Promoters :
Persons who initiate promotion of a company are known as promoters. All persons who take steps for the registration of a company e.g., those associated with the preparation of a prospectus or in drawing up the Memorandum of Association of the company and assisting in its registration are regarded as promoters. It should, however, be noted that persons acting only in a professional capacity e.g., the solicitor, banker, accountant etc. are not regarded as promoters.
The Companies Act, 2013 defines the term “Promoter” under section 2(69) which 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.
However, a person who is acting merely in a professional, shall not be regarded as promoter, e.g., the solicitor, banker, accountant etc. are not regarded as promoters.
Any one who assists in the formation for a consideration payable if the company is floated, is a promoter. “They are those who set in motion the machinery by which the Act enables them to create an incorporated company”, [per Lord Blank burn in Erlanger vs. Sambrero Phosphate & Co. (1893) 3 App. Case. 1218].
(a) Promoter’s duty to disclose: Until a company is incorporated, a promoter stands in a fiduciary capacity towards the company and its prospective shareholders. Hence, he must not make, either directly or indirectly or through a nominee etc., any profit out of his trust, unless the company after full disclosure of the facts, consents. In addition to his duty for declaration of secret profits, he must disclose to the company any interest he has in a transaction entered in to by it. Such disclosure is ineffective if made merely to directors who are nominees of the promoters. Disclosure may be made either to an independent board, or by means of a prospectus to the prospective shareholders. If the promoter makes a secret profit the company can rescind the contract or compel him to account for it. Where all the members of a private company are cognisant of the facts, the rule would not apply.
(b) Promoters as vendors: A promoter is entitled to sell his own property to the company provided he makes proper disclosure. This also applies to property which he acquires during the promotion and which he resells to the company. If he fails to make disclosure the company may either (a) rescind the contract, or (b) compel the promoter to surrender the profit.
(c) Promoter’s remuneration: A promoter has no right to demand any remuneration from the company, for his promotional services in the absence of an express contract with the company. Indeed, in the absence of such a contract, he cannot even recover from the company payments he has made towards legal fees, stamp duties, registration fees, or other expenses in connection with the formation of the company.