Promoters of a Company - Definition, Functions and Duties
Promoters play a crucial role in establishing a company right from its inception stage. An individual or a group
of people who come up with the concept of starting a business are the promoters of a company. They carry out
the required processes to establish the firm.
The company’s promoters shape the company and thus are moulding blocks of the company. However, a
promoter is not the owner of a company. The promoter helps to establish and run the company, but the company
shareholders are the actual owners of the company.
Who Are The Promoters of a Company?
As per Section 2(69) of the Companies Act, 2013, promoter means any of the following persons:
A person named as a promoter in the prospectus or identified by the company in its annual return in
Section 92.
A person who controls the company affairs, indirectly or directly, whether as a director, shareholder or
otherwise.
A person in accordance with whose directions, advice or instructions the Board of Directors of a
company are accustomed to act.
In simple words, promoters perform the preliminary steps, like floating the securities in the market, making the
prospectus of the company, etc., for establishing the company’s business. However, if a person is doing these
things professionally, they will not be considered a promoter.
Types of Promoters of a Company
A promoter is a person/entity who conceives the idea of company formation. An individual, firm, association of
person or company can be a promoter. A promoter of a company can be any of the following types:
Professional promoter: A professional promoter is an expert in promoting the business during its formation or
inception. They transfer the ownership of the business to shareholders when it is established in the market.
Financial promoter: A financial promoter is a promoter who invests capital or money and has a sizable
company share. They promote banks or financial institutions. They aim to assess the market's financial situation
and start a company at the right moment.
Managing promoter: A managing promoter helps in company formation. They also get the managing rights in
the company after it is formed.
Occasional promoter: An occasional promoter is a promoter whose main job is to float the company. They do
not promote the business routinely since they are in charge of two to three enterprises, and they get involved
only in the crucial matters of the business.
Functions of a Promoter
A promoter plays many functions in the formation of a company, from conceiving the business idea to taking all
the required steps to make the idea a reality. Below are some of the functions of a promoter:
A promoter needs to comprehend/conceive the idea of company formation.
A promoter looks into the feasibility and viability of the business idea. He/she assesses whether the company
formation will be practicable or profitable.
Once the idea is conceived, the promoter organises and collects the available resources to convert the business
idea into a reality.
The promoter decides the company name and settles the contents of the company’s Memorandum of
Association and Articles of Association.
The promoter decides the location of the company’s head office.
The promoter nominates associations or people for vital company posts, such as appointing the auditors,
bankers and the company’s first directors.
The promoter prepares all the necessary documents required to incorporate a company.
The promoter decides the company’s funding sources and capital requirements.
A promoter cannot be considered a trustee, employee or agent of a company. The role of the promoter ceases
when the company is established and is handled by the board of directors and the company management.
Duties of a Promoter
The promoters have certain duties towards the company, which are as follows:
Disclose hidden profits
The first duty of the promoters is to be loyal to the business and not involve in malpractice. They should not
earn secret or hidden profits while carrying out promoting activities such as buying a property and selling it for
a profit without disclosing it. They are not barred from making such profits, but the only condition is that they
must disclose it. They must share all the information regarding their profitability and earnings with all the
relevant company stakeholders.
Disclose all material facts
A promoter has a relationship of trust and confidence with the company, i.e., a fiduciary relationship. Under this
fiduciary relationship, the promoter has the duty to disclose all material facts relating to the company’s business
and formation with the relevant stakeholders.
Act in the best interest of company
In all situations, promoters should prioritise the company’s interest over their personal interests. They must give
utmost consideration to the company’s best interest in its formation and all business dealings.
Disclose all private arrangements
While forming and establishing a company, many private transactions take place. However, such transactions
must be disclosed by the promoters to the stakeholders. It is the duty of the promoters to disclose all private
transactions and the profit earned from them to the stakeholders.
