A Need For Stricter Accountability Of Promoters In The Corporate Governance Regime In India: In The Context Of Majority Shareholding Of Promoters
In India, despite there being no statutory responsibility for the promoter to
hold majority shares, most promoters (or those close to them) own the majority
of the company either themselves or along with their family members and
associates. In most cases, the promoters make their way up to management by
being part of the board of directors. Thus, both holding majority shares as well
as being on the management team gives them immense power in an organization.
Majority stake holding can give a single individual direct influence over
decision-making at different levels of an organization. This could prove harmful
for community welfare if, through a director's position within an organization's
hierarchy, one individual is able to abuse his or her power. A greater
accountability on both levels is necessary when it comes to corporate governance
in India because without its socio-economic injustices may continue to spread
across multiple sectors of Indian society.
As per Section 103 of the Companies Act, 2013, the promoter shall disclose to
the registrar, any material facts (in writing) which were known to him or ought
reasonably to have been known to him but were not disclosed by those who
supplied data.The promoter shall also ensure that no person other than directors
are present during a meeting of shareholders and that their names are not
entered in the minutes of the meeting.
The promoter shall ensure that no such person is present at any post-meeting
disclosure of information by such directors as required under section 161(2) of
the Act unless specifically invited by the registrar in writing. Furthermore, if
there is any change in the percentage shareholding held by promoters, they must
notify SEBI within three days from the date on which such change takes place.
SEBI held promoters and directors (including CEO) liable for manipulating
company's share price, public participation and disclosure etc. in their
prospectus. They have been imposed monetary penalty, jointly and severally, on
the promoter along with the directors of the company.
The case law distinguishes between fraud in connection with the affairs of a
company and fraudulent transactions undertaken by a company itself. Fraudulent
transactions undertaken by a company include the following: personal dishonesty,
misappropriation of funds, false statements made on directors' declaration
(i.e., incorporation documents), misleading information conveyed to employees or
prospective investors, misuse of corporate funds for own benefit etc.,
In other words, even if the directors are personally liable for any illegality
committed by their company through sub-dividing policies or taking loans on
securities based collateral so long as the corporation is shown to be liable for
delivery of those securities only then it can be argued that the veil has been
The two fiduciary duties imposed on a promoter are: not to make any secret
profits out of the promotion of the company without the company's consent; and,
not to make any profit at all. The authorities, however, have imposed on a
promoter a duty not to give misleading information as part of his duties in
promoting a company.
The maximum penalty for this offence is imprisonment for three years. In
addition, a person who makes incorrect statements in respect of shares held by
him is liable to pay to each holder such amount as they may elect not be less
than 20% of value of such shares or 2 pence per share if value exceeds.
The promoter plays a critical role when acquiring a property as a trustee. If
the seller, who himself has acquired the property for resale to the company,
fails to disclose profits or does not adequately disclose the profits he makes
and further amounts to an expropriation of the company's property, then he would
be liable for damages.
The promoter has two roles in this; one is when he acquires a property after
commencement of promotion of company, in which he is presumed to have done so in
capacity of trustee and must transfer it at cost at which it was acquired. This
duty is breached if the promoter acquires that property for his own benefit and
fails to disclose profits and beyond this amount, it amounts to expropriation of
company's property. For the promoter to retain profits on such transaction would
require consent after formation since resolution of general meeting cannot
authorize expropriation of their properties.
It is obvious that promoters hold majority shares in most Indian entities, as
India companies are characterised as largely family-driven and dominated by such
promoters, who also form a part of the board and thus influence and alter
practically all company decisions. The Companies Act, 2013, has made significant
strides toward improving India's corporate governance regime.
The Companies Act of 2013 introduced the definition of a promoter, recognising a
promoter as one who has control over the affairs of the company or on whose
advice the management is accustomed to working. This clearly demonstrates that
the legislature recognises the influence that a promoter has over the affairs of
Law Article in India
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