Role of promoters in India

Promoter

The term ‘Promoter’ is explained under Sec. 2(69) of the Indian Company Act, 2013. And the same has also been explained in Section 35, 34, 40, 300 and 317. As per this definition, someone whose name is there in the prospectus of the company, identified in the AR of the company, or who has dominance over the directors of a company or who can guide them to act.[1] To simplify, the essential work for a promoter lies in the upbringing of a company. He is required during the promotion, registration, floatation and winding up of the business. In the case of Bosher Case, Promoter is someone who starts the incorporation process and organizes the company. He brings people who are helpful in developing the organization, also helps in the subscription process as well as starts the wheels of formation of the company[2].Having said that, even if a person joins the company after registration and in his professional capacity helps in the floatation of the company, he can be counted as a promoter of a company. Therefore, we can say that there exists a fiduciary relationship between the company based on finance and benefits with the promoter.

There is no legal position of the promoter in the company as they are agents of the company before the incorporation of the company and therefore the company is non-est in the eyes of law. They are not trustees because a company can never be a beneficiary. They are only in a fiduciary capacity which makes them liable to 2 things as per Section 34 & 35 of the Indian Companies Act, 2013.

a) Not to make any secret profits

b) To disclose his interest in transactions.[3]

The promoter has many responsibilities like preparing a prospectus, signing new agreements, trading in stocks as well as other goods of the company, listing, financing, helps in overseeing of the corporate board of the company and also has an integral part in the winding up of the companies.

With duties, there are also liabilities where he is supposed to say the truth in the prospectus, for which if he is caught he can be held liable, both civil and criminally liable. He can also be liable to fraud and liable to a public examination when it is discovered. The company can also include an indemnification clause to save itself from the misappropriations of the promoter. And to govern this, there are 2 reliefs provided in the Specific Relief Act, 1963.

1. Section 15(h) the promoter has to enter in a contract only for the benefit of the company.

2. Section 19(h)The terms should imply such contracts in the main agreement.[4]

Therefore, the promoters have a lot of duties as well as liabilities and are duty bound to incorporate a company.

This article looks at the role of the promoters in a company as it is normally believed that ‘the role of a promoter ends when the Board of Directors are appointed’, the legal aspects of being promoters as well as their duties.

Concept of  Promoter

Meaning:

A promoter is someone, who has been connected with the business from the start. He can also be referred to as the starter of a business or the founder.He is responsible for raising capital from various sources and entering into the first agreements for the start of a business and incorporation of a company.
SEBI[5]’s Substantial Acquisition of Share Takeover Rules state that a Promoter is 1) He is someone at the cusp of a company 2) A person whose name is there in any of the filing papers of the company or according to the shareholding pattern filed by the company.

Definition

The concept of promoters is explained in the Indian Companies Act, 2013. Before 2013 there was no legal position defined in the Old Version of the Act of 1956. In the Old Act, the subscribers to the M.o.A was regarded as the promoters since they had subscribed to the company from its inception.

Section 2(69) of the Companies Act, 2013 defines promoter as:-

“Promoter” means a person-

(a) someone whose name is in the AR of the company or in the prospectus referred to in Sec 92; or

(b) Someone who has influence over the BoD as a shareholder or a director and is able to control the affairs; or

(c) As per the accordance to his guidance, advice and instructions, the BoD are supposed to act: Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity;[6]

Types of Promoters

A promoter can be a person or a corporation/association etc.

Professional Promoters: They give back control of the company to the shareholders as soon as the company starts its day to day workings. There are many such companies in developed countries like the UK, US and Germany who do investment banking as promoters of a company. There aren’t many promoter companies in India as it is a developing country.

Occasional Promoters: They help the companies to remain afloat. They don’t have long term interest but they help the company to sustain and then get out with some profit and get back to their earlier business.

Financial Promoters: They help financial institutions by promoting them. They manage companies and have an important task in promoting new companies and getting agency rights.

Functions of Promoters

A promoter has the most major role in the incorporation of a company from a mere business idea. They perform the following functions to set it on a course of development:

  • They are the first to get the idea of the business
  • They find out where a profitable business venture can be shelved and then analyse the situation in the market.
  • After that, they organize the whole process of turning an idea into a reality by doing the work of inception of a company.
  • They also decide the name of the company which has to be accepted by the registrar of companies and decide on where the registered office is to be situated.
  • Then they do the work of formation of AoA and the Memorandum.
  • The Board of Directors, the bankers, auditors are nominated by the promoter.
  • And then they file for incorporation.

In this way, a promoter can be regarded as a founding father of the company. They seek people to become the first directors of the company. In case the proposed company is a public company, the promoter’s duty is to get all the articles and the prospectus distributed. They have to recruit a whole team of bankers, auditors, solicitors to assist them to incorporate a company. In order to get the first capital issue, they also have to appoint underwriters and brokers. They also have to buy assets such as land for factory, machinery, the hiring of key employees. Sometimes they also do a takeover of the existing company before the incorporation of the said company. 

Duties of a Promoter

Duty to disclose secret profits

He is allowed to make profits but not secretly which will be harmful to the company. He can profit only with the consent of the company which makes this a fiduciary relationship as that of a principal-agent.

The duty of Disclosure of Interest

He must also declare his interest in every transaction that the company and he himself enters into. He must also request the company’s consent when he shows his interest.

Duty under the Indian Contract Act

As said by the courts in due course of time, there is a business relationship between a company and a promoter, therefore a contract before incorporation with a promoter shouldn’t be depended upon. Thus his liabilities come within the purview of the ICA, 1872.

Termination of the Promoter’s Duties

The duty of a promoter doesn’t end even after he has appointed the Board of Directors or he himself is on the board. It ends when the capital has been acquired (First Call) and the BoD have taken the control and have started managing. That is when his fiduciary relationship with the company ends.

Liabilities of a Promoter

 He is supposed to give full disclosure to the company and therefore is liable to pay secret profits acquired. He is liable under various provisions of the Companies Act, 2013:

  • Sec 26[7]. It states the matters to be issued in the prospectus. He can be held liable if he fails to follow the rules of this section.
  • Sec 32 & 35. A Promoter can also be found guilty of false statements in the prospectus for somebody who has bought shares or debentures. Such people can sue the promoter.[8]
  • Sector 63 and 68. There is criminal liability for misrepresentation and there is a heavy penalty on promoters for making untrue statements in the prospectus.
  • Section 543. A company can even go against a promoter for breach of duty where the promoter can be found guilty of wrongful contract in relation to the company.[9]

In Prabir Kumar Misra v Ramani Ramaswamy[10], the Madras High Court stated that there is a fix on the liability of a promoter. Not compulsory that his sign is supposed to be on the MoA/AoA or a Shareholder or in the BoD. His guilt and liability also depend on his conduct and the contracts that he has entered into during the pre-incorporation stage as an agent or a trustee.

Remuneration of a Promoter

As he has a fiduciary relationship with the company so generally there is no issue with regard to his remuneration. The Chancery Court in the Re English & Colonial Produce Co.[11] Case held that a promoter is not entitled to claim expenses in his duty unless there is an express provision to do so but he is entitled to a reasonable remuneration as stated in the Article of Association.

In Touche v Metropolitan Rly Warehousing Co.[12] Lord Hatherly highlighted the importance of remuneration saying that the help of the promoter is unique which requires great efficiency, power and which is employed in developing a business plan and making it so to the best benefit and thus should be given his fees.

He can get remuneration by:

1. If he states that he sold the property for cash or stock options.[13]

2. An option to buy further shares.

3. Charges on shares sold.

4. Lumpsum remuneration.

5. As stated in the Article of Association provided that the promoter hasn’t made the AoA in his favour.[14]

6. There can also be a written contract.

Status of Pre-Incorporation Contracts

The promoter is supposed to bring a company to its legal incorporation and therefore to make sure that the company becomes successful he enters into a contract with the company itself. This type of contract is called ‘Pre-Incorporation Contract’. This contract is different from the normal contract as the normal contract is between 2 parties while this contract has the feature of a tripartite contract. Because the contract is made between the interested party and the promoter but this contract is helpful to the prospective company which is not a party but just a beneficiary. One can say that if the company benefits from such a contract then why wouldn’t it be a party to the contract. The answer to this is that there is no legal standing of a company before its incorporation and thus is not a part of any agreement.

Before the S.R.A came into existence, the view of India on the ‘pre-incorporation contract’ was the same as that of the law of England. This had the provision where the company is not a party to the contract as it is yet to achieve a legal existence and so only a promoter can solely be made liable to the pre-incorporation contract.

After the Specific Relief Act, 1963, there were provisions that made the pre-incorporation agreements valid i.e. Sec. 15h and Sec.19e where they deviate from the British Common Law.

Section 15(h) talks about the Scope of the Memorandum of Association while 19 (e) talks about the other party that can enforce the pre-incorporation contract against the company.

Case Analysis

1. Weavers Mills Ltd. v Balkies Ammal[15], The Madras High Court extended the scope of Section 19(e). In this case, the promoter had entered into a contract to purchase some assets on behalf and for the company. It was held that, on the incorporation of the company, also when the property is not present, you cannot ignore the company’s title over the said property.

2. Kelner v. Bexter[16], It happened that the promoter on behalf and for the un-formed company accepted Kelner’s proposition to enter into the wine business. The company did not give remuneration to Kelner. ERLE, CJ held that the fiduciary relationship cannot come into existence before the incorporation of the company and therefore the company can’t be held liable or take any liability by ratifying or adopting the contract because, at the time when the agreement was made, the company was not born (a non-existent state). And so the promoters are to be held liable for any of the pre-incorporation agreements because they were the agreeing party.

3. Newborne v Sensolid (Great Britain) Ltd,[17] This case developed the principle laid down in Kelner v Bexter.

4. Seth Shobhag Mal Lodha v Edward Mill Co. Ltd[18], The Rajasthan High Court followed the approach of the Common Law approach discussed in the cases before. This was criticised by A. Ramaiya as he noticed that the Judge, in this case, failed to look into the Specific Relief Act.

4. Howard v Patent Ivory Manufacturing[19], It was observed by the court that even though the promoter is personally liable for the pre-incorporation contract, he can shift his liability to the company. This novation of contract principle was later incorporated into the Specific Relief Act, 1963.

5. Twycross v. Grant[20]. In this case, a promoter is described as someone who undertakes the responsibility to form a company in reference to a given project who sets the plan going and takes necessary steps to accomplish it.

6. In Lagunas Nitrate Co. v Lagunas Syndicate[21], it was stated that to be a promoter, one doesn’t need to necessarily be associated with the initial formation of a company, the people who also help in the floatation of the company can equally be regarded as a promoter.

We can say that, for all types of pre-incorporation contracts, the promoters can be held liable because at the time of incorporation of contract the company has yet to come into existence and only after the Specific Relief Act, 1963 the company was enabled to ratify or do a novation of contract where it would take the rights and the liabilities of the promoter.

Conclusion

It can be said the word ‘promoter’ is used in common to address any individual, association or a company who take necessary steps to create a company and get it going. The promoter originated for the incorporation of the company from a business idea to make it a reality by bringing together a business plan by making a memorandum, drafting up of the prospectus, getting it registered, bringing bankers, auditors and solicitors into the foray and then to look for subscribers. While doing this he also appoints a board of directors. He has to do all this with legal compliance. He does all the technical and the non-technical work and also does the registration of the company.

There is no legal position of a promoter as he only has a fiduciary relationship with the company as he is neither an agent nor a director or an employee. He cannot make secret profits or else he will be held accountable. Therefore there are many liabilities on him as he does the duties of the drafting of the prospectus, entering into pre-incorporation agreements etc and thus if found guilty there are both civil and criminal liabilities on him.

Therefore we can conclude that the promoter is at the helm of getting a company into existence, moulding it and giving it a shape to help it to come into existence.

Frequently Asked Questions

1. Where is promoter defined?

Although the term “Promoter” has not been defined in any law, it finds mention in a number of statutes – for instance, the Substantial Acquisition of Shares Takeovers (SEBI) Regulation states that the promoter is:

(a) any person who is in control of the target company

(b) any person named as the promoter in any offer document of the target company or any    shareholding pattern filed by the target company with the stock exchanges pursuant to the listing agreement, whichever is later;

2. Can promoter be someone other than the founder of the company?

Although the promoter ordinarily means the person who started the company, in certain exceptional cases, it can even mean the person who is in control of the company even if he/she did not actually start the company.

3. What are the duties of a promoter?

The promoter, however, has duties beyond simply raising capital that they must live up to. Promoters owe fiduciary duties to others within the future corporation. Owing fiduciary duties means that promoters have legal duties to act solely in another party’s interest.

4. Can a promoter be a company?

 A promoter may perhaps be an individual, a firm, and an association of persons or a company

5. What is the legal position of the promoter?

Legal Position of a Promoter: The promoter is neither a trustee nor an agent of the company because there is no company yet in existence. The correct way to describe his legal position is that he stands in a fiduciary position towards the company about to be formed.

Edited by – Sakshi Agarwal

Approved & Published – Sakshi Raje

Reference

[1] Section 2(69) of the Indian Companies Act, 2013

[2] Bosher v. Richmond Land Co, Va 455:16 SE 360

[3] Section 34,35 of the Indian Companies Act, 2013

[4] Specific Relief Act, 1963

[5] Securities Exchange Board of India Guidelines

[6] Section 2(69) of the Indian Companies Act, 2013

[7] Section 26 of the Indian Companies Act, 2013

[8] Indian Companies Act, 2013

[9] Indian Companies Act, 2013

[10] Prabir Kumar Misra v Ramani Ramaswami, HC 2009 (11)

[11] 1906 2 Ch. D 435 CA Re English & Colonial Procedure

[12] Touche v Metropolitan Rly Warehousing Co. (1871) LR 6, Ch App 671 at 676

[13] Solomon v Solomon & Co. (1897) AC 22

[14] Rotherham Alum & Chemical Co. (1883) 25 ChD 103

[15] Weaver Mills v Balkies Ammal. AIR 1969 Mad 462

[16] Kelner v Bexter 1866 15 LT 213

[17] Newborne v Sensolid (Great Britain) Ltd. [1954] 1 QB 45

[18] Sheth Shobhag Maal Lodha v Edward Mills 1972 42 CompCas 1 Raj, 1969 WLN 498

[19] Howard v Patent Ivory Manufacturing [1888] 38 Ch. D 156

[20] Twycross v Grant (1877) 2 CPD 469

[21] Lagunas Nitrate Co. v Lagunas Syndicate [1899] 2 Ch. 392

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I am Shipra Sayal from Nirma University, Institute of Law pursuing B.Com LLB (Hons.) Corporate law, Company law and Securities law form part of my core interest area. I love to keep myself updated with news, law and politics. I participate in Moots and Trial Advocacy competitions. My leisure time activities are playing badminton and cricket. I also enjoy watching sci-fi series and movies. I love to read, write and research as this helps a lot in shaping one’s personality and honing skills. I believe in smart work and efficient time management to get success at any work