion mechanism.
Managers vs Directors
Directors and promoters have different responsibilities.
Unlike directors, who are hired by the company and frequently report to the chairman to administer the organisation, promoters are either the creator of the firm themselves or an organisation that solicits the public to invest in the company in order to raise money. He oversees the operation of the company and oversees the board of directors, reporting to the chairman in both cases.
The director is in charge of managing and making decisions for the company. However, directors will only be paid through salaries and do not have any claim to the company’s revenues. This phrase is frequently used by businesses, and these businesses frequently have a large number of directors in various company tasks or roles.
To sum up, in India under the Companies Act of 2013, a promoter is anyone who takes up the responsibility of a business from the pre Incorporation stage up to getting it registered. They have certain rights, duties and strict liabilities as well as legal positions which they have to maintain accordingly.