Question

Write the role or functions of a promoter in the formation of a company.

Answer 1

While the earlier Companies Act, 1956 did not define the word “Promoter”, the Companies Act, 2013 makes an attempt in doing so. Section 2(69) of the Companies Act, 2013 defines the term promoter as a person-

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

Typically the work of the promoter ends when he hands over the control of the company to the directors of the incorporated company. The promoter has no statutory relation to the company. However, it has now well established that a fiduciary relationship exists.

The role and responsibility of the promoter are that of promoting a company or incorporating it. Once a company is formed, it becomes an independent entity and is now controlled by the board. There is no need for promoters to formally hand over the control to the board of directors. Once the company is formed the board of directors automatically take control of the company and the status of the promoters terminates there. However, mostly the promoters are the persons who eventually become the directors and hence it is only the change of designation rather than a real transfer of control.