Promoter Meaning and Function

10/07/2020 1 By indiafreenotes

A person who involves in the promotion the company. A promoter is a person who does all necessary preliminary work, incidental to the formation or promotion of the company. To be a promoter one need not necessarily be associated with the initial formation of the company; one who subsequently helps to arrange floating of its capital will equally be regarded as a promoter.

The expression ‘promoter’ has not been defined under the Companies Act, although the term is used expressly in Sections 2(69), 35, 39, 40, 300, and 317 of the New Company Act, 2013. Even in English law, no general statutory definition of ‘Promoter’ is available.

As per Section 2(69) of the Act, 2013 defines the term ‘Promoter’, it means a person-

  • Who has been named as such in a prospectus or is identified by the company in the annual return to in Section 92
  • Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise
  • In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act

Types of Promoter

“A promoter is the one who envisages an idea for setting up a particular business at a given place and carries out a variety of formalities required for starting a business.” A promoter is the one who envisages an idea for setting up a particular business at a given place and carries out a variety of formalities required for starting a business. A promoter may be an individual, a firm, an association of persons or a company.

The promoters may be professional, occasional, financial or managing promoters. Professional promoters handover the company to the shareholders when the company starts. Unfortunately, such promoters are very scarce in the developing countries.

They have played an important role in many countries and helped the business community to a great extent. In U.K. Issue house, in U.S. Investment Bank and in Germany, Joint Stock Banks have played the role of promoters very significantly.

  1. Occasional Promoters

Occasional promoters are those whose main interest is the floating of companies. They are not in promotion work on regular basis but take up promotion of some companies and then go to their earlier profession. For example, engineers, lawyers etc. may float some companies.

  1. Financial Promoters

Financial promoters do the task of promoting the financial institutions. They generally take up this work when financial environment is favorable at the time. Managing promoters played a significant role in promoting new companies and then got their managing agency rights.

A promoter is neither an agent nor a trustee of the company as it is a non-entity before incorporation. Some legal cases have tried to spell out the standing of promoters.

Functions of Promoter

A promoter plays a very important role in the formation of a company. A promoter may be an individual, an association or a company. In their capacity as promoters, they perform the following functions in order to incorporate a company and to set it going. To originate the scheme for formation of the company:

  • Promoters are generally the first persons who conceive the idea of business.
  • They carry out the necessary investigation to find out whether the formation of a company is possible and profitable.
  • Thereafter they organize the resources to convert the idea into a reality by forming a company;[ix] or in other words we can say that it is the promoter.
  • Who settles the name of the company thereby ascertain the name will be acceptable by the registered of the office;
  • Who settles the content or details as to the Articles of the companies; (here, articles implies Articles of association & Memorandum of association),
  • Who nominates the directors, bankers, auditors and etc.;
  • Who decides the place where registered office (head office) have to be situated;
  • Who prepare the Memorandum of Association, Prospectus and other necessary documents and file them for incorporation.

In this sense, the promoters are the originators of the plan for the formation of a company. To secure the cooperation of the required number of persons willing to associate themselves with the project: The promoters, in accordance with whether they want to incorporate a private or public company, try to secure the co-operation of persons needed to from the company. Minimum number of members required to from a public company is seven and that for a private company the minimum number is two. Depending upon the form chosen, the promoters may decide upon the number of primary members.

To seek and obtain the consent of the persons willing to act as first directors of the company: The company has a system of representative management and is managed by individuals appointed as directors. The first directors of the company are, however, generally appointed by the promoters. The promoters seek the consent of some individual whom they seem appropriate so that they agree to be the first directors of the proposed company. To settle about the name of the company: The promoters have to seek the permission of the Registrar of companies for selecting the name of the company.