Last updated: March 13th, 2023 1:12 PM

Promoters of a Company

We can define the expression ‘promoter’ referring to a promoter who has a party to the preparation of company prospectus, but is not inclusive of any person by reason of his acting in a professional capacity in enabling the formation of the company. The article studies the categories, functions and duties of the promoter of a company.

Definition of Company Promoter

According to section 2(69) of the Companies Act, 2013 the term ‘Promoter’ can be defined as the following:

1. A person who has been named as such in a prospectus or is identified by the company in the annual return in section 92; or
2. A person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
3. A person who is in agreement with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

In USA, Securities Exchange Commission Rule 405(a) defines a promoter as “a person who, acting alone or in conjunction with other persons directly or indirectly takes the responsibility in founding or organizing the business enterprise.”

Categories of Company Promoter

A promoter is the one who decides an idea for creating a particular business at a given place and carries out a range of formalities required for starting a business. A promoter is the one who decides an idea for setting up a particular business at a given place and carries out a range of formalities required for the setting up of a business. A promoter may perhaps be an individual, a firm, and an association of persons or a company. The promoters may perhaps be professional, occasional, financial or managing promoters. A professional promoter gives away the company to the shareholders when the company starts. Regrettably, such promoters are very inadequate in the developing countries. They have played a significant role in many countries and aided the business community to a great extent. In U.K. the issue houses, in U.S. investment banks and in Germany.

• Joint Stock Banks have enacted the role of promoters very appreciably and effectively.
• Occasional promoters are those whose most important interest is the floating of companies. They are not in promotion work on standard basis but take up promotion of some companies and then go to their former profession. For example, engineers, lawyers etc. may perhaps float some companies.
• Financial promoters perform the task of promoting the financial institutions. They usually take up this work when financial environment is constructive at the time. Managing promoters played an important role in promoting new companies and then got their managing agency rights.

A promoter is neither an agent nor a trustee of the company as it is a non-entity before incorporation. Some legal cases have attempted to spell out the standing of promoters.

Functions of Company Promoter

Promoters are usually the first persons who envision the idea of business. They perform the compulsory investigation to find out whether the formation of a company is probable and profitable. Afterward they systematize the resources to convert the idea into a reality by founding a company; or in other words we can declare that it is the promoter:

• who settles the name of the company thus determine the name will be acceptable by the registered official of the office;
• who decides the content or details as to the Articles of the companies; (here, articles refers to Articles of association & Memorandum of association);
• who proposes the directors, bankers, auditors and etc.;
• who decides the place where registered office or head office has to be situated;
• who prepares the Memorandum of Association, Prospectus and other essential documents and file them for the reason of incorporation.

Duties of Company Promoter

The promoters occupy a significant position and have wide range of powers related to the formation of a company. It is, nevertheless, interesting to note that so far as the legal position is referred, he is neither an agent nor a trustee of the proposed company. However it does not signify that the promoter does not have any legal relationship with the proposed company. The promoters stand in a fiduciary relation to the company they support and to those persons, whom they persuade to become shareholders in it.