WHO IS PROMOTER? WHAT ARE THE PROVISIONS FOR REMUNERATION TO PROMOTER?

 PROMOTER [Sec 2(69)]-  Fiduciary relationship with company

Promoter means a person

(a) Who have been named as such in prospectus or in annual return u/s 92,

(b) who has control over affairs of company directly or indirectly;

(c) In accordance with whose advice, direction or institution BOD is accustomed to act

 

Provided that nothing in subclause(c) shall apply to a person who is acting merely in professional capacity.

Control= more than 50% shares. Or.  Power to form policy

Person can be an individual,  company, AOP, BOI, HUF , Firm, any other form of entity.

Prospectus is the document to invite the public for subscription of shares.

Functions of Promoter

a) Generating the idea of starting a business and forming company.

b) Making a feasibility study to determine whether business is profitable or not.

c) Preparation of MOA and AOA and other documents.

d) Arranging Subscribers and signatories for MOA.

e) Filling the required documents with Registrar.

f) Appoint the first directors 

g) Entering into pre-incorporation contracts 

h) Making arrangement of issue of shares

*** Mere Subscribers to Memorandum cannot be a Promoter. All above conditions must be fulfilled.

*** If Promoter leaves the company he will not be considered as Promoter anymore because he has lose his control over the company. He will be called as former Promoter.

In this case the present Promoter of the company would be the individuals or entities currently playing a significance role in control of management & decision-making.

This could include:- 

a) co-founders

b) Investors

c) Board Members

d) New Individuals or Entities 

Pre-incorporation contracts 

If Promoter enters into pre-incorporation contract before Incorporation of company there will be three situation after the Incorporation where the Promoter have to present the contract at Board meeting to BOD's.(Board Resolution must be passed)

Situation-1: Board may approve the contract = company will be liable

*** approval must be in expressed form not in implied form. If it was not expressed then Promoter will be liable even if company is enjoying the benefits of pre-incorporation contract.

Situation-2 : Reject the contract = Promoter will be liable

Situation-3 : Novation of contract = modify the contract - company will be liable

Once company adopts or Novates the contract , third party neither sue the Promoter nor could refuse to perform. Third party is bound to perform.

### If Promoter has made any secret profit in pre-incorporation contract it must be disclosed to BOD in Board meeting.

If any default made by Promoter and later on company knows the fact:-

a) company can rescind the contract within a reasonable time.

b) company can recover the secret profit

c) can sue the Promoter for breach of trust 

Provision for Remuneration to Promoter 

The Promoter shall have no right to:-

a) recieve any Remuneration from the company  or;

b) recover the preliminary expenses properly incurred by them for Incorporation of the company unless the company after the Incorporation has contracted the same with Promoter.

### Even when the articles provide that the company shall pay Remuneration to promoters or reimburse expense, such Provision is not binding the company.

Remuneration type

a) shares at discount

b) lumpsum amount

c) commission on property and asset purchase

d) commission on sale of shares to members

e) Buying of shares at a fixed price (today) in future

f) purchase of promoter's property at higher price.