Promoter (Company Act 2013)

Promoter Definition and Role

A promoter is someone who usually performs the preliminary duties necessary to bring a company into existence. They take all necessary steps to create and set it in motion. A company must be registered under the Companies Act to have legal existence, and promoters are instrumental in this process. They ensure that all required documents are prepared and submitted to the Registrar of Companies. These documents typically include the company’s memorandum of association and articles of association, which outline the company’s constitution and objectives.

While the term “promoter” was not explicitly defined in the Companies Act, 1956, the Companies Act, 2013 provides a more comprehensive definition in Section 2(69). According to this definition, a promoter is a person who:

Is named in a prospectus:

A prospectus is a document issued to the public to raise funds for the company. It provides detailed information about the company’s business, financial performance, and investment opportunities.

Is identified by the company in its annual return:

The annual return is a statutory report that companies must file with the Registrar of Companies.

Exercises control over the company’s affairs:

This can be direct or indirect control, through shareholding, board representation, or other means.

Influences the Board of Directors:

If the Board of Directors regularly follows the advice or instructions of a particular individual, that person may be considered a promoter.

Exclusions from the Definition

The definition itself excludes individuals acting in a professional capacity, such as valuers who prepare valuations on behalf of promoters, accountants, or solicitors who draft agreements or articles of association.

Legal Position of Promoter

Neither Agent nor Trustee

A promoter is not considered an agent of a company before its incorporation. Agents act on behalf of a principal, but a company cannot appoint an agent before it exists. Similarly, a promoter is not a trustee of the company’s assets. Trustees hold property for the benefit of others, but a promoter’s investments are their own, not the company’s.

Fiduciary Relationship

Despite not being agents or trustees, promoters have a fiduciary relationship with the company. This means they must act in the best interests of the company and avoid conflicts of interest. Promoters are liable for any personal profits they make from company deals and must ensure the company receives maximum value.

Remuneration and Secret Profits

Promoters may be entitled to remuneration for their services, but they cannot make secret profits at the company’s expense. Any profits made from company deals must be disclosed and accounted for. If a promoter makes a secret profit, the company may rescind the transaction and recover the profit.

Negotiation and Breach of Fiduciary Duty

Promoters must account for any benefits they derive from negotiations on behalf of the company. For example, if a promoter purchases property for the company and later sells it to the company at a higher price, they may be liable for breach of fiduciary duty. The company may rescind the contract and recover the excess payment.

The Importance of Promoter Identification

Promoter identification is a crucial aspect of corporate governance. It plays a significant role in:

Gaining investor credibility:

Investors often look to promoters for information about a company’s leadership, experience, and commitment. Identifying promoters can help build trust and confidence among investors.

Disclosing shareholding:

Promoters are typically major shareholders in a company. Disclosing their shareholding is essential for compliance with regulations set by the Securities and Exchange Board of India (SEBI) or other relevant authorities.

Managing changes in promoter shareholding:

If there are changes in promoter shareholding, these must be disclosed to SEBI or other regulatory bodies as applicable. This ensures transparency and helps prevent insider trading or other irregularities.