Who are Promoters of a Company? Roles, Duties and Rights

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 “promoters of a company.” 

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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. 

Who is Promoter of a Company?

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.

Definition of Promoter in Company Law

The definition of promoter as per the Securities Exchange Commission Rule 405(a), USA’s company law is

a person who, acting alone or in conjunction with other persons directly or indirectly takes the responsibility in founding or organizing the business enterprise

Definition of Promoter according to Securities Exchange Commission Rule 405(a), USA

What are the 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.
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What is the Position of Promoter in a Company?

The position of promoter of the company is fiduciary. A fiduciary is the person who manages money and property for someone else. The promoter of the company takes steps in the formation of the company and details the primary expenses used in company incorporation. These primary expenses include details such as registration expenses, professional fees, stamp duty payments, invoice processing, etc.

What Are The Duties Of A Promoter In Company Law?

The Promoter of a Company is bounded by certain duties and liabilities towards the company given as follows:

  • The promoter must disclose all the material facts in association to the formation of the company.
  • The promoter, according to the company law, should not make any secret profit at the cost of the company, being promoted by him.
  • In respect of the company, the promoter must give the company the benefit of all the negotiations or contracts entered into by him as soon as he starts to act for the formation of the proposed company.
  • The promoter must exercise due diligence and care. He must not misuse the extensive powers that are vested in him.
  • It is pertinent that the promoter considers company’s interest prior to his personal interest in case any conflict arises between the company’s and his interests.

What are the 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.

What are the Rights of Promoters?

According to the Companies Act of 2013, a promoter has been given certain rights. The duties and rights of promoters in Company Law are explained 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. It is one the many rights of a promoter. 

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.

What are the Duties and Liabilities of a Promoters in Company Law?

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. 

What is the 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 in Company Law

There are various types of promoters in business. The four categories of promoter in company law 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.

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Is Promoter Same as Director?

Directors and promoters of company 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 of promoters. 

Which Situation a Promoter Is Held Liable?

If the company promoter is found to be liable for pre-incorporation contracts or breach of trust or contract, If a company finds that a promoter of its company is violating its duties, then under the Company Act, there are some solutions provided to companies against the promoters, such as:

  1. Contract Recission
  2. Profit Recovery in the Dark
  3. Sue against the promoter
  4. Cancellation of promoter remuneration

How to Find Promoters of a Company?

The steps to find promoters of a Company are as follows:

  • Step 1: Visit the official website of the MCA (Ministry of Corporate Affairs).
  • Step 2: On the homepage, click on the MCA Services tab and choose Master Data from the drop-down menu.
  • Step 3: Now, towards the left side of the screen, click on “View Signatory Details.
  • Step 4: Click on the search bar and enter the company name.
  • Step 5: Resolve the captcha and click on the “Submit” button.
  • Step 6: The company’s signatories will now be displayed on your screen.
  • Step 7: Any one of them would be the promoter of the company. Also, you can click on the “View Company/LLP Master Data” link from the left side of your screen.
  • Step 8: In the same section, enter the name of the company, and the entire master data of the company will be shown on your screen.
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10 Promoters in India and Their Salary

Here is a list of India’s Top 10 highest-paid promoters.

Kalanithi MaranChairmanSunTV NetworkRs 87.5 crore
Onkar S KanwarCMDApollo TyresRs 49.58 crore
Ravi JhunjhunwalaChairman, Managing Director and CEOHEG (Hindustan Electro-Graphites) Rs 43.33 crore
H.M. BangurManaging DirectorShree CementRs 42.56 crore
Pawan MunjalChairman, Managing Director and CEOHero MotoCorpRs 75.44 crore
Sajjan Jindal CMDJSW Steel Rs 49.58 crore
Murali K. DiviCMDDivi’s LaboratoriesRs 40.20 crore
Arvind Poddar CMDBalkrishna IndustriesRs 36 crore
Jaydev GallaVice Chairman & MDAmara Raja BatteriesRs 38.86 crore
P.R. Venketrama RajaCMDThe Ramco CementsRs 33.93 crore
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FAQs on Promoter of a Company

The frequently asked questions on the Promoter of a Company are given below:

What are the rights and duties of promoters in company law?

The rights and liabilities of promoters in company law can vary depending on the jurisdiction. Generally, a promoter is responsible for establishing the company, creating its articles of incorporation, obtaining any necessary financing, registering it with the relevant government body, and appointing its first directors. The promoter may have additional obligations, such as an implied duty to act honestly and in good faith in the interests of the company.

Is the promoter the owner of a company?

No, the promoter is not the owner of a company. The promoter helps to get the company established and running, but they do not own it. The actual owners of a company are the shareholders, who elect the Board of Directors to oversee the company’s affairs.

What is the role of promoters in company law?

The role of the promoter in company law is to take the necessary steps to set up a new company. This includes drafting its articles of incorporation, obtaining the necessary financing, registering with the relevant government body, and appointing its first directors. The promoter also has an implied duty to act honestly and in the best interest of the company.

What are the four types of promoters?

The four types of promoters are Professional promoters, Occasional promoters, Financial promoters and Managing agents as promoters.

What are the powers of promoters?

The powers of promoters in company law include:

  1. Drafting the company’s articles of incorporation
  2. Obtaining any necessary financing
  3. Registering the company with the relevant government body
  4. Appointing its first directors.

Apart from the above, the promoter also has the power to review business plans and discuss strategies with fellow directors. Finally, they have the power to make decisions that are in the best interests of the company.

Who is a promoter? 

A promoter is someone who settles on an idea for establishing a specific business at a certain location and completes several formalities necessary for the establishment of the business. A promoter could be a single person, a business, a group of people, or a corporation. 

Is it possible for a promoter to be a shareholder? 

The role of a promoter is rather functional than a legal designation. A promoter is a person who either helped form a business or has influence over how it runs. Employees, as well as external people or organisations, can be promoters. Additionally, they might or might not own shares in the corporation. 

How can I become a promoter? 

To be a Promoter, first of all, you will need a Bachelor’s degree in either marketing, sales or business administration, as you need to have an understanding of the industry. Next, you need to decide on the type of promoter that you want to be and gain work experience through internships, and networking. Finally, build your CV and soft skills. 

Concluding Thoughts

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. 

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