Promoters | Company Law - CLAT PG PDF Download

Introduction

When someone has an idea for a new business, they often try to get others interested and convince them to invest money to start a company. This person is known as the 'promoter' of the company. However, if someone is acting in a professional role, they are not considered a promoter. A company only comes into existence when it is officially registered. The process of setting up a company involves preparing various documents and completing certain formalities, all of which are handled by the promoters.

Who Are Promoters?

Promoters play a crucial role in the formation of a company. Their main job is to initiate the process of setting up the company. This process can be divided into four stages:

• Promotion
• Registration
• Floatation
• Commencement of Business

Promotion refers to the initial steps taken to prepare for the registration and floatation of the company. A promoter can be an individual, a group of people, an association, a partnership, or even another company.

Legal Definition of a Promoter

According to Section 2(69) of the Companies Act, 2013, a promoter is defined as a person who:

• Is named as a promoter in the company’s prospectus or identified in the annual return.
• Has control over the company’s affairs, either directly or indirectly, as a shareholder, director, or in another capacity.
• Gives advice or instructions that the Board of Directors follows, unless they are acting in a professional capacity.

The term "promoter" is also used in various sections of the Companies Act, such as sections 35, 39, 300, and 317.

Promoter in Legal Cases

In the case of Bosher v. Richmond Land Co., a promoter is described as someone who is responsible for bringing a corporation into existence and organizing it. This includes gathering interested parties, helping with subscriptions, and initiating the formation process. Essentially, a promoter is someone who plans to establish a company for a specific project and takes the necessary steps to make it happen. The term "promoter" is more of a business concept than a legal one, as noted by L.J. Brown in the case of Whaley Bridge Printing Co..

Role of a Promoter

A person does not have to be involved in the initial formation of the company to be considered a promoter. Even someone who helps arrange the floating of capital later on can be regarded as a promoter. However, individuals assisting the promoters in a professional capacity do not become promoters themselves. The relationship between a promoter and the company they are establishing is considered a fiduciary relationship from the beginning of the formation process until the directors take over the remaining tasks needed to complete the company setup.

Termination of Promoter Status

A promoter's status usually ends when the Board of Directors is formed and takes over the management of the company. Initially, the promoters are the ones who control and influence the company’s affairs. They come up with the idea of forming the company and take the necessary steps to incorporate it, including arranging for share and loan capital. Once these tasks are completed, the control of the company is handed over to the directors. At this point, the promoter's fiduciary duties and legal obligations cease, and they are no longer bound by any duties towards the company beyond what a regular third party would be.

Meaning of Promoter

• A promoter is someone who starts a business, similar to a founder. They are responsible for raising capital, pursuing initial leads, and setting up the company.
• According to SEBI regulations, a promoter can be anyone in control of the company or named as a promoter in official documents.
• The Companies Act, 2013 provides a clear definition of a promoter, unlike the previous 1956 Act.

Position of Promoter in Companies Act, 1956

• The term "promoter" was not clearly defined in the Companies Act, 1956, although it was mentioned in various sections.
• Section 62 of the Companies Act, 1956, provided a limited definition of "promoter" for the purpose of that section only.
• In the case of Twycross v. Grant, a promoter was described as someone who undertakes to form a company and take necessary steps to set it up.

Position of Promoters in Different Statutes

• In the USA, the Securities Exchange Commission defines a promoter as someone who takes the initiative in founding or organizing a business.
• In the case of Lagunas Nitrate Co. v. Lagunas Syndicate, it was stated that a promoter need not be involved in the initial formation of the company; even someone who helps arrange the floating of capital later can be considered a promoter.
• The term "promoter" is not a legal term but a business term, and its definition can vary.

Position of Promoters in Companies Act, 2013

• The Companies Act, 2013, defines a promoter in Section 2(69) as a person named in a prospectus or annual return, someone who has control over the company, or someone whose advice the Board of Directors follows.
• A person acting in a professional capacity, such as a solicitor or accountant, is not considered a promoter unless they act outside their professional role.
• Merely signing the memorandum as a subscriber for shares does not make someone a promoter.
• In general, a promoter is anyone who takes the necessary steps to create and set up a company.