COMPANY LAW- I

MODERN COMPANY LAW MUST DEFINE `PROMOTER` - A STUDY ON CHANGING

CORPORATE LAW JURISPRUDENCE

SUBMITTED BY:

FAGUN SAHNI
PRN: 18010223079 DIVISION: E BATCH: 2018-2023

OF

SYMBIOSIS LAW SCHOOL, NOIDA

SYMBIOSIS INTERNATIONAL DEEMED UNIVERSITY, PUNE

UNDER THE GUIDANCE OF:

DR. MOHIT SHARMA

ASSISTANT PROFESSOR
 C E R T I F I C AT E

The Project entitled “Modern Company law must define `Promoter` - a study on
changing corporate law jurisprudence” submitted to the Symbiosis Law School,
NOIDA for Banking Laws as part of Internal assessment is based on my original work
carried out under the guidance of Dr. Mohit Sharma from July 2020 to September
2020. The research work has not been submitted elsewhere for award of any degree.
The material borrowed from other sources and incorporated in the thesis has been duly
acknowledged.
I understand that I myself could be held responsible and accountable for plagiarism, if
any, detected later on.

Signature of the candidate: Fagun Sahni

Date: 9th September 2020

 TABLE OF CONTENTS

S. NO. TITLE PAGE

NO.

1. ABSTRACT 4

2. INTRODUCTION 4

3. POSITION OF PROMOTERS IN INDIA 5

4. POSITION OF PROMOTERS IN USA 5

5. ANALYSIS OF PROMOTERS IN INDIA AND USA 7

6. CORPORATE LAW JURISPRUDENCE 9

7. CONCLUSION 10

8. BIBLIOGRPAHY 11
 “ABSTRACT

This article is titled as “Modern Company law must define `Promoter` - a study on changing
corporate law jurisprudence” circumscribes the introduction of promotion and its history in the
Companies Act. It also analyses the concept of promoters in USA and therefore drawing a
comparative analysis with the concept of promoters in India. The paper focuses on the functions and
types of Promoters and the need for it to be defined in Companies Act. The aim of the study is to
change the corporate law jurisprudence with the changing formation of companies. It is concluded
promoters play an essential role and companies act should give it recognition.

INTRODUCTION

Promotion means the preliminary steps taken for registration and floatation of the company, and the
persons who assume the task of promotion are called Promoters. They take the intention of forming
a company into operation.
The most important work of a promoter is in the formation of a company. The whole process of the
formation of a company may be divided into four stages

Commencement
Promotion Registration Floatation
of Business
Promotion is a term of wide import denoting the preliminary steps taken for the purpose of
registration and floatation of the company. A promoter may be an individual, syndicate, association,
partner or company.

The expression promoter has been defined under Section 2(69) in the Companies Act, 2013 as:
“promoter” means a person—

a) Who has been named as such in a prospectus or is identified by the company in the annual return
referred to in section 92; or

b) Who has control over the affairs of the company, directly or indirectly whether as a shareholder,
director or otherwise; or

c) In accordance with whose advice, directions or instructions the Board of Directors of the company
is accustomed to act.
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional
capacity.”
The term is used expressly in sections 35, 39, 300 and 317.1

In the case of Bosher v. Richmond Land Co2., the term Promoter has been defined as:
“A Promoter is a person who brings about the incorporation and organization of a corporation. He
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 itself.”

“A promoter is one who undertakes to form a company with reference to a given project and to set it
going, and who takes the necessary steps to accomplish that purpose.”

L.J. Brown in the case of Whaley Bridge printing Co3. observed that the term promoter is “a term
not of law but of business”.

POSITION OF PROMOTERS IN INDIA

“The expression ‘promoter’ had not been defined under the Companies Act, 1956, although the term
is used expressly in sections 62, 69, 76, 478 and 519.
Section 62 of Companies Act, 1956 defines ‘promoter’ for the limited purpose of that section only.
Section 62(6)(a) defines the expression ‘promoter’ to mean a promoter who was a party to the
preparation of the prospectus or of a portion thereof containing the untrue statement, but does not
include any person by reason of his acting in a professional capacity in procuring the formation of
the company. 

In Twycross v. Grant4, promoter was described as “one who undertakes to form a company with
reference to a given project, and to set it going, and who takes the necessary steps to accomplish that
purpose.”
The difficulties in defining the term led the judges to state that the term promoter is not a term of art,
nor a term of law, but of business.

However, in the new Companies Act, 2013 in section 2(69):

A person who acts in a professional capacity is not a promoter. Thus a solicitor, who prepares on
behalf of the promoters the primary documents of the proposed company, is not a promoter.
Similarly, an accountant or a valuer who helps the promotion in his professional capacity is not a
promoter. But any such person may become a promoter if he helps the formation of the company by
doing an act outside the scope of his professional capacity.”

POSITION OF PROMOTERS IN USA

1
Companies Act, 2013
2
89 va 455:16 SE 360
3
(1880) 5 QBD 109
4
(1877) 2 CPD 469
“The U.S. Securities and Exchange Commission (SEC) is an independent federal government agency
responsible for protecting investors, maintaining fair and orderly functioning of
the securities markets, and facilitating capital formation
The Securities and Exchange Commission has a definition of “promoter” in both Rule 405 under the
Securities Act of 1933 and Rule 12b-2 under the Securities Exchange Act of 1934—

“Any person who, acting alone or in conjunction with one or more other persons, directly or
indirectly takes initiative in founding and organizing the business or enterprise of an issuer; “ or
“Any person who, in connection with the founding and organizing of the business or enterprise of an
issuer, directly or indirectly receives in consideration of services or property, or both services and
property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the
proceeds from the sale of any class of such securities. However, a person who receives such
securities or proceeds either solely as underwriting commissions or solely in consideration of
property shall not be deemed a promoter within the meaning of this paragraph if such person does
not otherwise take part in founding and organizing the enterprise.”

A “promoter of the issuer” is a person or company who actively participated in the formation and
initial management of the issuer’s business or otherwise actively contributed to its initial growth or
prosperity, and who, at the time of the proposed trade, continues to be actively involved in the
ongoing management of the issuer’s business or actively contributing to its ongoing growth or
prosperity.
So, for example, a person who founds an issuer and then sells control of it to someone else would
not, following the sale, continue to be a promoter of the issuer unless he, she or it continues to be
actively involved in the management of the issuer’s business, or otherwise actively contributing to its
ongoing growth or prosperity, even if he, she or it continues to be a shareholder of the issuer.
Finally, the initial shareholders of an issuer will not be promoters merely because they have
subscribed for shares to facilitate its incorporation or as passive investors, even if the amount of the
investment is significant.”
 ANALYSIS OF PROMOTERS IN INDIA AND USA

USA INDIA

There are 4 types of Promoters in The types of Promoters in India are —

USA—
Professional Promoters Professional Promoters:
There are firms which specialise in These are the persons who specialise in
company promotion, including its promotion of companies. They hand
incorporation and flotation, before over the companies to shareholders
handing it over to the shareholders or when the business starts. In India, there
their representatives for the company. is lack of professional promoters. In
many other countries, professional
Occasional Promoters promoters have played an important
These promoters take interest in role and helped the business
floating some companies. They are community to a great extent. In
not engaged in promotion work on a England, Issue Houses; In U.S.A.,
regular basis. They take up the Investment Banks and in Germany,
promotion of some company and once Joint Stock Banks have played the role
it is over they go to their original of promoters very appreciably.
profession. For instance, engineers,  
lawyers etc. may float some Occasional Promoters:
TYPES OF companies. These promoters take interest in
PROMOTERS floating some companies. They are not
Entrepreneur Promoters in promotion work on a regular basis
They are both promoters and but take up the promotion of some
entrepreneurs. They conceive the idea company and then go to their earlier
of a new business unit, do the profession.. 
groundwork to establish it and may
subsequently become a part of the Financial Promoters:
management. Some financial institutions of
financiers may take up the promotion
Financial Promoters of a company. They generally take up
Some financial institutions, like this work when financial environment
investment banks or industrial banks, is favourable at the time. 
may take up the promotion of a
company with a view to finding Managing Agents as Promoters:
opportunities for investment.5 In India, Managing Agents played an
important role in promoting new
companies. These persons used to float
new companies and then got their
Managing Agency rights. Managing
Agency system has since long been
abolished in India.

 First persons who conceive the idea

 Discovery of a business idea of business.
5
[ CITATION USS06 \l 1033 ]
  Detailed investigation  They carry out the necessary
 Assembling the factors of investigation to find out whether
production the formation of a company is
 Entering into preliminary possible and profitable.
contracts  Thereafter they organize the
resources to convert the idea into a
reality by forming a company; or in
FUNCTIONS other words we can say that it is the
promoter –
 Settles the name of the company
thereby ascertain the name will be
acceptable by the registered of the
office;
 Settles the content or details as to
the Articles of the companies;
 Decides the place where registered
office (head office) have to be
situated.6

CORPORATE LAW JURISPRUDENCE

6
[ CITATION Avt18 \l 1033 ]
The first principles of corporate jurisprudence are that a company is different from its shareholders.

A company is a—
 Separate Legal Entity: Upon incorporation a company becomes a separate legal entity. It has
its own name and seal. Its assets and liabilities are distinct from that of its members. It is
capable of owning property, borrowing money, having a bank account, entering into
contracts, suing and being sued

 An Artificial Person: A company is created under the law and is not itself a human being. It
is therefore artificial in nature. Due to having certain rights and liabilities it qualifies as a
person. hence and artificial person

 Limited Liability: The liability of a company is limited by its shares to the nominal value of
the shares held by the members. Thus, the members are not liable beyond such nominal value
as a company is a separate legal person. Therefore, if the shares are fully paid up, the liability
of its members is NIL.

 Separate Property: The shareholders are not part of the owners of the company or its
property.

 Transferability of Shares: Since the business is separate from its members, it facilitates
transfer of members’ interest. This can be done by procedure prescribed in the AOA.

 “Perpetual Succession: It being a separate legal entity does not depend on the survival,
retirement or insolvency of its members. Members may come and go, but the company lives
on forever.

 Common Seal: A company works through its directors, officers and other employees. The
signature of a company in entering any agreement is bound by the seal of the company
having a distinct identity. The seal may be put on all formal documents executed by the
company like power of attorney, negotiable instruments, contracts etc.

Thus, as their characteristics are universal for all companies, it is imminent for the jurisprudence to
keep changing as the company’s formation process changes. In modern companies, promoters play a
vital role for a company which has in present day become very common and universal in the
formation of new companies. That is why, it is essential for Promoters to be defined Companies
Act.”

CONCLUSION
The promoter is neither a trustee nor an agent of the company because there is no company yet in
existence. The correct way to describe his legal position is that he stands in a fiduciary position
towards the company about to be formed.

The promoters of a company stand undoubtedly in a fiduciary position. They have in their hands the
creation and moulding of the company. They have the power of defining how and when and in what
shape and under what supervision, it shall start into existence and begin to act as a trading
corporation and lately have great role in the formation of the companies. Hence, it is important for
modern company law act to give it a proper definition.

It may be said that the word ‘Promoter’ is used in common parlance to denote any individual.
syndicate, association, partnership or a company which takes all the necessary steps to create and set
it going. The Promoter originated the scheme for the formation of the company; gets together the
subscribers to the memorandum: gets memorandum and prepared articles. executed and registered:
finds the bankers, brokers and legal advisors: located the first directors, settle the terms of
preliminary contracts with vender and agreement with underwriters and makes arrangements for
preparation, advertisement and circulation of the prospectus and arrangement of the capital. So,
Promoters act as a molding format for the company and gives it a shape which can exist in the world
although they cannot take anything in this regard. Legal status of promoter is concerned it is
undefined. So, legal status of promoter has not been determined and specified by the statute. His
position is incapable of being defined. He cannot consider as an agent, an employee and trustee of
the companies. The status of the promoter is generally terminated when the board of directors has
been formed and the board starts governing the company.
 BIBLIOGRAPHY

 U.S. Secutities and Exchange. (2006). Retrieved from

https://complyadvantage.com

 Singh, A. (2018). Company Law. EBC.

 Sethi, V. (2017). Role of Promoters. Retrieved from www.shodhganga.com

 Promoters, F. o. (2018, April). Retrieved from www.legalservicesindia.com.

 Bosher vs Richmond Land Co. (1889).

 Whaley Bridge Printing Co., 2 cpd 469 (1877).

 Companies Act with Rules. (n.d.).