Promoter | Meaning | Functions | Legal Position

Promotion is the primary stage in any business in which an individual or a group of people conceive an idea an is put into practice with the help of his or their own resources, influence and skill. The term generally refers to the sum total of all the activities connected with the formation of a company. The person who undertakes all these activities is known as the promoter.

Business promoter - Meaning, Definition, Functions, Legal position

Image: Business promoter – Meaning, Definition, Functions, Legal position

Meaning and Definition of a Promoter

We have already noted that the person who take all necessary steps to create a company and set it going is known as a promoter. He takes an active part in the formation of a company. The Promoter need not be an individual. A firm, a company or an association can be the promoter of a company. Even two or three persons can also act as the promoters of the same company.

Thus, any one can become the promoter of a company provided he performs all the acts necessary to the formation of a company. The question as to whether a person is a promoter or not, is not a question of law but a question of fact.

In this context, Bower, L.J., in Whaley Bridge Co. V. Green rightly observed as follows:

“It is not a term of law but of business operations familiar to the commercial world by which a company generally brought into existence”.

Therefore, the Act does not define the term promoter. But a number of judicial decisions have tried to explain the term.

Definition of Haney:

“Promoter is a person who conceives the idea, studies the prospects of the business critically, chalks out an attentative scheme of organisation, brings together the requisite men, materials, machinery, money and managerial ability and float the enterprise”.

Functions of a Promoter

The definitions cited above clearly brings out the peculiar functions of a typical promoter. They are as follows:

1. Promotion of an Idea: It is the promoter who has to conceive the idea of forming a company. This is the first step towards the formation of a company.

2. Detailed Investigation: The promoter, after forming an idea should make a thorough and detailed investigation of the prospects of the business. It should be done with reference to the sources of supply, nature of demand, extent of competition, capital requirements of the present and future etc. He can also take the help of technical experts.

3. Verification: The promoter should also verify whether the advises or comments or reports made by the experts are free from bias. He should also consult with other impartial and disinterested experts and should see whether the idea is commercially viable.

4. Assembling: After verification of the idea, the promoter should go ahead with the promotion of the projected company. He should find out the first directors and the subscribers to the Memorandum.

5. Financing the Proposition: The promoter, at this stage, has to prepare a plan setting out the mode of getting the necessary finance. He should arrange for finance to meet the preliminary expenses. He should negotiate with the vendors if it proposes to buy an existing business. He should also arrange for underwriting contracts. He should estimate the required capital and the availability of bank loan etc., and also the cost of raising the capital.

6. Presentation of the Proposition: Finally, after making necessary arrangements and modes of raising finance, he gets the necessary documents such as Memorandum etc. printed, filed with the Registrar and then arranges for their publication. He should take the aid of legal experts in preparing the documents and should see that the documents are strictly in accordance with the provisions of the Companies Act.

Who can be a Promoter?

Just like the companies Act does not define the term promoter, it does not specify who can act as promoter. Generally speaking, the first persons who are desirous of acquiring control over the affairs of a company are its promoters. They generally appoint themselves as the first directors. But even a company, firm or syndicate can act as a promoter.

In many cases, the vendor of the property or business which the company is to acquire, himself acts in the capacity of a promoter. Mere employees or contractors or a solicitor who prepares the documents are not promoters.

A person may become the promoter even after incorporation of the company if he does all the acts concerned with the raising of capital or publishing the prospectus.

Legal Position of the Promoter

The legal status of a promoter is incapable of precise statement because the law is very silent on this debatable question. Lindley, L.J., while describing his position in Wigpool Iron Ore Company’s case rightly remarked that

“the promoter is not an agent for the company nor a trustee for it before its formation…..”.

The reason is obvious. An agent can act only for an existing principal. As the company is not in existence at the time when the promoter started his work, he can’t be considered as a trustee of the company. As such, a promoter stands in a fiduciary relation to it.

Promoters, being in a fiduciary position, may not make, either directly or indirectly, any profit at the expense of the company he promotes.