Promotion of a Company

Meaning. Promotion is the first and, in many ways, the most creative stage in forming a company. It covers everything that happens between the birth of a business idea and the actual registration of the company — discovering an opportunity, verifying that it is workable, and assembling the people, property and capital needed to turn it into a functioning company.

Who is a Promoter? Section 2(69) of the Companies Act, 2013 defines a promoter, in effect, as a person who:

• has been named as a promoter in the prospectus or in the annual return of the company, or
• 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 is accustomed to act.

A person giving advice in a purely professional capacity — a chartered accountant, company secretary or advocate helping to draft the incorporation papers — is not treated as a promoter merely because of that professional role.

Functions of a Promoter. A promoter typically:

• identifies a promising business opportunity and carries out a preliminary investigation into its technical, financial and economic feasibility;
• decides on the name of the company and gets it approved by the ROC (through the online name-reservation facility that is now part of the SPICe+ incorporation form);
• arranges for the drafting of the Memorandum of Association and Articles of Association;
• appoints the first directors, bankers, auditors and legal advisors of the proposed company;
• enters into preliminary (pre-incorporation) contracts on behalf of the company that does not yet legally exist; and
• arranges the initial capital needed to get the company registered and running.

Legal Position of a Promoter. A promoter is neither an agent nor a trustee of the company in the strict legal sense, because the company itself does not exist as a legal person until it is incorporated — and one cannot be an agent of a person who does not yet exist. Even so, the law places a promoter in a fiduciary position towards the company he is bringing into being and towards its future shareholders. This means a promoter must act in good faith and must not make any secret profit out of the promotion without disclosing it. If a promoter sells his own property to the company, or earns a commission from a third party in the course of promotion, he must disclose the profit — typically to an independent Board of Directors, or to the shareholders through the prospectus or the Articles. If he fails to disclose such a profit, the company can rescind the contract, recover the secret profit, or sue the promoter for damages for breach of his fiduciary duty. …