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Promoter Of A Company: Analysing Role, Rights And Liabilities Under The Companies Act, 2013

The person or people who play a key role in starting and developing a company are known as promoters. They are the ones who come up with the business idea, gather the necessary resources, and make the company come to life. In other words, a promoter is someone who takes on the responsibility of creating a company for a specific project and takes all the necessary actions to make it happen.

In three different manners, a promoter is classified under Section 2(69) of the Companies Act, 2013. Firstly, they are identified by the company in its annual return or explicitly named in the prospectus. Secondly, they have control over the company's affairs either directly or indirectly as a director, shareholder, or through other means.

Lastly, their directions, advice, or instructions are habitually followed by the company's Board of Directors. In easier language, promoters are the ones in charge of the first actions in setting up a company, like introducing stocks to the market and making the company's prospectus. It's worth mentioning that if someone does these tasks as their job, they might not be considered a promoter according to the legal definition.

Under the Companies Act of 2013, a director who is not a whole-time, managing, or nominee director is referred to as an independent director. It is a requirement for an independent director to not have any past or present involvement as a promoter of the company. Additionally, individuals who are related to the promoters or directors of the company, its subsidiary, holding, or associate company are also ineligible to serve as directors. Therefore, a promoter of a company is not able to fulfill the role of an independent director.

Types of Promoter:

A promoter, who could be an individual, a firm, an association, or a company, plays a vital role in the creation of a new company. There are different kinds of promoters, each with their own specific tasks in the process of forming a company. Firstly, we have professional promoters who are experts at promoting businesses during their initial stages and then transferring ownership to shareholders once the company is well-established in the market.

On the other hand, financial promoters invest capital and hold substantial shares in order to carefully analyze the financial situation of the market and launch a company at just the right moment. Promoters who are involved in managing play a crucial role in the creation of the company, and once it is established, they gain the right to manage it.

On the other hand, occasional promoters focus on setting up companies and usually handle important business matters. They oversee multiple enterprises without getting involved in promotional activities on a regular basis.

Functions of Promoters:

The promoter is a crucial figure in the formation of a company, carrying out a diverse range of responsibilities. Firstly, they conceptualize the business idea and meticulously assess its feasibility and profitability. Next, the promoter secures resources, determines the company name, and finalizes the Memorandum of Association and Articles of Association.

The promoter also makes decisions on the location of the company's head office and the appointment of key personnel, such as auditors and directors. Additionally, they are responsible for preparing all necessary documents for company incorporation and defining funding sources and capital requirements. It is important to note that the promoter operates independently, with no affiliation as a trustee, employee, or agent of the company.

Once the company is established, the promoter's role comes to an end, and the governance shifts to the board of directors and company management. Ultimately, the promoter acts as the driving force in turning a business idea into a tangible and functioning entity, overseeing crucial tasks throughout the company's early stages.

Rights of a Promoter:

The role of promoters in company formation comes with specific rights that are crucial to their function. One of these rights is the right of indemnity, which holds promoters jointly and severally liable for any undisclosed profits or false statements in the prospectus. This means that each promoter can be held individually accountable and can be sought after for compensation or damages by others.

Furthermore, promoters are entitled to reimbursement for preliminary expenses incurred during the establishment of the company, including costs such as solicitors' fees and advertising expenses. Additionally, promoters have the right to receive remuneration unless otherwise stated in a contract or the company's Articles of Association.

However, even if the company's Articles of Association allow directors to compensate promoters for their services, promoters cannot legally sue the company for remuneration if there is no contract specifying such terms. These rights serve as a legal framework that governs the financial aspects and responsibilities of promoters in the creation and operation of a company.

Liabilities of a Promoter:

  • It is not permissible for them to clandestinely benefit from the company's profits or engage in deals solely for personal advancement. In the event that they do garner such profits, the promoters bear the responsibility of returning said profits to the company.
  • Due to false statements made in the company prospectus, a person who subscribes for debentures or shares can hold them liable for damages or losses suffered.
  • They are criminally liable for mentioning false statements in the prospectus.
  • When there are allegations of fraud in a company's formation or promotion activities, they can be held liable for a public examination of private company documents.
  • Misappropriated company property, guilty of breach of trust, or where there is a breach of duty on their part, they are also liable to the company.

Advantages of a Promoter:

According to the Companies Act 2013, promoters are entitled to various advantages during the incorporation and early stages of a company. To begin with, they have the authority to determine crucial aspects of the company's establishment, such as the company's name, registered office address, share capital structure, and the selection of key professionals like auditors and legal advisors.

In addition, promoters have a significant role in creating the Memorandum of Association and Articles of Association, which outline the company's goals, structure, and rules. This involvement allows them to have a significant impact on the fundamental principles and framework of the company.

Moreover, promoters have the opportunity to enter into preliminary agreements with vendors and underwriters, establishing important relationships and laying the foundation for future business partnerships. They also play a vital role in arranging for the preparation, filing, and publication of the prospectus, which aids in the company's fundraising efforts.

Furthermore, promoters oversee the process of company registration and are responsible for obtaining the certificate of incorporation, which signifies the company's official legal existence.

While these privileges grant promoters the ability to shape the company's foundation and initial path, it is crucial to note that they also carry responsibilities and fiduciary duties towards the company and its stakeholders.

Legal Position of a Promoter:

Promoters hold a multifaceted legal position, encompassing a wide range of rights, duties, and obligations. These individuals or groups are responsible for conceiving and instigating the formation of a company, taking on crucial responsibilities during its establishment. As fiduciaries, they are obligated to act in the best interest of the company and disclose any hidden profits, as well as ensuring transparency regarding material facts and private arrangements.

While promoters are entitled to claim indemnity for hidden profits and false statements from co-promoters, they also have the right to reimbursement for preliminary expenses. Additionally, unless stated otherwise in a contract or the company's Articles of Association, promoters have the right to remuneration.

The fulfillment of these duties and exercise of these rights within the realm of corporate law are integral to the legal standing of promoters, shaping their role in the initial stages of the company and laying the groundwork for subsequent governance by the board of directors.


The inception of a company relies heavily on the multifaceted role of a promoter, who is responsible for conceiving the idea and thoroughly exploring its potential. Decision-making processes are a significant aspect of a promoter's responsibilities, encompassing crucial decisions such as determining the company's name, registered office location, share capital structure, and selecting key stakeholders like bankers, auditors, and legal advisers.

Promoters are also accountable for drafting and printing the Memorandum of Association and Articles of Association, which are fundamental documents that outline the company's purpose and regulations. Additionally, promoters engage in making preliminary contracts with vendors and underwriters, laying the groundwork for future collaborations.

Furthermore, they orchestrate the preparation, filing, and advertisement of the prospectus, strategically issuing capital. Finally, promoters meticulously oversee the registration of the company, ultimately obtaining the certificate of incorporation, marking the official start of the company's journey.

Written By: Md.Imran Wahab
, IPS, IGP, Provisioning, West Bengal
Email: [email protected], Ph no: 9836576565

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