Promoter, Characteristics, Kinds

Promoter can be defined as any person or entity involved in the formation of a company. They are responsible for identifying a business opportunity, organizing resources, and bringing together the elements needed to form a company. The Companies Act, 2013, defines a promoter as a person who:

• Is named as such in the prospectus of the company.
• Has control over the company’s affairs, directly or indirectly.
• Is involved in the preparation of the documents or contracts required for the incorporation of a company.

Six Key Characteristics of a Promoter

1. Idea Originator:

Promoter is essentially the originator of the idea of forming a company. They identify the need or opportunity in the market and develop a concept around it. This idea is the basis for the business model the company will adopt.

2. Risk-Bearer:

During the promotion stage, the promoter assumes a significant amount of financial risk. They invest their own funds or arrange financing to cover the initial expenses of forming the company. These include feasibility studies, legal consultations, and other pre-incorporation costs.

3. Arranger of Capital:

Promoter is responsible for arranging the capital needed for the initial setup of the company. This may include securing investment from venture capitalists, angel investors, or financial institutions, as well as personal investments. They may also negotiate terms with banks for loans or other financial assistance.

4. Liaison with Legal Authorities:

Promoter is the one who ensures that the company meets all legal requirements for incorporation. This includes applying for the company name, drafting the Memorandum of Association (MoA) and Articles of Association (AoA), and submitting incorporation documents to the Registrar of Companies (RoC). The promoter handles these initial formalities to make sure the company is legally recognized.

5. Fiduciary Duty:

Promoters owe a fiduciary duty to the company they are forming, meaning they must act in the company’s best interests and avoid conflicts of interest. They must disclose any personal benefits they might gain from their dealings with the company, and they are expected to act with transparency and honesty.

6. Preliminary Contracts:

The promoter may enter into preliminary contracts with third parties on behalf of the company before its formal incorporation. These contracts often involve purchasing property, hiring personnel, or acquiring goods. The promoter may remain liable for these contracts if the company does not adopt them after incorporation.

Kinds of Promoters:

Promoters can be classified into different types depending on their involvement in the company’s formation and the role they play in bringing it into existence.

1. Professional Promoters:

These are individuals or firms that specialize in the business of forming companies. They are often experts in financial and legal matters and assist in setting up companies for others in exchange for fees. Professional promoters typically do not have a long-term interest in the company; their job is to handle the technical aspects of formation and then step back.

Example: Law firms, chartered accountants, and business consultants who assist in the formation of companies.

2. Occasional Promoters:

These promoters are typically individuals or entities who promote a company on a one-time basis. They do not regularly engage in company formation but do so when they identify a business opportunity or have a personal interest in starting a specific company. Once the company is set up, they may or may not continue to be involved in its operations.

Example: An entrepreneur who sets up a business but does not regularly promote companies.

3. Financial Promoters:

Financial institutions, such as banks or investment firms, may act as promoters by providing the necessary capital and expertise to start a company. These promoters have a vested interest in the company’s success because of their financial involvement.

Example: Venture capital firms or investment banks that promote companies in which they have made significant financial investments.

4. Institutional Promoters:

Institutions such as government bodies, development banks, or large corporations sometimes promote companies to support economic development or achieve strategic goals. Institutional promoters often help to form companies in sectors that require large-scale investments or are of national importance.

Example: State-owned enterprises (like public sector units) or large conglomerates forming subsidiaries.

5. Entrepreneurial Promoters:

These are individuals who start companies to pursue their entrepreneurial vision. They are typically the original founders and often stay involved with the company in a managerial or executive capacity after its incorporation. Entrepreneurial promoters are typically hands-on and continue to play a key role in shaping the company’s future.

Example: Startup founders like Steve Jobs (Apple) or Jeff Bezos (Amazon) who promote the company and stay involved in its operations post-incorporation.

6. Nominee Promoters:

Nominee promoters act on behalf of another party, usually a financial institution or a group of investors. They may be hired to set up a company but have no personal stake in the business. Their role is purely functional, as they serve the interests of the party that appointed them.

Example: A nominee appointed by a group of shareholders or an investment firm to handle the technicalities of company incorporation.