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Promoters of a Company: Key Roles, Types, Duties & Rights

Rewati Krishnan
Setindiabiz Team |inUpdated : February 03, 2024

Overview :The promoters of a company are those entities entrusted with developing and transforming ideas into businesses. They handle the entire initial stages of incorporation, from developing the concept to securing necessary resources and documentation. The article elucidates who is promoter in a company, their roles, types, duties, rights, and liabilities to provide a clear and comprehensive overview of the promoters of a company.

Key Takeaways

  • Promoters play a key role in deciding business ideas for a company by handling everything from creating initial concepts to legal incorporation.
  • There are four main types of promoters: professional, occasional, financial, and entrepreneurial, each with different roles and involvement levels.
  • Promoters have fiduciary duties, rights to compensation for expenses, and face legal liabilities for false statements during the company’s formation.

Definition of a Promoter

A company promoter is an individual or entity responsible for bringing a business idea to life and handling all the formalities required for its incorporation. The Companies Act defines a promoter as someone who establishes a business idea and completes the formalities for incorporation. This role primarily includes preparing the business's prospectus, floating securities and managing the initial operations that are required for the formation of a business/company.

Promoters are also referred to as any individual, group or association of persons or companies and have direct or indirect impact on controlling the company's affairs. These individuals or groups devise the concept of a business and take the requisite steps to turn it into an actual business to ensure the initial success of the company. In short, a promoter is the key player who transforms a business idea into a tangible corporate entity.

Key Functions of a Promoter

The main functions of a promoter are numerous and multifaceted, and encompass a wide range of activities from conceptualizing the business idea to transform it into the successful incorporation of a company. The key primary function of a promoter is to develop a plan for the business model and perform market feasibility studies to assess the viability of the proposed business. Promoters identify a business opportunity, evaluate its feasibility, and gather the necessary resources to bring the idea to life.

Promoters are also responsible for handling the legal groundwork necessary for the company’s establishment. This also involves drafting foundational documents (like Memorandum of Association and Articles of Association), filing incorporation documents, obtaining necessary licenses, and overseeing financial arrangements so the business has the required capital for its incorporation. They negotiate with financial institutions and investors to obtain capital, manage preliminary expenses, and enter pre-incorporation agreements like tenancy arrangements.

Along with these administrative and financial duties, promoters also have a key role in associating initial members and managing the registration process of key documents. In general, they handle preliminary contracts with supplies, property owners, and service providers, and also ensure a smooth and hassle-free transition during the incorporation phase of a company. Upon managing these preliminary contracts and negotiations, promoters should also confirm that the company is well-prepared to launch its operations.

Moreover, promoters raise preliminary assets like office space and machinery. They are also responsible for the administrative, financial, and legal groundwork necessary for the establishment of the company to ensure that all the aspects are taken care of for a hassle-free transition from idea to incorporation. As a result, you can say that a promoter plays a vital role at each step of the formation of a company, from creating ideas to smoothly executing them.

Types of Promoters

Promoters come in various forms, each bringing their unique expertise and focus to the table. They can be broadly categorized into four main types:

  • Professional promoters
  • Occasional promoters
  • Financial promoters
  • Entrepreneurial promoters

Each type has distinct characteristics and roles.

Professional Promoters

Professional promoters as their name implies are those types of promoters who have specialization in managing the promotion process and exit once the company is established. They are experts in forming companies and often move on to new projects after handing over control to its stakeholders. The main role of these promoters is to contribute to successfully incorporation of the company before exiting and moving on to the new project.

Occasional Promoters

Occasional promoters engage in company formation sporadically, often related to their main profession. Their involvement is irregular; they primarily float companies and handle preliminary work when necessary, especially during the company’s formation.

These promoters may be professionals in other fields who occasionally take on the promoter role when opportunities arise.

Financial Promoters

Financial promoters are mainly banks and other financial institutions that mainly focus on creating companies for the investment purposes. Such promoters invest capital to help in business creation for the sake of achieving financial returns. Their investment is driven by the expectation of financial gains from the companies they establish.

Entrepreneurial Promoters

Entrepreneurial promoters are those promoters who actively manage their businesses without negotiating on the vision and strategic direction of the company. Such promoters are generally the founders of the business who play crucial roles in managing and directing the company after its incorporation. Their personal interests and commitment to business success set them apart.

Legal Position of a Promoter

If it comes to the legal position of a promoter, it is defined by their fiduciary duty towards the company, their responsibility to disclose material facts and avoid hidden profits during the company's formation. Promoters also aid in drafting legal documents and other requirements to fulfill the company's incorporation process smoothly. They are established to manage and represent the company’s interests during the pre-incorporation phase.

However, promoters can face personal liability for any pre-incorporation contract they enter into if the company cannot ratify it. They are personally accountable for pre-incorporation contracts unless these contracts are adopted by the company. If a promoter enters a contract without the company’s power to ratify it, they would be individually liable. Once the company is formed, the promoter’s role in company management is terminated, and their responsibility ceases.

Rights of Promoters

Promoters enjoy several rights, including indemnity against hidden profits and false statements, as well as indemnity against secret profits. They are entitled to indemnity for valid expenditures incurred during the promotional phase. A company may choose to compensate promoters for their services, but it is not obligatory unless specified in an agreement.

Promoters can receive payment or remuneration for their services if mutually agreed. The company must reimburse promoters for expenses incurred during the promotional phase. However, they are not entitled to reimbursement unless the company agrees to cover those costs. Promoters have the right to compensation for valid expenses related to their promotional activities.

Duties of Promoters

Promoters must always prioritize the company’s best interests over personal gain. They must disclose all material facts, including private transactions that may affect the company’s integrity. During company formation, promoters must act with utmost care and diligence. Promoters must also avoid undisclosed profits in their transactions that may affect the company.

Their fiduciary duties ensure they act in good faith and with transparency, maintaining the company’s best interests throughout the formation process.

Liabilities of Promoters

Promoters face both civil and criminal liabilities depending on their actions and any breaches of duty. They are personally accountable for any false statements made in the prospectus, leading to civil liability. Including untrue statements in the company’s prospectus can result in criminal charges, penalties, or imprisonment.

The penalty for false claims in a company prospectus can include two years in prison, a fine up to 5000 rupees, or both. Misconduct can lead to both civil and criminal penalties, depending on the severity of the breach.

Promoters may be publicly examined by courts if fraudulent activities are suspected during the company’s formation and operations.

Restrictions on Promoters

Once the company is incorporated, all powers of promoters are transferred to the Board of Directors. Promoters are only authorized to act on behalf of the company prior to formal incorporation. They must avoid actions that could harm the company’s interests to prevent conflicts.

Promoters may sell their declared assets to the company if the terms are fair and transparent. They should avoid actions prejudicial to company interests to mitigate conflicts.

Promoters are responsible for any contracts made without company authorization unless those contracts are ratified later.

Importance of Promoters in Company Formation

Promoters play a crucial part in the company formation as they evaluate the viability and profitability of the proposed business idea before proceeding. They help organize requisite resources, including financial backing to initiate company operations successfully. Their expertise and commitment towards the business contribute significantly to the successful formation of the business.

On the other hand, occasional promoters are those who participate in company formation only if required. They often balance multiple enterprises at a single time. Though sporadic, their involvement is important in ensuring all essential steps are taken to establish a company successfully.

Conclusion

In summary, promoters play a critical role in the laying foundation, incorporation and initial success of a company. From developing business models and securing capital to managing legal obligations and preliminary expenses, their multifaceted role is indispensable. Understanding the different types of promoters and their respective functions helps in appreciating the depth of their contributions.

Whether professional, occasional, financial, or entrepreneurial, each promoter brings unique skills and expertise to the table. Their legal position, rights, duties, and liabilities are clearly

defined, ensuring they act in the best interests of the company. As we conclude, it is evident that promoters are the backbone of any successful business venture, driving the company from concept to reality.

Faq's

1.What is the position of promoter in a company?
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