Promoter – Meaning, Role, Legal Position, Duties

The term ‘promoter’ has been defined under section 2(69) of the Companies Act, 2013. As per this section it refers to a person-

a) Who has been named as such in the prospectus or is identified by the company in the annual return;

b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or any other position in the company

c) Who advices, directs or instructs the the board of directors of a company (but does not include a person who is acting merely in a professional capacity).

Meaning of a promoter

A promoter may be an individual, a firm or a company who performs all the preliminary duties necessary to bring company into existence. He conceives the idea, develops it and finds and induces others to join the company.

The promoters prepare the scheme for the formation of the company, find and bring together the subscribers to the memorandum, prepare the memorandum and articles and get it executed and registered, finds the bankers, brokers and legal advisers, finds the first directors and makes arrangement for the advertisement and circulation of the prospectus and arranges the capital.

The question whether a person is a promoter or not depends upon the role that he has performed during the formation of the company. Any person who acts on his behalf whether as a solicitor or an accountant and or paid worker is not considered as a promoter. The most important criteria for being a promoter is that the individual must have a personal business interest in the company.

Legal position of promoter

A promoter is neither a trustee nor an agent of the company but he has a fiduciary relationship with the company. Fiduciary relation means a relation of trust and confidence. Therefore he is liable to disclose all the relevant facts and any secret profit made by him in relation with the formation of the company.

Duties of a promoter

Following are the important duties of a promoter of a company-

1) He being in a fiduciary position cannot make either directly or indirectly any secret profit at the expense of the company and even if he makes any secret profit then a company can rescind the contract made with him.

2) He cannot sell his own property to the company and derive profit out of it, unless he discloses all the facts relevant to it.

Functions of a Promoter

• Discovering business opportunities
• Conceptualizing the business idea
• Conducting feasibility studies and analysis
• Arranging for funds and managerial expertise
• Preparation of documents
• Implementation of Idea
• Other preliminary activities

Remedies available to the company against a promoter

If a promoter makes any secret profit and does not disclose it, in that case a company has the following remedies available against him.

1) Rescind the contract and recover the secret profit made by him

2) Retain the property, paying no more for it than what the promoter has paid depriving him of his profit.

3) Where the above remedies would be inappropriate, the company may sue him.

Remuneration of promoters

When a promoter makes proper disclosure and does not makes any secret profit , he is often rewarded for his efforts. Therefore, when the company is registered , it pays some remuneration to him for his services.

In practice, following are the ways by which a promoter can be remunerated-

a) He may sell his own property to the company after making full disclosure to the board of directors or to the intended shareholders.

b) He may sell his property to the company and buy fully-paid shares after making full disclosure.

c) He may be given opportunity to buy further shares at par in the company.

d) He may be given a commission.

e) He may be paid a lump sum amount by a company according to the contract made by them.