A company is not just founded by one person; rather, an empire is built through the collective efforts of a team. Their initiative and struggle are what fuel the company's expansion and financial success. Promoters are those who consistently and ethically work to make ideas a reality. Although it is a crucial component of the business, the promoter of a company is not a term recognised by the law. Let’s discuss more about the promoter of a company and the person behind the process in this article.
What is a Company Promoter?
The term ‘promoter’ can be defined as a promoter who participated in creating the company prospectus. Still, it excludes anyone who assisted in the formation of the company professionally. The article examines a company’s promoter’s various types, jobs, and responsibilities.
Categories of Company Promoter
The promoters may be professional, occasional, financial, or managing promoters. A professional promoter gives away the company to the shareholders when the company starts. Regrettably, such promoters are very inadequate in developing countries.
- Joint Stock Banks have played the promoters’ role very significantly and successfully
- Occasional promoters are people whose primary interest is in helping companies go public. They don’t regularly work in promotion, but they do it for some businesses before returning to their previous line of work. For instance, engineers, attorneys, and others might flog some companies
- Promoting financial institutions is what financial promoters do. They typically begin this work when the current financial climate is favourable. Promoting new businesses was crucial, and managing promoters later received agency rights.
As a non-entity before incorporation, the promoter is neither an agent nor a trustee of the company. Some legal cases have attempted to spell out the standing of promoters.
Company Promoter’s Responsibilities
Promoters are typically the ones who first conceive of business ideas. They carry out the required research to determine whether the creation of a company is likely and profitable. Then they organise the resources to launch a business to turn the concept into reality; in other words, we can say that the promoter is:
- Who decides the company’s name and makes sure the registered office official will accept the name
- Who determines the details or content of a company’s articles?
- Who suggests the board of directors, bankers, auditors, etc
- Who chooses the location for the company’s registered office or head office?
- Who draughts the prospectus, memorandum of association, and other crucial documents and files them for incorporation
- What a company promoter does
- The promoters hold a significant position and are endowed with a variety of authority over creating a company.
- Although it is interesting to note that he is neither an agent nor a trustee of the proposed company as far as the legal position is concerned
- However, it does not necessarily mean that the promoter has no official connection to the proposed company.
- The company they support and the people they persuade to become shareholders are both in a fiduciary relationship with the promoters.
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Liabilities of a Promoter
The liabilities of a promoter of a company in India include:
- The rules do not allow them to make secret profits out of company deals or profits for personal promotion.
- The deposition of all the amounts received on behalf of the company has to be done in the company account.
- The promoter needs to take proper care while performing their tasks.
- In the case of any contracts signed or pending, the promoters are solely responsible till their approval.
- For any investments, the promoter has to make the compensation in case of any issues or untrue statements.
Steps Involved During the Promotion of a Company
There are several steps involved during the promotion of a company which include:
- Ideation: The first and most important step is to have an idea and how to execute it. One must know the business and look for opportunities in the field.
- Investigation: The promoters create a proper well-planned structure of company management and execution. An expert opinion and the cost structure are sought and analysed.
- Name approval and registration: Once completed, the promoters are responsible for applying and registering the company name with the Registration of Companies.
- Appointments: After this, the promoters take the appointments from all the professionals to carry out various tasks and contracts.
- Documents: The promoter in company law has to essentially keep all the legal and official safe for incorporation and further activities.
Functions of a Promoter
Promoters perform several essential functions, including:
Conceptualization: They conceive the business idea, identify opportunities, and assess the feasibility of the proposed venture.
Business Planning: Promoters create a comprehensive business plan outlining the company’s objectives, strategies, and financial projections.
Incorporation: They initiate the process of incorporating the company, which involves legal formalities, documentation, and compliance with regulatory requirements.
Capital Procurement: Promoters secure initial funding for the company, which may come from personal investments, loans, or external investors.
Management Setup: They establish the initial management team, defining roles and responsibilities.
Asset Acquisition: Promoters may acquire assets, properties, or intellectual property necessary for the company’s operations.
Regulatory Compliance: They ensure compliance with legal and regulatory frameworks, including obtaining licenses and permits.
Marketing and Branding: Promoters develop the company’s brand identity, marketing strategies, and positioning in the market.
Risk Assessment: They evaluate potential risks and develop risk mitigation strategies.
Negotiations: Promoters may negotiate with suppliers, partners, and investors to secure favourable terms and agreements.
Capital Raising: They seek additional funding, either through equity investments, debt financing, or other means in order to fuel the company’s growth.
Exit Planning: Promoters may plan for their exit from the company, whether through a sale, merger, or public offering.
Rights of Promoters
Being a part of the company and its incorporation, the rights of promoters include the following:
Right of indemnity
In the case of partnership or involvement of over one promoter in a company, one promoter can deem the other for any untrue statements or secret profits.
Right of preliminary expenses:
The promoter has the right to receive legitimate expenses for being a part of the company. However, it is not mandatory among the rights of promoters. It depends on the individual or the group to claim it.
Right of remuneration:
The promoters usually receive remuneration depending on the services or the director’s will. However, the promoter cannot sue the company until they have a legal contract for the same. They provide the remuneration in several ways, including:
-
- Commission
- Grant amount
- Shares
- Subscription of shares
- Buying a part of the company’s property
Apart from the rights of promoters, they have several other duties and liabilities to adhere to.
FAQs:
1. Can a company have more than one promoter?
Yes, a company can have multiple promoters. In fact, many companies have more than one individual or entity involved in their promotion and establishment.
2. How is a promoter different from a founder?
While a founder is typically someone who conceives and initiates a business idea, a promoter is responsible for the broader process of incorporating the company, securing funding, and setting it on a path to operational existence. In some cases, a founder can also be a promoter.
3. Are there any restrictions on the transfer of promoter shares?
The transfer of promoter shares may be subject to certain restrictions, depending on the company's articles of association and any contractual agreements. These restrictions are often in place to maintain stability and protect the company's interests.
4. Are promoters liable for the company's debts or failures?
Promoters may be personally liable for the company's debts or failures in certain circumstances, such as fraud or wrongful trading. However, the limited liability structure of companies shields promoters from personal financial liability for the company's obligations.
5. Can a promoter be removed from a company?
The removal of a promoter from a company can be a complex legal process and depends on the company's articles of association, shareholder agreements, and applicable laws. It often requires the consent of shareholders or board members and the reasons for removal must be legally justified.
Conclusion:
The promoters unquestionably greatly influence the establishment and success of the company. The promoters assist in establishing the business in the best ways possible, whether dealing with experts or hiring staff. If you have any legal concerns or any legal paperwork to be done, always do connect with Vakilsearch. They are India’s number one legal service provider. They will help you to complete any legal paperwork in a hassle-free manner!
Read more,
- What Happens When a Promoter Dies?
- What Is the Difference Between a Promoter and a Shareholder?
- What Are the 4 Types of Companies in India?
