ANALYSIS OF PROMOTERS IN THE CONTEMPORARY WORLD BY - NAVEEN.M
AUTHORED BY - NAVEEN.M
INTRODUCTION
The formation of a company does not
take place overnight. It involves various steps like promotion, Registration,
Floatation, and the launch of a Business. For the commencement of every
business, the primary stage is “Promotion.” Promotion refers to the entire
process by which a company is brought into existence, from the development of
the idea to form a company to the actual formation of the company. And the
person who does “Promotion” is called a Promoters or Promoter Group. As per
section 2(69) of the Companies Act, 2013, "promoter" means a person
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) who has control over the
affairs of the company, directly or indirectly whether as a shareholder,
director or otherwise; (or) by whose advice, directions, or instructions the
Board of Directors of the company is accustomed to act. In simple words, a
promoter or promoter group means any person, association, partner, or company that
conducts all the activities ranging from the pre-incorporation stage to all the
important affairs of the company.
Recently, the Securities and Exchange
Board of India ('SEBI') has issued a consultation paper on redefining the
definition of corporate 'promoters' and moving toward the concept of 'person in
charge. This has led to the rise of questions on the rationality of this shift.
So, in this research paper, we will be analyzing the concept of promoters &
Promotion, its duties, and the rationale behind the suggestion of redefining
the definition of corporate 'promoters' and moving toward the concept of
'person in charge. Firstly, we will be looking into the concept of promotion
and promoters in detail. Then, we will be looking into many sub-topics like
functions and the importance of promoters. We will also be looking into the duties
and liabilities of a promoter. Last but not the least, we will be looking into
the reason for redefining the term “Promoters” and the need to revisit it. We
will also investigate the positive and negatives within the reform.
I. PROMOTERS: AN IN-DEPTH
UNDERSTANDING
Let us first define the phrase
"promotion" before attempting to grasp the term "promoter."
Therefore, the term "promotion" is used widely to refer to the
initial procedures done to register and list the firm. And those responsible
for promotion are referred to as "Promoters. “In the corporate world, A
promoter is someone who performs all essential preliminary work as a byproduct
of the company's development or promotion. One need not have been involved in
the company's inception to be a promoter; someone who later helped coordinate
the "floating" of its capital will also be recognized in this
capacity[1].
The term “promoters” is defined in section 2 of Companies At, 2013. According
to Section 2(69) of the Companies Act of 2013, a promoter is defined as “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 who has control over the affairs
of the company, directly or indirectly whether as a shareholder, director or
otherwise; or in accordance with whose advice, directions, or instructions the
Board of Directors of the company is accustomed to act[2]”.
In Twycross v. Grant (1877), Cockburn CJ defined a promoter as someone or a
person who agrees to organize or orchestrate a corporation concerning a certain
project, to get it started, and to take the essential actions to carry out that
enterprise[3].
So, in simple words, a promoter is like the parent of the company. They come up
with the idea of how to structure the company with the prior knowledge and
experience they gained from the corporate world, plan and form the objectives
of the company, bring in the best directors for running the company, and bring
in the best investors for the development and flotation and looks after all the
documentation required for starting the company. In short, they are like the
bird which builds the best nest for its babies.
II. PROMOTERS: TRACING THE ORIGIN
To understand where it all started,
we must look back at the pages of the history of mankind. When man started
settling after the agricultural revolution took place, some people started
cultivating certain products. The hunter-gatherers were the people who produced
animal products. But the problem was that they were not able to obtain
agricultural products. Likewise, the people producing agricultural products were
not able to obtain animal products. Hence, as a solution to this problem, there
started the practice of exchange of materials between individuals. However, not
every man could have the same level of skill and talent. Some men made
high-quality products, and those men were considered specialists. This
specialization of the individuals created a demand for one product from other
specialized persons. With an increase in population and the efficacy of the
techniques used in production, several individuals started competing with one
another for occupying the market for themselves. However,
capturing the market is not as simple as said. The implementation of many
techniques of trade was essential for this. And here came Promoter into the
picture. Just like other specialists, the promoter was also a specialist in
capturing the market. And people started seeking them. And this was how
promoter originated. And then, these evolved over the years.
III. TYPES OF PROMOTERS
Based on the classification of the
nature of work they perform, and the number of individuals who perform, these
promoters are broadly divided into four types: They are Professional Promoters,
Occasional Promoters, Financial Promoters, and Managing Agents as Promoters of
a company.
1. Professional Promoters:
If we take professional promoters, as
the name suggests, these individuals fall under the category of specialists who
are deeply expertized in the field of foundation and promoting of a company
right from the induction stage of that company and sometimes during the formation
of a company and that period. At the onset of the firm and its taking over a
particular position in the market as its own, the promoter hand over the
accounts, working, and all other furnishings that it had done on the company to
the original shareholders of the company as their work got over after the firm
establishment of the company in the market. In India, many such professional
promoters indulge in such kind of activity. One cannot deny the role that they
play in the incubation of a company from its scratch and is very vital for its
growth.
2. Occasional Promoters:
These types of promoters would not
function as done by professional promoters, as these types of promoters are the
ones comprised of persons who are not into stuff like active promotion of a
business as a routine function in their lives. Usually, the responsibilities of
promoting 2-3 companies are only vested in promoters of this type. As a
simultaneous way of understanding this type, these people are involved and
coordinate among themselves alone in the promotion activities of a company and
take part in the events or significant serious affairs of the company and about
the activities of the business.
3. Financial Promoters
As the name suggests, this is a
category of promoters who are involved in the promotion of the company from a
more financial perspective like those who indulge in investing of capita of any
form including money and are entitled to hold a position in the company like an
extensive palisade in the corporation. These promoters tend to ask for and get superpowers
like voting rights on their hand which results in a strong influence on their
part for the daily day functioning of the activities related to the business of
a company. For example, institutions related to finance like banks such as the
State Bank of India, or insurance companies like the Life Insurance
Corporation, etc. also act as promoters of some infamous companies.
4. Managing Agents as Promoters of a
company:
This is an obvious category of
promoter where these agents are always used in moving new companies into the markets
of a nation, say, India, for which as a return, they get the managing agency
rights.
IV. PROMOTERS: THE FUNCTIONS
A Promoter plays a very important
role in the formation of a company. But nothing in this world
shall function efficiently without the concerned person doing his functions
properly. Behind every importance, there lies a function, which is ought to be
carried out properly. Likewise, the Promoters also have their own set of functions
to be carried out. In
their capacity as Promoters, they perform some functions to incorporate and
develop a company. The functions of the Promoters are not vast, yet does have a
crucial effect on the company’s growth and development.
the first Function of the Promoter is
to conceive an idea for the formation of a company by exploring all the
possibilities. The formation of the company does not work which can
be done overnight. It needs a lot of planning beforehand. As the promoter of
the company, he/she should come up with a suitable idea for the formation of
the company.
The
Promoter's next function is to create a blueprint for the company and choose
the company's corporate objectives or goals. A company without a favorable
blueprint and objectives is something equal to stagnant water. All it could
bring is the downfall of the company. Hence, the promoter has the
responsibility to create a blueprint that helps in the development of the company
and forms a suitable object for the company.
The
Promoter's next function is to draught the company's prospectus, articles of
association, and memorandum of association. Additionally,
it is the promoter's responsibility to finance all initial costs and locate the
best and most competent investors to support the business. The Promoter also
has the responsibility to make agreements with suppliers, legal consultants,
and other individuals required or needed for the company's Flotation.
Another
function of the promoter is to decide on which place the headquarters or the
registered office should be placed. The promoter should search for the most
suitable place for the registered office, which could foster the development of
the company and help in gaining maximum profit.
Along
with all these functions, the promoters also have other functions like looking
after the documentation process, naming the company, registering it, and
selecting the apt directors for the company. So, these are the main functions
of Promoters. Besides this, there are other functions too which are minute in
nature.
V.
PROMOTERS: THE DUTIES AND RESPONSIBILITIES
The
Companies Act of 2013 talks about the liabilities of a promoter throughout the
Act. The liabilities are stated across different sections of the Act like
Sections 34, 35, and section 339[4].
But when it comes to the duties of the promoters, the act does not have
anything to say about it. There is not even a single section discussing the
duties of the promoter. And this led to the misuse or abuse of the position by
the promoters. There are many instances where the promoters, taking advantage
of the loopholes, have misused their position by laundering the company’s money
for their benefit. Hence, intending to stop this, the Indian courts came up
with their derived law discussing the duties of the promoters.
1)
Duty to disclose secret profits
This duty was emphasized for the
first time in the case of Gluckstein v. Barnes[5].
In this case, it was held by the court that a promoter must inform the
company's shareholders of the financial profit he made through the process. The
promoter is bound with the duty to disclose whatever profit he/she had made. It
is not that the promoters cannot make a profit at all, but the rule is as
simple as that he should disclose the profit. In simple words, no secret profit
should be made. For example, if X, who is the promoter of company Y, buys land
for the company for 1 crore and sells it with a profit of 20 lakhs to the
company, then he is duty-bound to disclose the profit he made. However, the
consent to gain this profit lies with the company only. It is just like the
need for the principal’s consent for the agent’s profit. However,
the promoter is not duty-bound to reveal the profit if they are selling their
own land. (Land bought before entering the role of promoting)[6]
2)
Duty to disclose interest
The
next duty that lies on the promoter is the duty to disclose his/her interest in
a transaction. Just like the duty to disclose the profit, the promoter also must
reveal whether they have any interest in the transaction that is made for the
company. The promoter is duty-bound to disclose, both interest and profit, to
the directors’ board or the investors[7]
of the company. In the case of Erlanger v. New Sombrero Phosphate Co[8].,
the court held that if a promoter fails to declare his interest in the contract
with the company, it is a breach of the promoter's duty, and the company may
withdraw the contract and demand the money to be reimbursed.
3)
Duty to disclose the legal actions
The
next duty of the promoter is to mention if there is any legal action against the
promoters, in the prospectus. Every
promoter is bound with the duty to reveal the presence of any legal proceedings
that have been brought against them in the five years prior to the year in
which the firm releases the prospectus[9].
These
are the duties laid down by the courts. However, the absence of clear
legislation stating the different duties of the promoter has always been a
point of emergence of issue. Hence, there is a need for the Indian legislation
to revisit the Companies Act and incorporate the duties of the promoters in it.
VI. PROMOTERS: THE LIABILITIES
The
Indian Judiciary system does not have any problem when it comes to discussion
about the liabilities of a promoter. As aforementioned, unlike the duties of a
promoter, the liabilities of a promoter are mentioned through different
sections in the Companies Act. The Companies Act of 2013 holds the promoters
accountable for any misconduct or any other actions such as earning secret
profits and providing false information in the company’s prospectus.
The
liabilities are as follows: -
1)
“Criminal liability for misstatements in the prospectus”- Section 34
Section
34 of the Companies Act talks about the criminal liability for misstatements in
prospectus. Section 34 states that “Where a prospectus, issued, circulated or distributed under this
Chapter, includes any statement which is untrue or misleading in form or
context in which it is included or where any inclusion or omission of any
matter is likely to mislead, every person who authorizes the issue of such
prospectus shall be liable under section 447”[10].
Section 447 which talks about the punishment for fraud states that any person
liable under section 447 shall be imprisoned for at least 6 months, extendable
to 10 years, and shall also pay a fine.
We all know the fact that drafting a
prospectus is one of the functions of the promoter. So, logically, the promoter
could be the person who could have drafted, and hence liable. So, the promoter
will be liable for any misstatement in the prospectus.
2)
“Civil liability for misstatements
in prospectus”- Section 35
Section
35 of the Companies Act, 2013 talks about civil liability for misstatements in
prospectus. According to section 35 of the Companies Act, the promoter has the
liability to pay compensation to those people who purchased stocks based on a
false statement, omission, or inclusion on the prospectus by the promoter and
subsequently incurred loss or injury.
3)
Liability to attend the tribunal
Section 300 of the Companies Act,
2013 says that “where an order has been made for the winding up of a company by
the Tribunal, and the Company Liquidator has made a report to the Tribunal
under this Act, stating that in his opinion a fraud has been committed by any
person in the promotion, formation, business or conduct of affairs of the
company since its formation, the Tribunal may, after considering the report,
direct that such person or officer shall attend before the Tribunal on a day
appointed by it for that purpose, and be examined as to the promotion or
formation or the conduct of the business of the company or as to his conduct
and dealings as an officer thereof.”. In simple words, if the tribunal directs
the promoter to attend before the tribunal at a specific date based on the
Company Liquidator’s report, then the promoter is liable to attend it.
4)
Liability for fraudulent conduct of
business
Section
339 of the Companies Act states that if any activities to defraud the creditors
are done during the shutting down of the company, then the person shall be
liable for fraudulent conduct. Section 340 states that if a person is found
guilty of misfeasance or a breach of trust, or has misdirected or kept any
unaccounted corporate property, shall be held liable. These two sections shall
apply to the promoters also. the promoters are liable under sections 339 and
340 of the Companies Act.
VII.
SEBI’S RECOMMENDATION: A NEEDED REFORM?
India
has implemented several initiatives to encourage economic activity, including
Start-up India, incentive programs tied to production, etc, resulting in the
enhancement of the economic outlook of our country. The Securities and Exchange
Board of India (SEBI) recently recommended four additional reforms with the
same intent to fundamentally alter the business climate in India. The four
reforms were:
a)
Reduction of the minimum promoter
contribution’s lock-in periods
b)
Rationalization of the 'Promoter
Group' definition
c)
streamlining group company
disclosures
d)
Replacing the concept of a
"promoter" with that of a "person in control"
In
this chapter, we could not be focusing on the first three reforms, rather could
be focusing only on the fourth reform mentioned above; the reform shifting the concept
of the promoter to the “person in control.”
Nothing
in this world is stagnant. Everything is subjected to evolution and
transformation as time flows, with the corporate world not being an exception.
Over the decade, the corporate landscape and business trends have transformed a
lot. But I believe, the transformation has only resulted in the concept of
promoters and promoter groups becoming less prevalent and a burden to the
shareholders. Business trends demonstrate the existence of promoters since they
are categorized as such even when they do not have a commensurate
financial stake. Even though shareholders are the ones who make the financial
investments in the firm, it seems as though promoters receive an excessive
amount of weight in corporate governance because of the unique advantages and
preferential treatment that the legal system affords them. As a result, the
SEBI reform to change the definition of "promoter" to "person in
charge" is both required and beneficial.
There
are a lot of issues pertaining to the concept of promoters. As mentioned
earlier, the corporate world has developed so much that companies have started
to develop and survive without a promoter itself. Companies like Zomato and Larsen
are some of the companies which do not have promoters or promoter groups. For
such companies, the laws related to promoters by itself is not relevant. Also,
there are many instances where the promoter’s permission is needed for
initiating a process in the company. For example, Regulation 31A states that the
process of reclassification of the promoter can only commence at the demand of
the promoter. Such rules completely paralyze the working company and its board of
directors from even thinking about reclassification. In short, the role of the promoter
is just like an honorary post. It does not have much use, and it stands as an
obstacle any many instances. Hence, I could say that the reform is needed and
useful.
VIII. SEBI’S REFORM: THE JOURNEY AND
THE OBSTACLES AHEAD
As I mentioned before, the reform to
change the definition is much needed and useful. By doing this reform, Promoters'
accountability needs can be lowered, providing them with greater relief concerning
disclosures and other duties and responsibilities that is bound to them. Also,
after this reform, the management and governance of the company could be must
easier, as it could be done by the person in control, with no requirement of
getting any permission from the promoter of the company. To say in simple
words, there could no longer be any promoter-dependent process, and hence the
process could be easier. Also, due to this reform, compliance requirements will be much
easier, due to which, more private firms will step forward to get in as listed
companies, expanding the securities market. This will encourage foreign
investment even more. However, every positive shall always have some negative
impact within it. Likewise, there are a few obstacles in this case also.
The first barrier is the potential
uncertainty surrounding the transitional phase, which may undermine stability
and the business process. Also, the drafting part is very crucial. Drafting
should be done with utmost preciseness and accuracy, such that no loopholes are
present. A vague definition could result in misuse and abuse by using
loopholes. Also, it could result in a situation where different courts come up
with different interpretations, resulting in chaos. Hence, it must be rigidly
read while carefully stipulating their rights to bring it into compliance with
global best practices. Also, when the definition of promoters is changed, it
should be clearly stated upon whom the liability falls.
VIII. CONCLUSION:
Promoters are equal to the founders
of the company. Right from the naming of the company, to the documentation
part, most of the jobs required to establish a company lie on the promoter
only. They play a very crucial part in building the foundation of the company.
They have their own set of duties and liabilities. The liabilities of a
promoter are listed in the Companies Act itself, through many sections like sections
34, 35, 39, 40, etc. however, when it comes to the duties of the promoter, the
act has not mentioned anything. However, the courts have derived thein version
explaining the duties of the promoters.
Recently, the Security Exchange Board
of India came up with some reforms related to promoters. They came up with a
total of 4 reforms, out of which, one reform was to change the definition of
promoters to “person in control”. I believe that this reform is much needed
because, in the changing world, promoters have become less prevalent, and their
presence has started to become a burden. Hence, a new definition is needed.
However, that is not as easy as we think. The drafting should be done with
utmost accuracy. Even a slight mistake could result in a total collapse, creating
chaos. Hence, I could say, that reform is needed, but is not needed urgently.
By taking enough time, precise drafting should be made.
BIBLIOGRAPHY
·
PRIMARY SOURCE
1)
Companies
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2)
SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2009
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·
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2)
Sarah
Worthington, “Text Cases & Materials in Company Law,” 11th
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Shivam
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Sumit
Kumar Suman, “Position of Promoter in India: Critical analysis,”
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Ajay
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·
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1)
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