Question: A promoter is people who bring about the incorporation and organization of a corporation. He brings together the persons who become interested in the enterprise, aids in procuring subscriptions and sets in motion the machinery which leads to the formation itself. Explain and illustrate.
The term “Promoter” finds its place in the company law, it has not been defined anywhere under the Companies Act, 1956 (“Act”) 1. This is because the term does not have any legal connotation but contains a business element. Promotion is a term of wide import denoting the preliminary steps taken for the purpose of registration and floatation of the company. The persons who assume the task of promotion are called promoters. A promoter may be an individual, association, partner or company.
It is noteworthy that the concept of promoter is enunciated in the Securities Exchange Board of India (Disclosure and Investor Protection), 2000 (“DIP Guidelines”) which is mostly from the disclosure perspective. The term “Promoter” also finds place in the Securities Exchange Board of India2, Takeover Code 19973. It is stated that a promoter is neither an agent nor a trustee of a company under incorporation but certain fiduciary duties have been imposed upon him both under the English Companies Act and the Indian Companies Act. They have the power of defining how and when in what shape and under whose supervision the company shall come into existence.
Corporators are those who compose a corporation, whether as stockholders or as members. Incorporators are those stockholders or members mentioned in the articles of
Incorporation as originally forming and composing the corporation and who are signatories thereof. Every incorporator must be a stockholder
1 “most important piece of legislation that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. The Act contains the mechanism regarding organizational, financial, and managerial and all the relevant aspects of a company. It empowers the Central Government to inspect the books of accounts of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violation of the Act.
2. Substantial acquisition of Shares and Takeover Regulations
3 Control shall include the right to appoint the majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholding agreements or voting agreements or in any other manner
2. Defination Of A Promoter :
(i) The person or persons who are in over-all control of the company;
(ii) The person or persons who are instrumental in the formulation of a plan or programmed pursuant to which the securities are offered to the public;
(iii) The persons or persons named in the prospectus as promoters(s). Provided that a director/ officer of the issuer company or person, if they are acting as such merely in their professional capacity shall not be included in the Explanation.
(iv) Promoter is inclusive in nature and “is a term of wider significance, and does not confine itself to de jury control
Summarizing the definition we can say that a promoter is a person who exercises substantial control over the company or a person who undertakes all necessary steps in the floatation of the company. The relationship between a promoter and a company which he has floated must be deemed to be a fiduciary relationship from the day the work of floating the company started .The status of the promoter is generally terminated when the Board of directors has been formed and they start governing the company.
As a company promoter
(i) Any company in which promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital of the promoter
(ii) Any company in which a group of individuals or companies or combinations thereof who holds 20% or more of the equity capital in that company also holds 20% or more of the equity capital of the issuer company;
(iii) Any company in which 10% or more of the share capital is held by the promoter or an immediate relative of the promoter or a firm or HUF in which the promoter or any one or more of his immediate relative is a member;
(iv) Any company in which aggregate share of the promoter and his immediate relatives is equal to or more than 10% of the total; and all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus under the heading shareholding of the promoter group
The above definition not only encompasses within its ambit the promoter and his immediate relatives but also takes into account the subsidiary or the holding company or any other company in which the promoter holds 10% or more of the capital of the company. In cases of promoter being a natural person, any firm in which the promoters and his immediate relatives possess an aggregate shareholding which is either equal to or more than 10% of the total capital of the company. The definition also tends to include persons whose shareholding is aggregated to satisfy the disclosure requirements in the prospectus.
In the light of the issues raised above, it may be noted that the above definition of ‘promoter’ is segregated into two parts. The first part deals with the general concept of the term ‘promoter’ whereas the second part differentiates between promoters as “natural persons” (including his immediate relatives, companies, partnership firms in which he possesses the prescribed shareholdings) and as “corporate promoters” (including the holding companies and its subsidiaries). It is pertinent to cite Clause 8.3 of the Malegam Committee Report4.
4. It needs to be clarified that the above definitions of “Promoter” and “Promoter As a company” are designed specifically for the purposes of disclosure in the prospectus of shareholding and share transactions and are not to be used for any other purposes.
4. Judicial Decisions About Promoter:
According to the judicial interpretation of the term ‘promoter’ there are many certain activities that are attributed to ;
(i). Controlling the management of such companies after its incorporation.
(ii). Activities undertaken and exertions made towards the forming of the company and assumption of subsequent duties towards it.
(iii). Persons involved in the process of finding directors, qualifying them, preparing the prospectus and incurring expenses in printing, advertising and other allied activities, incidental to bringing the company into existence.
(iv). Persons acting in their professional capacity are not promoters, unless they become a party to the issuance of shares, procurement of subscriptions or acting outside the scope of their professional duties
5. A Promoters Lock-In Requirements
a promoter is required to contribute to the extent of:
• 20% of the post-issue capital in case of an unlisted company;
• 20% of the proposed issue or of the post-issue capital in case of a listed company;
• 20% of the post-issue capital after offer for sale.
All the abovementioned cases the promoter’s contribution shall be locked in for a period of three years starting from the date of allotment in the proposed public issue. Further the entire pre issue share capital of the issuer company shall be locked in5 for a period of one year.
5 A note relating to promoters’ contribution and lock-in period, stating date of allotment, date when made fully paid up, nature of allotment (rights, bonus, etc.), number of securities, face value of securities, issue price of securities, percentage of promoters’ contribution to total issued capital and the date up to which the securities are locked-in
6. Disclosure Regarding Promoters Entities:
There are several disclosure that are regarding to promoters Entities
1. Date of incorporation.
2. Shareholding of the Company.
3. Nature of activities including the main objects.
4. Location of the registered office.
5. History of the Company and the promoters of the Company.
6. Financial information for the past three years, which includes:
i. Reserves (excluding revaluation reserves).
iii. Profit after tax.
iv. Earning per share.
v. Net asset value.
vi. Highest/lowest market price (if any)
7. Full particulars of the nature and extent of the interest, if any, of every promoter in the promotion of the issuer company or in any property acquired by the issuer company within two years of the date of the prospectus or proposed to be acquired by it need to be disclosed.
8. Litigation details regarding promoters and promoter group entities and details of contingent liability as on date of last audited financial statement
7. Disclose Personal Profits Of The Promoter:
The promoters who purchase property and then create a company to purchase that property stand in a fiduciary position towards the company. They must make a faithful disclosure to the company of all relevant facts which might affect the willingness of the company to purchase the property, including any profits made.
The promoters have certain basic duties towards the company formed:-
1. He must not make any secret profit out of the promotion of the company. Secret profit is made by entering into a transaction on his own behalf and then sells the concerned property to the company at a profit without making disclosure of the profit to the company or its members. The promoter can make profits in his dealings with the company provided he discloses these profits to the company and its members.
2. He must make full disclosure to the company of all relevant facts material to any transaction made by him with the company. He must use his position fairly and reasonably and in the interest of the company and must abstain from exercising undue influence and fraud.
In case of default on the part of the promoter in fulfilling the above duties, the company should be:-
1. Rescind the contract and recover the purchase price where he sold his own property to the company.
2. Recover the profit made, even though rescission is not claimed or is not possible.
3. Claim damages for breach of his fiduciary duty. The measure of damages will be the difference between the market value of the property and the contract price can be recovered from him
8. Liability of Promoter:
1. Promoter is liable to the original allotted of shares for the misstatements contained in the prospectus- He may also be imprisoned for a term extending to two years or fine upto Tk. 50,000 for such untrue statements in the prospectus.
2. In the course of winding-up of the company, on an application made by Official Liquidator, the court may make a promoter liable for misfeasance or breach of trust.
Where there is more than one promoter, they are jointly and severally liable and if one of them is sued and he pays damages, he is entitled to claim contribution from others. The death of a promoter does not relieve his estate from liability arising out of abuse of his fiduciary position.
A corporation results from careful planning and preliminary arrangements by promoters, the creative force behind the corporate enterprise. They from and set in motion the corporation, frequently continuing in control after the corporation achieves legal existence. Promoters are so to speak, the midwife of corporate business. The promoter must first discover a promising business opportunity such as a patent, amine, anew ides of achieving a business goal, anew business or the combining of two or more business associations into a new corporation. After discovery he must have thought out the economic possibilities of the new venture – what market is there for the product. A promoter is one who brings together the persons who become interested in the enterprise, aids in procuring subscription and sets in motion the machinery which leads to the formation of the corporation itself. It is the promoter works which brings the corporation into existence. While ordinary a promoter ceases to be such when the corporation is fully formed and the business turned over to the directors, such is not necessarily the ease. As long as the work of formation continues, those carrying on such work retain the character of promoters6. A pre-incorporation contract never binds a company since a person (legal or juristic) can not contract before his or its existence and a company before incorporation has no legal existence. Another reason is that promoters are proverbially profuse in their promises and if the corporation were to be bound by them, it would be subject to many unknown, unjust and heavy obligations.
6. A promoter may also be incorporator, subscriber, shareholder, director or other officer in a private corporation and , in the usual case
1. Vali Pattabhirama Rao v. Sri Ramanuja Ginning and Rice Factory Pvt. Ltd.  60 Comp. Cas. 568 (A.P.)
2. Kelner v Baxter (1866) L.R. 2 C.P 174( Common Please)
3. Newborne v Sensolid( Great Britain) Ltd. [ 1953] 1 All E.R 708
4. Balck v Smallwood & cooper (1966) 117 C.L.R 52(High Court of Australia
5. Wickberg v Shatsky (1969), 4 D.L.R (3 rd ) 540 (B.C.S.C)
6. Dr. Tabrez Ahmad (2009), KLS, KIIT, BBSR, Company Law-I.
7. Indian law Journal, Vol , III , p.233
8 Harry G. Henn, Handbook of The Law of corporation and Others Business Enterprise.171 (2nd ed., 1970). Hereinafter cited as “ Henn , Law of Corporations”
9. Norman D.Lattin, The Law Of Corporations, 116(2nd ed., 1971). Hereinafter cited as “Lattin. On Corporation”.
10. Judge , Seoul Civil District Court;LL.B., College of Law, Seoul National University ,1963; LL.m., Graduate School, Seoul National University, 1971; Visiting scholar to the School of Law, University Of California at Berkeley, 1970-1971