Promoters of a Company - Definition, Functions and Duties

Promoters play a crucial role in establishing a company right from its inception stage. An individual or a group of people who come up with the concept of starting a business are the promoters of a company. They carry out the required processes to establish the firm. 

The company’s promoters shape the company and thus are moulding blocks of the company. However, a promoter is not the owner of a company. The promoter helps to establish and run the company, but the company shareholders are the actual owners of the company. 

Who Are The Promoters of a Company?

As per Section 2(69) of the Companies Act, 2013, promoter means any of the following persons:

• A person named as a promoter in the prospectus or identified by the company in its annual return in Section 92.
• A person who controls the company affairs, indirectly or directly, whether as a director, shareholder or otherwise.
• A person in accordance with whose directions, advice or instructions the Board of Directors of a company are accustomed to act.

In simple words, promoters perform the preliminary steps, like floating the securities in the market, making the prospectus of the company, etc., for establishing the company’s business. However, if a person is doing these things professionally, they will not be considered a promoter.

Types of Promoters of a Company

A promoter is a person/entity who conceives the idea of company formation. An individual, firm, association of person or company can be a promoter. A promoter of a company can be any of the following types:

• Professional promoter: A professional promoter is an expert in promoting the business during its formation or inception. They transfer the ownership of the business to shareholders when it is established in the market.
• Financial promoter: A financial promoter is a promoter who invests capital or money and has a sizable company share. They promote banks or financial institutions. They aim to assess the market's financial situation and start a company at the right moment. 
• Managing promoter: A managing promoter helps in company formation. They also get the managing rights in the company after it is formed.
• Occasional promoter: An occasional promoter is a promoter whose main job is to float the company. They do not promote the business routinely since they are in charge of two to three enterprises, and they get involved only in the crucial matters of the business.

Functions of a Promoter

A promoter plays many functions in the formation of a company, from conceiving the business idea to taking all the required steps to make the idea a reality. Below are some of the functions of a promoter:

• A promoter needs to comprehend/conceive the idea of company formation.
• A promoter looks into the feasibility and viability of the business idea. He/she assesses whether the company formation will be practicable or profitable.
• Once the idea is conceived, the promoter organises and collects the available resources to convert the business idea into a reality.
• The promoter decides the company name and settles the contents of the company’s Memorandum of Association and Articles of Association.
• The promoter decides the location of the company’s head office. 
• The promoter nominates associations or people for vital company posts, such as appointing the auditors, bankers and the company’s first directors.
• The promoter prepares all the necessary documents required to incorporate a company.
• The promoter decides the company’s funding sources and capital requirements.

A promoter cannot be considered a trustee, employee or agent of a company. The role of the promoter ceases when the company is established and is handled by the board of directors and the company management.

Duties of a Promoter

The promoters have certain duties towards the company, which are as follows:

Disclose hidden profits

The first duty of the promoters is to be loyal to the business and not involve in malpractice. They should not earn secret or hidden profits while carrying out promoting activities such as buying a property and selling it for a profit without disclosing it. They are not barred from making such profits, but the only condition is that they must disclose it. They must share all the information regarding their profitability and earnings with all the relevant company stakeholders.

Disclose all material facts

A promoter has a relationship of trust and confidence with the company, i.e., a fiduciary relationship. Under this fiduciary relationship, the promoter has the duty to disclose all material facts relating to the company’s business and formation with the relevant stakeholders. 

Act in the best interest of company

In all situations, promoters should prioritise the company’s interest over their personal interests. They must give utmost consideration to the company’s best interest in its formation and all business dealings.

Disclose all private arrangements

While forming and establishing a company, many private transactions take place. However, such transactions must be disclosed by the promoters to the stakeholders. It is the duty of the promoters to disclose all private transactions and the profit earned from them to the stakeholders.

Rights of a Promoter

The rights of promoters include the following:

Right of indemnity

Promoters are jointly and severally accountable for any hidden profits made by any of them and false statements made in the prospectus. All the promoters are individually and equally responsible for the company’s affairs. Thus, one promoter can claim the compensation or damages paid by him/her from the other promoters.

Right of preliminary expenses

A promoter is entitled to reimbursement for preliminary expenditures incurred for the company’s establishment, such as solicitors’ fees, advertising costs and surveyors’ fees. 

Right of remuneration

A promoter has the right to receive remuneration from the company unless a contract to the contrary. The company’s Articles of Association can also provide that the directors can pay an amount to the promoters for their services. However, the promoters cannot sue the company for remuneration unless there is a contract.

Liability of a Promoter

The liabilities of a promoter include the following:

• They cannot make secret profits out of company profits or deals for personal promotion. The promoters are liable to pay such profits to the company when they make such profits.
• They can be held liable for damages or losses suffered by a person who subscribes for debentures or shares due to the false statements made in the company prospectus.
• They are criminally liable for mentioning untrue statements in the prospectus.
• They can be held liable for a public examination of private company documents when there are reports alleging fraud in the company formation or promotion activities.
• They are also liable to the company where there is a breach of duty on their part, misappropriated company property or guilty of breach of trust.

Frequently Asked Questions

What are promoters of a company?

A promoter is a person or entity who settles on an idea to establish a specific business and completes the required formalities for its establishment. An individual, company, firm or association can conceive the idea of company formation and be the company’s promoter. The promoter undertakes all the activities necessary for the company’s incorporation and establishes it as a separate legal entity. 

Can a promoter of a company be the independent director?

As per the Companies Act, 2013, an independent director is a director other than the whole-time, managing or nominee director. An independent director should not be or have been a promoter of the company. A person related to the promoters or directors of the company, its subsidiary, holding, or associate company cannot be a director. Thus, a promoter of a company cannot be the independent director.

How to become promoter of a company?

Any person or set of individuals who come together collectively to establish a business or idea can become promoters. Any person in whose mind the seed of starting a business emerges can be a promoter. To be a promoter, it is not essential to be a business founder. A person who arranges for capital and assists in crucial work part-time can also be a promoter. However, a person must have an understanding of the industry, marketing or sales knowledge to be a promoter.

How to find promoters of a company?

Following is the process to find out the promoters of a company:

• Visit the official MCA website.
• On the homepage, click on the ‘MCA Services’ tab and choose the ‘Master Data’ option from the drop-down menu.
• Click on the ‘View Signatory Details’ option.
• Enter the company name and CIN and click on the ‘Submit’ button.
• The company’s signatories will be displayed on the screen. All the signatories, or any one of them, would be the company promoter. 

What is the legal position of a promoter?

It is tough to define the legal status of a promoter. Promoters are not the trustees or agents of the company. They behave in a fiduciary capacity for the company. They take actions and activities to create the company and pay the preliminary costs related to its incorporation, such as stamp duty, registration and professional fees. They have a fiduciary duty towards the company and are liable for any profits made by them personally in company deals.