The role of the promoter in forming a company is undisputed. Under the Companies Act, a promoter is defined as a person who takes preliminary steps to form, establish, and organize a company, sometimes even before it comes into legal existence. A promoter is liable to visualize the future of the company and also arrange all the necessary resources required and meet all the legal requirements that bring the company into legal existence.

Promoters play an important role in setting up a company under the Companies Act. The article discusses the meaning, types, rights, powers, duties, and functions of a promoter as defined by the Companies Act 2013, and provides a comprehensive overview of his role.

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Meaning of Promoter

For this Act, a promoter shall generally mean a person who performs all the necessary steps towards forming a company and getting it ready for its operation. According to Section 2(69) of the Companies Act, a promoter can be defined as follows:

1. He is named as a promoter in the prospectus of the company or in the annual returns in Section 92 of the Companies Act.

2. Who directly or indirectly controls or purports to control the companies, either through a shareholder's interest or a director's interest or otherwise;

3. On whose instructions the company's Board of Directors often acts.

Thus, a promoter is involved at the very inception of the company, handling the establishment and coordinating key aspects that make the company operationally and legally viable.

Types of Promoters

Promoters are classified into different categories based on the nature of their involvement and commitment to the company:

1. Professional Promoters: 

These are individuals or companies that specialize in the formation of a company. Several companies are structured as professional services, which, once the company is formed, closes the project and moves to another one.

2. Occasional Promoters: 

These are individuals who occasionally participate in the formation of companies. Sometimes professionals in other fields of occupation, when an opportunity arises, help in forming a company but don't make this an occupation.

3. Financial Promoters: 

These promoters are generally big financial institutions, like banks or investment firms. They create companies for investing and sowing returns but do not necessarily remain invested after incorporation.

4. Entrepreneurial Promoters: 

These are a class of promoters who create companies they want to manage themselves. They certainly take an active part in management after incorporation. Generally, these promoters are visionaries or founders who plan to see their ideas grow into a fully functioning concern.

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Rights of Promoters

The promoters are entitled to several rights as considered by the Companies Act. These rights aim towards proper compensation and recognition for the effort and resources. These rights include the following: importance of rights of promoters.

• Indemnity Right: Promoters have the right to be indemnified by the company for all the valid expenditures incurred towards the promotion of the company.

• Right to Remuneration: If agreed, promoters can receive remuneration or fees upon rendering their services. Remuneration can be in the form of cash, stocks, and other incentives as agreed.

• Right to sell property to the company: The promoters may have property that the company needs to acquire. They can sell the said assets to the company if they have been declared, but the terms should be clear and fair.

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Powers of Promoters

The promoters have some powers that are very crucial in the process of making and pre-incorporating actions of a company. Though these powers are essential, they are typically used before the company lawfully comes into existence. Promoter powers include:

• Decision-Making Authority: The power to make decisive decisions with regard to the organization, goals, and initial operations of the company under an action referred to as a constitutive decision, which forms the foundation of the future.

• Pre-Incorporation Contracts: The promoters may agree on contracts regarding an enterprise, such as renting office space, supplier contracts, or even employment contracts. However, these have to be approved by the company when established.

• Fundraising Power: The promoters should mobilize funds by liaising with banks and investors, among other financial institutions, to ensure that the company gets the required amount of capital.

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Duties of Promoters

While the promoters have significant responsibilities, they are also subject to acting in good faith. The Companies Act brings various responsibilities to safeguard against potential misuse of authority by the promoters. They include the following duties:

1. Duty of Disclosure: While carrying on their responsibility in setting up the company, the promoters have to disclose personal interest or profit. It is expected that all of their dealings will be transparent.

2. Duty of Loyalty: The promoter acts in the best interest of the company, along with the need to put the interest of the company before personal profit.

3. Duty of Accountability: Promoters manage resources and funds with proper care so that no misuse of company assets takes place for personal benefit.

Functions of Promoters

Promoters perform various functions, from conceptualization to fulfilling legal requirements. Some of the major duties performed by promoters are as follows:

1. Conceptualization and Feasibility Study: The promoter conceptualizes the business model of the company and undertakes a study of market feasibility to determine its viability.

2. Legal Formalities: Promoters arrange for all legal formalities, such as drafting and filing documents and making all necessary compliance under relevant laws; besides, they seek the incorporation of the company with the concerned authorities.

3. Appointment of Directors: The promoters identify suitable candidates for key positions, like directors and other top-notch positions, so that the venture becomes smooth after establishment.

4. Resource Acquisition: The promoters raise preliminary assets such as office space, machinery, or technology to begin the company's operations.

5. Fundraising: They negotiate with financial institutions, investors, or shareholders to raise preliminary capital for the company's formation.

6. Pre-Incorporation Agreements: The promoters enter into agreements such as a tenancy arrangement or equipment purchase to meet preliminary requirements before company formation is legally achieved.

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Liabilities of Promoters

Promoters are accountable to the Companies Act for any acts of malfeasance and are held accountable to act responsibly and ethically.

• Liability for Misrepresentation: In case promoters withhold information or give false information, they become liable for misrepresentation and can be sued.

• Contractual Liability: The promoter is liable under contracts entered into before incorporation. As soon as the company comes into existence, it ratifies such contracts and makes the promoter free from further liability.

• Breach of Duty: The promoters can sue the defaulting individuals in respect of failure to discharge duties on their part, either failing to act in the best interest of the company or making a profit at the expense of the company.

Restrictions and Limitations on Powers of Promoters

The powers of the promoters are very strictly exercised only during the formation and initial setting-up process. Once the company has been legally incorporated, the powers and authority vested in the promoter are usually passed on to the Board of Directors. More restrictions are as follows:

• No Secret Profits: The promoters shall not make any secret profits or benefits from the transactions relating to the formation of the company which were not disclosed.

• No Conflict of Interest: The promoter should not do anything that could be prejudicial to the interest of the company and that may bring him a conflict of interest.

• Personal Liability for Unauthorized Contracts: The contracts entered into by promoters on behalf of the company bind the company unless those agreements are subsequently adopted by the company.

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Conclusion

Promoters under the Companies Act play a very vital role in the incorporation of a company as well as in setting the foundation for its business operation. They conceive, raise capital and resources, and fulfill the legal requirements of incorporation. The promoters have certain powers to form the company but are also restricted by a range of fiduciary duties—the duty to act in good faith, disclose personal interests, and avoid conflicts of interest, among other duties.

The liabilities imposed ensure the proper exercise of powers by promoters. This liability is imposed on any act of misconduct or breach of duty. The liabilities created are stern for promoters so that they can balance their authority with a commitment to ethical conduct, transparency, and fairness in all dealings related to the company. Defined roles, rights, and duties as outlined in the Companies Act promote the idea of a fair process in setting up a company so that the interests of the company are of the essence and the rights of shareholders, as well as stakeholders, are not compromised.

Promoter as per Companies Act FAQs

Q1. What does the term 'promoter' entail in the Companies Act? 

A promoter forms and incorporates a company, conceives, arranges resources, and makes all the necessary legal arrangements to bring the company into existence.

Q2. What types of promoters are there? 

There are four types of promoters: professional, occasional, financial, and entrepreneurial. All differ by level of involvement and intent.

Q3. What are the rights of promoters?

Promoters are entitled to an indemnity of expenses, to remuneration for their efforts, and may sell their assets to the company if properly disclosed.

Q4. What are the obligations of promoters? 

Obligation towards the company with promoters to act in good faith, disclose personal interests, avoid conflicts of interest, and ensure that dealings are transparent to the company's advantage.

Q5. What is the liability of a promoter?

A promoter is vicariously liable for misrepresentation, breach of duty, and pre-incorporation contracts and must act fairly so that personal liability does not arise.

Q6. What restriction is placed upon the powers of a promoter by the Companies Act?

The Companies Act limits the powers of promoters to pre-incorporation activity. On post-incorporation, it vests authority in the Board of Directors of the company.