From the very beginning of a company’s existence, promoters are an essential component in the establishment of the business. Those individuals or groups of individuals who are responsible for the conception of the idea of launching a business are referred to as the promoters of a firm. As part of the establishment of the company, they carry out the necessary procedures.
The promoters of the firm are the ones that shape the company, and as such, they are the blocks that shape the company. There is a distinction between a promoter and the owner of a corporation. Although the promoter is involved in the establishment and management of the firm, the shareholders of the company are the ones who actually own the business.
Who are the promoters of a company?
Under the provisions of Section 2(69) of the Companies Act of 2013, the term “promoter” can refer to any of the following individuals:
- A person who is identified by the company in its annual return in Section 92 or who is named as a promoter in the prospectus.
- A person who acts as a director, shareholder, or in some other capacity that gives them power over the business of the firm, either directly or indirectly.
- A person about whom the Board of Directors of a firm is customarily accustomed to act in line with the orders, advice, or instructions that they have received.
- To put it another way, promoters are the individuals who carry out the preliminary procedures that are necessary for the establishment of the firm’s operations. These steps include things like floating the securities in the market and preparing the prospectus of the company. It is important to note that a person will not be deemed a promoter if they are engaged in these activities on a professional level.
Various Categories of Promoters for a company
A promoter is a person or entity that is responsible for conceiving of the idea of forming a firm. The term “promoter” can refer to a human, a company, an association of people, or a company. Among the above categories, a promoter of a corporation can be any of the following:
- Professional promoter: A professional promoter is an individual who is knowledgeable in the process of promoting a business when it is still in the process of being formed or established. When the company has sufficiently established itself in the market, they hand over ownership of the company to the shareholders.
- Financial promoter: A financial promoter is a promoter who invests capital or money and has a substantial corporate share. This type of promoter operates in the financial sector. They promote any financial institutions or banks that they can. It is their intention to evaluate the current state of the market’s finances and launch a business at the most opportune time.
- Managing promoter: A managing promoter is someone who assists in the formation of a company. Following the formation of the company, they are also granted the rights to manage the business.
- Occasional promoter: Floating the firm is the primary responsibility of an occasional promoter, who is a promoter whose primary function is to market the company. Due to the fact that they are in charge of two to three businesses, they do not engage in routine promotion of the company. Instead, they only get involved in topics that are of critical importance to the company.
Roles of a Promoter
During the process of establishing a firm, a promoter is responsible for a variety of tasks, including the conception of the business idea and the execution of all the necessary procedures to turn the idea into a reality. An example of one of the functions of a promoter is as follows:
- To be able to comprehend or conceive of the concept of company formation, a promoter is required.
- An inquiry into the practicability and potential of the business idea is carried out by a promoter. A determination is made regarding whether or not the formation of the company will be lucrative or feasible.
- When a concept is formed, the promoter is responsible for organizing and gathering the resources that are available in order to turn the idea into a reality for the firm.
- The promoter is the one who makes the decision on the name of the company as well as the contents of the Memorandum of Association and Articles of Association used by the company.
- The location of the company’s headquarters is determined by the promoter of the business.
- The promoter is responsible for putting forward candidates or associations for important positions inside the firm, such as the appointment of auditors, bankers, and the initial directors of the company.
- In order to incorporate a company, the promoter is responsible for preparing all of the essential corporate documents.
- The promoter is the one who makes decisions on the company’s capital requirements and funding sources.
One cannot be considered a trustee, an employee, or an agent of a corporation just because they are a promoter. After the company is founded, the promoter’s function is no longer necessary; instead, the board of directors and the management of the firm are responsible for its operations.
Duties of a promoter
The following are the promoters’ responsibilities to the company:
- Reveal any unreported earnings: The promoters’ primary responsibility is to uphold company loyalty and refrain from unethical behavior. When engaging in promotional activities, such as purchasing real estate and selling it for a profit without revealing it, they shouldn’t make any unreported or concealed earnings. They are free to make these kinds of gains; the only requirement is that they have to disclose them. They have to provide all pertinent firm stakeholders with information about their earnings and profitability.
- Declare all relevant information: A promoter and the company have a fiduciary relationship, which is one based on trust and confidence. The promoter is required by law to provide all pertinent stakeholders with material information about the company’s establishment and operations as part of their fiduciary obligation.
- Act in the company’s best interests: Promoters ought to put the needs of the business ahead of their own at all times. When forming the company and conducting business, they must put the company’s best interests first.
- Declare all private agreements: There are numerous private transactions involved in the formation and establishment of a corporation. Nonetheless, the promoters are required to notify the stakeholders of such transactions. Promoters have an obligation to inform stakeholders of any private transactions and any profits made from them.
Rights of the Promoter
Promoters’ rights include the following:
- Right to indemnity: Promoters are jointly and severally liable for any hidden profits and fraudulent representations contained in the prospectus. All promoters bear individual and equal responsibility for the company’s affairs. Thus, one promoter can seek reimbursement or damages from the other promoters.
- Right to pay for preliminary expenses: A promoter is entitled to repayment for preliminary expenses made during the company’s formation, such as attorneys’ fees, advertising charges, and surveyors’ fees.
- Right to compensation: Unless otherwise stated in the contract, a promoter has the right to collect remuneration from the company. The company’s Articles of Association may additionally require that the directors pay a fee to the promoters for their services. However, the promoters cannot sue the firm for remuneration unless a contract exists.
Liability of the Promoter
A promoter’s liabilities are as follows:
- They are not permitted to make covert profits from company profits or to enter into personal promotion partnerships. When the promoters earn such gains, they are required to give them to the company.
- They may be held liable for damages or losses incurred by a person who subscribes for debentures or shares based on fraudulent assertions in the company prospectus.
- They are criminally liable for including false statements in the prospectus.
- They may be held liable for a public inspection of private company documents if there are reports of fraud in the company’s creation or promotion activities.
- They are also accountable to the company if they breached their obligation, misappropriated company property, or violated the trust.