Who is a Promoter?

A person who develops business ideas, assesses their feasibility, obtains resources, prepares essential documents, and engages in other tasks needed for commencing a business is known as a  Promoter.

The first stage in a company’s formation is promotion. It involves steps like identifying a business opportunity, evaluating its prospects, and then following implementation in order to start a company. ‘Promoter’ is defined as the following in Section 2(69) of the Companies Act of 2013: 

• a person who is identified by the company in the annual return under Section 92 or who is named as such in a prospectus; or
• a person who, directly or indirectly, whether as a shareholder, director or otherwise, has control over the company’s affairs; or
• a person under whose advice, guidance, or instruction the company’s board of directors of the company is accustomed to act.

A promoter performs a variety of functions to start a company. These functions are the steps of a company’s promotion. It should be noted that a promoter might be an individual, a group of individuals, or a business.

Position of a Promoter

As previously stated, a promoter performs a variety of activities to bring a company into existence. A promoter, however, is neither the company’s agent nor its trustee.

1. The promoter is personally liable for all contracts he enters into (known as preliminary contracts) prior to incorporation and is not the agent of the company because the company is not yet registered.

2. The promoter is not a trustee of the company, but he has a fiduciary relationship (i.e. a trust relationship) with the company he is promoting and should not misuse his position. He shouldn’t make any hidden profits in the transactions, and if he makes profits, then it should be made public. If the promoter fails to disclose the secret profits earned by him and the company gets to know about it, the company may: 

• Cancel the contract;
• Recover the purchase price given to the promoters; and 
• Claim damages for the loss suffered.

3. Promoters are not legally entitled to compensation for expenses incurred in the promotion of the company. However, the company may pay back these pre-incorporation costs.

4. The company may offer the promoters remuneration in the form of a cash amount or commission (based on the sale of shares or property purchased).

5. The business may allot the promoters an option to purchase shares or debentures now or at a future date.

Functions of Promoter

The following are the major functions of promoters (or steps involved in promotion):

1. Identification of a Business Opportunity: 

The formation of a company begins when the promoter identifies a business opportunity or an idea. The idea could be related to the establishment of a new business, the expansion of an existing unit, or the merging of two business units. The promoter conducts a preliminary analysis of the idea with respect to probability, the risk involved, resources necessary, and so on. After developing the concept, the promoter investigates the feasibility of the business in view.

2. Feasibility Studies:

It may not be feasible or profitable for transforming all potential business opportunities into real projects. Therefore, in order to fully understand the intended business, several factors, such as expected demand for the product, level of competition, the availability of various physical, financial, and human resources, as well as their associated costs, are estimated before investing money in the idea. The following feasibility studies may be undertaken depending on the project’s nature and with the help of specialists like engineers, CAs, etc.

• Technical Viability: Sometimes the business idea is feasible, but it may be technically impossible to implement it. It can be because the necessary technology, raw materials, and other inputs are not readily available. 
• Financial Feasibility: Every business activity needs funds. The project is said to be financially unfeasible if the required funding is so large that it cannot be arranged within the available resources. For instance, a project to create townships can be very profitable, but if funding cannot be arranged, the project lacks financial feasibility. 
• Economic Feasibility: A project can sometimes be abandoned simply because it might not be very profitable. Generally, businessmen prefer to stay with profitable ideas.

It must be noted that the specialists hired to undertake feasibility studies do not become promoters just because they are assisting the promoters.

3. Name Approval: 

The promoters have to select a name for the company and get the approval of the Registrar of Companies before using it. It must be confirmed that the name selected for the company is unique and does not match the name of another company. The registrar is given three names in order of preference. If the proposed name is not the same as the name of another existing company and is not misleading, the registrar will accept it.

4. Selecting Signatories to the Memorandum of Association: 

The promoters have to select the people who will sign the proposed company’s Memorandum of Association. The signatories of the memorandum are usually known as the First Directors of the Company. Signatories must provide their written approval before working as directors or purchasing qualifying shares. In the case of a public company, the Memorandum must be signed by a minimum of seven persons and by two persons in the case of a private company. Promoters often attempt to convince influential and experienced businessmen to sign the proposed company.

5. Appointment of Specialists: 

The promoters appoint professionals such as merchant bankers, auditors, and others to assist in the preparation and submission of relevant documents to the Registrar of Companies.

6. Preparation of Necessary Documents:

The promoter takes action to prepare the legal documents that must be presented to the Registrar for getting the company to be registered, which includes the Memorandum of Association, the Articles of Association, the Consent of Directors, etc.