Promoter

PROMOTER: Transforming a business idea into reality

Author: Poulomi Sen, IIT Kharagpur

Introduction

A corporate promoter is usually a firm or person or association of persons who administers the prefatory work incidental to the establishment of a company. The promoters are accountable for promotion, incorporation and also for hiring professional experts to assist them. Besides, a promotor also invests money during the initiation of a company.  Corporate Promoter is defined by Justice C.J. Cokeburn as[1]:

“A promoter is the one, who undertakes to form a company with reference to a given object and sets it going and takes the necessary steps to accomplish that purpose.”

In a nutshell, promoter is the one who is capable of transforming an idea of initiation of a company into reality by taking necessary steps. The promotor along with envisaging the aim and objective of initiating a company takes a practical approach towards it by bringing in raw materials, labour, manpower, financial resources, machinery etc. that are essential to lay the foundation of a company or business creating a path to register it.

Features/ Characteristics of Promoter

A promoter possesses the following characteristics:

1. A promoter transforms a business idea into a company capable of yielding profits.
2. A promoter does several examinations incidental to the initiation of a company.
3. A promoter forms a group for further assistance by making the associates sign a Memorandum of Understanding.
4. A promoter is responsible for registration of the company.
5. Drafting pre-initiation terms and conditions
6. A promoter raises funds and invests money for formation of a company.

Types of Promoter

There are basically four categories of promoter:                            

1. Professional Promoter:

The professional promoters are those specialized promoters who handle over the company to the shareholders after complying with all the requirements towards formation of a company in an efficient manner.   

• Occasional Promoters

Unlike Professional promoters, they are not specialized in this field and they do not work on a regular basis. However, they undertake the promotion of certain companies once in a while and then get back with their actual profession.

• Financial Promoters                  

The financial institutions which undertake the job or promotion are known as financial promoters.

• Managing agents as promoters

Initially, managing agents used to perform the task of a promoter. However,  in India, the managing agency system has been banned.

Duties and functions of a Promoter

• Identification of Business Objective

The promotor has to first come up with a well-defined objective of initiating a company and has to put forward the rationale behind establishing a company. The objective of setting up a business or company can be any of the following:

1. Manufacturing a new product
2. Marketing a new product
3. Providing services
4. Renovating a pre-existing product
5. Any other purpose requiring investment.

• Feasibility Studies

This is the first step towards giving a practical shape to all the ideas and objectives of initiating a company. Certain objectives and goals are not attainable at times on the account of viability. Therefore the promoter first analyzes the pre-requisites of establishing a company and tries to come up with a strategy that facilitates the setting up of a company.

Prior to the undertaking of a project, the promoters try to anticipate the repercussions by conducting feasibility research. They conduct detailed research on market trends, need of establishing a company, market analysis, merits and demerits of initiating a company, industry survey, etc. with the aid of experts in the respective fields. The following tests are required to be complied with before initiating a company.

Technical Feasibility

• The technical requirements of establishing a company has to be looked into.
• Further it has to be checked whether meeting up with those requirements are practically possible.
• It has to be confirmed that the technology required to facilitate the initiation of a company is available and affordable or not.
• The raw materials, basic goods and services are available and viable or not.
• The basic infrastructure necessary to lay the foundation of a company is possible or not.

If following tests are satisfied, the promoters will begin with the next step

Financial Feasibility

• It has to be examined whether the promoters themselves can finance the entire process of establishing a company.
• If not, then can they arrange the finance and expenses involved from somewhere?
• Can they seek for funds and loans from financial institutions?

If the following tests exhibit positive results, the promoters will move forward to the next step.

Economic Feasibility

• Whether the establishment of such company will generate commercial benefits?
• What will be the impact of such company on economy?
• Will it be a profitable venture?

It has been noticed that many-a-times, the tests of technical feasibility and financial feasibility are complied with, but despite that, it is predicted that most probably the company will not be able to yield adequate profits. In that case, investing in initiating a company will be futile.

If it economically, technically, and financially feasible to initiate a company, the promoter may continue the meticulous process of establishing a company.

• Approval of Name of Company/ Registration of name of Business Entity

After conformity with the feasibility test, a name is given to the business entity and it is registered. In this digital era, it is advisable to create a website and register its domain name as well. The registration has to be done with the registrar of the company in the state in which the company has been set up. An application for registration has to be filed consisting of three names in the order of priority. The registrar will approve one of the suggested names depending on whether it is registered previously.

• Finalising the asscociates to the Memorandum of Association

The members who will be working for the company and will be associated with the company are shortlisted. Posterior to that, their consent and approval are taken in a written format for further references. The initial members forming the company are referred to as the Directors of the company. The promoters take the signatures of the members of the proposed company in the memorandum of association for confirmation.

• Hiring of Professional Experts

Any business entity would fail to efficiently perform its functions without the aid and assistance of professionals. A company deals with numerous tasks and it will be a hefty job for the members to look after all the departments. They might not be adequately qualified to perform all the duties aptly. Therefore the promoters hire certain professional experts to look after the various departments. A legal expert is hired for handling the legal affairs of a company, a marketing specialist may be hired for marketing the products, Auditors may look after the auditing part and so on. Depending upon the type and requirements of a company, the professionals may be hired.

• Drafting essential documents

Finally all the documents legitimizing the establishment of a company has to be drafted appropriately. The documents includes Memorandum of Association, Registration Certificate, consent of Directors, statutory declaration etc.

Penalties imposed on the Promotor by the Company

• The company may impose strict penalties if the promotor is found to be indulged in some mischievous activities affecting the company including secretly making profits as the promoters has to inform the company about all the profits generated.
• In such cases, the company may even revoke the contract, terminating the promoters permanently from their job.
• The company may also ask for returning all the profits generated by the promoter in an unethical manner.
• Since a fiduciary relationship exists between a company and its promoters, they can also be sued for breach of trust by the company.

Advantages of a Promoter

The functions of a promoter in setting up a company are very crucial. Therefore the promoters are bestowed with certain perks in acknowledgment of their efforts:

• They are provided with adequate remuneration for rendering services.
• He is provided with an option to purchase shares in the company
• For selling shares, the promoters may get commission from the company.
• The promoters are allowed to yield profits from various transactions subsequent to disclosing the profits to the company.
• A company can offer to pay fixed amount of money within a certain interval of time.

Significant Judicial Pronouncements regarding Promoters

The court in the case of Kelner v. Baxter[2] held that: 

A company cannot enter into a contract or any other act in the law before its incorporation. Therefore, before initiation of a company, it will be having no liabilities for any contracts made prior to its incorporation on account of the fact that a contract requires an agreement between two consenting parties but such ratification is not possible when the company was not formed when the contract was entered into.

In the case of Braymist Ltd. v. Wise Finance Co. Ltd[3], the court concluded that:

A promoter will be personally liable for entering into a contract before the initiation of the company and the contract will be purported as a personal contract.

In the case of In re English and Colonial Produce Company[4] the court declared that:

Promotional expenses cannot be claimed unless authorized by a valid contract. Nevertheless, the promotor is entitled to get reasonable remuneration which may be provided by Articles of Association.

Lord Hatherly further highlighted that:

 “The services of a promoter are very peculiar, great skill, energy and ingenuity may be employed in constructing a plan and bringing it out to the best advantages.” Therefore he must be given remuneration.

Regarding the duties of a promoter, the court in the case of Lagunas Nitrate Co.v. Lagunas Syndiacte Ltd[5] held that:

The responsibilities of a promotor commences from the day he conceives the idea of establishing a business firm and continues till the Board of Directors are appointed and the company is formed.

The court in the case of Bagnall v. Carlton[6] held that

“If the promoter has made a secret profit by selling his own property to the company in return for allotment of shares in it, the company may recover from him the difference of the price at which it sold the shares and the price at which it bought the property.”

The court in the case of Gluckstein v. Barnes [7] declared that:

Promoters are bound to pay the company the amount of profit they made secretly. The promoters will be having the liability of paying the profits if the disclosure is not sufficient.

Conclusion

Promotion is the very step towards the establishment and initiation of a company. The entire task of promotion is done by a person of a group of persons who give physical existence to the basic idea of setting up a company that is known as promoters. In a nutshell, the promoters play a crucial role in establishing a business entity. Beginning from coming up with an idea and concept of setting up a business or company to taking a practical approach to turning the idea into a reality by following several tedious and herculean tasks. Adding on to the responsibilities, they are personally liable for all the contracts undertaken prior to the incorporation of a company. They have a sort of fiduciary relationship with the company, thereby has to conduct the entire process in a transparent and fair manner. They do not extract huge profits from promoting a company. Only a lump-sum amount is sanctioned to them in order to reimburse the expenses incurred prior to the establishment of a company.

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[1] Promoters of a company, RC Agarwal, available at, https://www.yourarticlelibrary.com/company/promoters-of-a-company-definitions-characteristics-and-other-details/42057

[2] Kelner v. Baxter  (1866) 15 LT 213.

[3] Braymist Ltd. v. Wise Finance Co. Ltd [2002] 2 All ER 333

[4] In re English and Colonial Procesure Company 6 1906 2 Ch.D. 435 CA 27

[5] Lagunas Nitrate Co.v. Lagunas Syndiacte Ltd.,1899 2 Ch392

[6] Bagnall v. Carlton (1877) 6 Ch D 371

[7] Gluckstein v. Barnes, (1900) AC 240