The person or people who play a key role in starting and developing a company
are known as promoters. They are the ones who come up with the business idea,
gather the necessary resources, and make the company come to life. In other
words, a promoter is someone who takes on the responsibility of creating a
company for a specific project and takes all the necessary actions to make it
happen.
In three different manners, a promoter is classified under Section 2(69) of the
Companies Act, 2013. Firstly, they are identified by the company in its annual
return or explicitly named in the prospectus. Secondly, they have control over
the company's affairs either directly or indirectly as a director, shareholder,
or through other means.
Lastly, their directions, advice, or instructions are
habitually followed by the company's Board of Directors. In easier language,
promoters are the ones in charge of the first actions in setting up a company,
like introducing stocks to the market and making the company's prospectus. It's
worth mentioning that if someone does these tasks as their job, they might not
be considered a promoter according to the legal definition.
Under the Companies Act of 2013, a director who is not a whole-time, managing,
or nominee director is referred to as an independent director. It is a
requirement for an independent director to not have any past or present
involvement as a promoter of the company. Additionally, individuals who are
related to the promoters or directors of the company, its subsidiary, holding,
or associate company are also ineligible to serve as directors. Therefore, a
promoter of a company is not able to fulfill the role of an independent
director.
Types of Promoter:
A promoter, who could be an individual, a firm, an association, or a company,
plays a vital role in the creation of a new company. There are different kinds
of promoters, each with their own specific tasks in the process of forming a
company. Firstly, we have professional promoters who are experts at promoting
businesses during their initial stages and then transferring ownership to
shareholders once the company is well-established in the market.
On the other
hand, financial promoters invest capital and hold substantial shares in order to
carefully analyze the financial situation of the market and launch a company at
just the right moment. Promoters who are involved in managing play a crucial
role in the creation of the company, and once it is established, they gain the
right to manage it.
On the other hand, occasional promoters focus on setting up
companies and usually handle important business matters. They oversee multiple
enterprises without getting involved in promotional activities on a regular
basis.
Functions of Promoters:
The promoter is a crucial figure in the formation of a company, carrying out a
diverse range of responsibilities. Firstly, they conceptualize the business idea
and meticulously assess its feasibility and profitability. Next, the promoter
secures resources, determines the company name, and finalizes the Memorandum of
Association and Articles of Association.
The promoter also makes decisions on
the location of the company's head office and the appointment of key personnel,
such as auditors and directors. Additionally, they are responsible for preparing
all necessary documents for company incorporation and defining funding sources
and capital requirements. It is important to note that the promoter operates
independently, with no affiliation as a trustee, employee, or agent of the
company.
Once the company is established, the promoter's role comes to an end,
and the governance shifts to the board of directors and company management.
Ultimately, the promoter acts as the driving force in turning a business idea
into a tangible and functioning entity, overseeing crucial tasks throughout the
company's early stages.
Rights of a Promoter:
The role of promoters in company formation comes with specific rights that are
crucial to their function. One of these rights is the right of indemnity, which
holds promoters jointly and severally liable for any undisclosed profits or
false statements in the prospectus. This means that each promoter can be held
individually accountable and can be sought after for compensation or damages by
others.
Furthermore, promoters are entitled to reimbursement for preliminary
expenses incurred during the establishment of the company, including costs such
as solicitors' fees and advertising expenses. Additionally, promoters have the
right to receive remuneration unless otherwise stated in a contract or the
company's Articles of Association.
However, even if the company's Articles of
Association allow directors to compensate promoters for their services,
promoters cannot legally sue the company for remuneration if there is no
contract specifying such terms. These rights serve as a legal framework that
governs the financial aspects and responsibilities of promoters in the creation
and operation of a company.
Liabilities of a Promoter:
- It is not permissible for them to clandestinely benefit from the company's profits or engage in deals solely for personal advancement. In the event that they do garner such profits, the promoters bear the responsibility of returning said profits to the company.
- Due to false statements made in the company prospectus, a person who subscribes for debentures or shares can hold them liable for damages or losses suffered.
- They are criminally liable for mentioning false statements in the prospectus.
- When there are allegations of fraud in a company's formation or promotion activities, they can be held liable for a public examination of private company documents.
- Misappropriated company property, guilty of breach of trust, or where there is a breach of duty on their part, they are also liable to the company.
Advantages of a Promoter:
According to the Companies Act 2013, promoters are entitled to various
advantages during the incorporation and early stages of a company. To begin
with, they have the authority to determine crucial aspects of the company's
establishment, such as the company's name, registered office address, share
capital structure, and the selection of key professionals like auditors and
legal advisors.
In addition, promoters have a significant role in creating the Memorandum of
Association and Articles of Association, which outline the company's goals,
structure, and rules. This involvement allows them to have a significant impact
on the fundamental principles and framework of the company.
Moreover, promoters have the opportunity to enter into preliminary agreements
with vendors and underwriters, establishing important relationships and laying
the foundation for future business partnerships. They also play a vital role in
arranging for the preparation, filing, and publication of the prospectus, which
aids in the company's fundraising efforts.
Furthermore, promoters oversee the process of company registration and are
responsible for obtaining the certificate of incorporation, which signifies the
company's official legal existence.
While these privileges grant promoters the ability to shape the company's
foundation and initial path, it is crucial to note that they also carry
responsibilities and fiduciary duties towards the company and its stakeholders.
Legal Position of a Promoter:
Promoters hold a multifaceted legal position, encompassing a wide range of
rights, duties, and obligations. These individuals or groups are responsible for
conceiving and instigating the formation of a company, taking on crucial
responsibilities during its establishment. As fiduciaries, they are obligated to
act in the best interest of the company and disclose any hidden profits, as well
as ensuring transparency regarding material facts and private arrangements.
While promoters are entitled to claim indemnity for hidden profits and false
statements from co-promoters, they also have the right to reimbursement for
preliminary expenses. Additionally, unless stated otherwise in a contract or the
company's Articles of Association, promoters have the right to remuneration.
The
fulfillment of these duties and exercise of these rights within the realm of
corporate law are integral to the legal standing of promoters, shaping their
role in the initial stages of the company and laying the groundwork for
subsequent governance by the board of directors.
Conclusion:
The inception of a company relies heavily on the multifaceted role of a
promoter, who is responsible for conceiving the idea and thoroughly exploring
its potential. Decision-making processes are a significant aspect of a
promoter's responsibilities, encompassing crucial decisions such as determining
the company's name, registered office location, share capital structure, and
selecting key stakeholders like bankers, auditors, and legal advisers.
Promoters
are also accountable for drafting and printing the Memorandum of Association and
Articles of Association, which are fundamental documents that outline the
company's purpose and regulations. Additionally, promoters engage in making
preliminary contracts with vendors and underwriters, laying the groundwork for
future collaborations.
Furthermore, they orchestrate the preparation, filing,
and advertisement of the prospectus, strategically issuing capital. Finally,
promoters meticulously oversee the registration of the company, ultimately
obtaining the certificate of incorporation, marking the official start of the
company's journey.
Written By: Md.Imran Wahab, IPS, IGP, Provisioning, West Bengal
Email:
[email protected], Ph no: 9836576565
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