Introduction

The concept of “promoter” is unique to our country “India”. Due to closely held
family businesses and their strict equity structures, the ownership of the
business mainly lies in the hands of one or two individuals who take the core
decisions of the company. These individuals not only conduct the task of
promotion, but they are responsible for each and every affair of the business;
thereby, known as promoters of a company.

A promoter is the one, who forms a company with a given object and
sets it going by taking the necessary steps.
-Justice C.J. Cokburn

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. 

Promoter is a person who is engaged in promoting the formation and incorporation

of the Company. He conceives the idea of setting up the business and took the
steps for the formation of the Company. However, the persons who assist in the
incorporation of the company are the Professionals and not the promoters.
A promoter of a company is a person or a group of persons who came
together with the objective of setting up a business. The promoter can be an
individual, a firm or an association of artificial legal persons. For being a
promoter, it is not necessary to be a founder of a business; the person who
arranges capital and assists in other important works can be equally regarded
as a “promoter of a company”.
A promoter conceives an idea for setting-up a particular business at
a given place and performs various formalities required for starting
a company. A promoter may be a individual, firm, association of
persons or a company. The persons who assist the promoter in
completing various legal formalities are professional people like
Counsels, Solicitors, Accountants etc. and not promoters.
A person cannot be held as promoter merely because he has signed
at the foot of the Memorandum or that he has provided money for
the payment of formation expenses.

The promoters, in fact, render a very useful service in the formation

of the company. A promoter has been described as ”a creator of
wealth and an economic prophet.” The promoters carry a
considerable risk because if the idea sometimes goes wrong then the
time and money spent by them will be a waste.

Definition of Promoter
“A promoter is the one, who undertakes to form a company with
reference to a given object and sets it going and takes the necessary
steps to accomplish that purpose.” —Justice C.J. Cokburn
“A promoter is the person conscious of the possibility of
transforming an idea into a business capable of yielding a profit;
who brings together various persons concerned and who finally,
superintendents the various steps necessary to bring the new
business into existence.” —Arthur Dewing
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.”

Legal Position of a Promoter

A Promoter is neither an agent nor a trustee of the Company. He acts in a fiduciary

position towards the Company. He takes steps for the formation of the Company
and incurs the preliminary expenses for the Incorporation of the Company like
Registration expenses, Stamp duty payment, professional fees, etc.

Characteristics of promoter
1. A promoter conceives an idea for the setting-up a business.

2. He makes preliminary investigations and ensures about the

future prospects of the business.

3. He brings together various persons who agree to associate with

him and share the business responsibilities.

4. He prepares various documents and gets the company

incorporated.

5. He raises the required finances and gets the company going.

6. A Promoter may be:-

o Any Individual
o Any Firm
o Association of persons
o A Company

7. A Promoter is neither agent nor trustee of the Company.

8. The promoter can be more than one person.
9. He acts in a fiduciary position for the Company
10. The promoter is liable for all the important affairs of the company.

Functions of a Promoter:

The Promoter Performs the following main functions:

1. To conceive an idea of forming a company and explore its

possibilities.

2. To conduct the necessary negotiation for the purchase of business

in case it is intended to purchase as existing business. In this
context, the help of experts may be taken, if considered necessary.
3. To collect the requisite number of persons (i.e. seven in case of a
public company and two in case of a private company) who can sign
the ‘Memorandum of Association’ and ‘Articles of Association’ of the
company and also agree to act as the first directors of the company.

4. To decide about the following:

(i) The name of the Company,

(ii) The location of its registered office,

(iii) The amount and form of its share capital,

(iv) The brokers or underwriters for capital issue, if necessary,

(v) The bankers,

(vi) The auditors,

(vii) The legal advisers.

5. To get the Memorandum of Association (M/A) and Articles of

Association (A/A) drafted and printed.

6. To make preliminary contracts with vendors, underwriters, etc.

7. To make arrangement for the preparation of prospectus, its filing,

advertisement and issue of capital.

8. To arrange for the registration of company and obtain the

certificate of incorporation.

9. To defray preliminary expenses.

10. To arrange the minimum subscription.

Rights of Promoter

1. In the case of more than one Promoter, he has the right to recover the
proportionate amount from the co-promoter if he pays the entire
expenses.

2. The promoter can enter into preliminary contracts on behalf of the

company.

3. Promoter has the right to receive remuneration. However, there must be

a valid contract for remuneration.
4. He has the right to receive legitimate preliminary expenses.

Duties of Promoter

1. To disclose the secret profit:

The promoter should not make any secret profit. If he has made any
secret profit, it is his duty to disclose all the money secretly obtained
by way of profit. He is empowered to deduct the reasonable
expenses incurred by him.

2. To disclose all the material facts:

The promoter should disclose all the material facts. If a promoter
contracts to sell the company a property without making a full
disclosure, and the property was acquired by him at a time when he
stood in a fiduciary position towards the company, the company
may either repudiate the sale or affirm the contract and recover the
profit made out of it by the promoters.

3. The promoter must make good to the company what he

has obtained as a trustee:
A promoters stands in fiduciary position towards the company. It is
the duty of the promoter to make good to the company what he has
obtained as trustee and not what he may get at any time.

4. Duty to disclose private arrangements:

It is the duty of the promoter to disclose all the private arrangement
resulting him profit by the promotion of the company.
5. Duty of promoter against the future allottees:
When it is said the promoters stand in a fiduciary position towards
the company then it does not mean that they stand in such relation
only to the company or to the signatories of memorandums of
company and they will also stand in this relation to the future
allottees of the shares.

Liabilities of Promoter:
The liabilities of promoters are given below:
1. Liability to account in profit:
As we have already discussed that promoter stands in a fiduciary
position to the company. The promoter is liable to account to the
company for all secret profits made by him without full disclosure to
the company. The company may adopt any one of the following two
courses if the promoter fails to disclose the profit.

(i)The company can sue the promoter for an amount of profit and
recover the same with interest.

(ii) The company can rescind the contract and can recover the
money paid.

2. Liability for mis-statement in the prospectus:

Section 62(1) holds the promoter liable to pay compensation to
every person who subscribes for any share or debentures on the
faith of the prospectus for any loss or damage sustained by reason of
any untrue statement included in it. Sec. on 62 also provides certain
grounds on which a promoter can avoid his liability. Similarly Sec.
63 provides for criminal liability for mis-statement in the
prospectus and a promoter may also become liable under this
section.

The promoter may also be imprisoned for a term which may extend
to two years or may be punished with the fine upto Rs. 5,000 for
untrue statement in the prospectus. (Sec. 63).

3. Personal liability:
The promoter is personally liable for all contracts made by him on
behalf of the company until the contracts have been discharged or
the company takes over the liability of the promoter.

The death of promoter does not relieve him from liabilities.

4. Liability at the time of winding up of the company:

In the course of winding up of the company, on an application made
by the official liquidator, the court may make a promoter liable for
misfeasance or breach of trust. (Sec. 543).

Further where fraud has been alleged by the liquidator against a

promoter, the court may order for his public examination. (Sec.
478).

Conclusion
The promoter performs many activities. The  promoter  is involved in almost all major
steps of the company, from drafting the prospectus to the winding up of a company.
If a person takes an interest in giving shape to a company and takes all necessary
steps, he is considered as a good promoter. India has seen significant development
in the establishment of companies, and a promoter plays a vital role in it. A
promoter must ensure that a company grows and thrives in a society. Every
transaction and every action taken by a promoter needs to be transparent and
being in a fiduciary position; it becomes even more important that he looks out for
the company. A promoter is behind the idea of the formation of a company, he
arranges the capital and assets and is responsible for appointing people to run the
company as well; this shows his value in the company, and if he succeeds in
planning out the same effect, the society grows with the growth of the company.