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 PROMOTERS AND CORPORATE
GOVERNANCE UNDER THE COMPANIES
ACT, 2013 AND ALLIED ACTS IN INDIA
Harpreet Kaur*

The term 'promoter' has been a term of frequent occurrence

in company matters in India. The Indian Companies Act, 1956
used the term to fix liability on promoters but did not define
it and accepted their established position under the Common
law principles. The Securities and Exchange Board of India,
however, defined the term 'promoter' in its Regulations. The
Indian CompaniesAct, 2013 has defined the term for the first time.
The author has proposed this study to know how the definition
of the term 'promoter'has evolved, what is the role of promoters
in corporate governance, how duties of promoters have been
enlargedfrom time to time and how obligations have been placed
on them in order to increase their accountability. The author
will trace the evolution of the term from the period when it was
said that the term 'promoter' has no definite meaning or has
never been clearly defined either judicially or legislatively2 or was
defined in terms of duties performed by them or the definition was
kept flexible to bring only those under strict duties who will fulfil
the functional concept of the definition.3

1. INTRODUCTION

The financial and securities markets in India have grown at a very fast
pace in the last decade. The fact that Indian companies are mostly family
owned and closely held companies gives a stronghold to promoters in their
companies. Increasing complexity in the nature of business transactions

Professor of Law at National Law University, Delhi. The author had presented the draft
paper under the title 'Promoters, Corporate Governance and the Companies Act, 2013'
at CLTA Annual Conference 2015 organised by Melbourne Law School, University of
Melbourne under the theme 'Corporate Law: Local and Global dimensions', Feb 1-3,
2015.
1 Emma Silver Mining Co v Lewis (1879)4 CPD 396 (Lindley J).
2 Joseph H Gross, 'Who is company promoter' (1970) 86 LQR 493.
3 JacobusMarler Estates Ltd v Marler (1913) 85 LJPC 167.
54 Journal of National Law University, Delhi [Vol. 3

relating to companies and securities market, the promoters' involvement in

such transactions makes the company and other shareholders vulnerable.
Therefore, it is necessary to understand the need to define the term 'promoter'
and the role played by him in the company promoted by him. Promoter's
obligations towards the company, statutory duties and liabilities imposed
upon him from time to time will be explored in the study in order to analyse
his importance in corporate governance.

II. 'PROMOTER': WHO HE IS?

The question raised by Nathan Isaacs4 in his paper in 1924, "can or should
anything be done by statute to clarify the exact legal status of the promoter"
has been answered by the Indian Companies Act in 2013 by defining the
term 'promoter'. 5 The question which now arises is why it took years in
defining the term and why no need was felt to define the term earlier? In
order to find an answer to the question we have to trace the evolution of the
term 'promoter' first.

In 1877, Cockburn, C.J observed in the case of Twycross v. Grant,6

"a promoter, I apprehend, is one who undertakes to form a company with
reference to a certain project, and takes certain steps to accomplish that
purpose."

Bowen, J said as early as 1879 in the case of Whaley Bridge Priniting

Company v. Green7 that the 'term promoter is a term not of law but of
business, usefully summing up in a single word a number of business
operations familiar to the commercial world by which a company is generally
brought into existence.'

Lindley J in Emma Silver Mining Co v Lewis observed that the term

'promoter' has no definite meaning. "As used in connection with the
companies, the term 'promoter' involves the idea of exertion for the purpose
of setting up and starting a company, and also the idea of some duty towards
the company imposed by it arising from the position which the so-called
promoter assumes towards it."8

It was pointed out in Jacobus Marler Estates Ltd v Marler that it is

advantageous to keep the definition flexible in terms of duties performed by

4 The Promoter: A Legislative Problem, 38 Harv L Rev 887 1924-1925

Companies Act 2013, s 2(69).
6 2 CPD 469 (1877) 541.
7 5 QBD109 (1879).
8 Lindley (n 1).
2015-2016] Promoters and Corporate Governance under the Companies Act 55

them to bring only those under strict duties of promoters who will fulfil the
functional concept of the definition. 9

Following what Cockburn, C.J had observed in the case of Twycross v.

Grant,'0 it was stated in the Weavers Mills Ltd v. Balkis Ammal" that "a
'promoter' is a compendious term given to a person who undertakes, does
and goes through all the necessary and incidental preliminaries, keeping
in view the objects, to bring into existence an incorporated company. This
process leading to the genesis of a company may include a variety of things,
not the least of them, I think, being some of the steps taken by a promoter
to ensure commencement, within a reasonable time, of the business, for
the carrying on of which the company is formed. He makes purchase of
moveable and immoveable assets, enters into contracts involving rights and
obligations and applies to authorities for a variety of things, all on behalf of
the company to be formed."

On the basis of the above, it can be said that the term 'promoter' was
never considered a legal term but was used to refer to persons involved in
the promotion of business and operations of companies. The term has been
frequently used as the company form of business organisation has been the
most advantageous type of business organisation for conducting any business
and the persons promoting companies have been involved in decision-making
for companies due to their position in companies.

However, Joseph H. Gross in his celebrated article 'Who is a Company

Promoter?' Wrote that it was rather intentional to not provide a definition
in English Legislation, because if legislation tries to define it then someone
might escape from the liability who otherwise enjoys the position of promoter
but not coming under the definition.1 2 The other reason for not defining the
term may be that it should be left to be treated as business term only as it
is not possible to give a workable definition which may apply to all types
of companies and business promoted by 'promoters'. Where the legislature
is silent about any definition, the scope of judicial interpretation increases.
It is submitted that probably it was probably thought it will be possible to
fix accountability on all those persons who can be bracketed under the
term 'promoter' if they have been involved in any fraudulent activities in
conducting the business of the company in the absence of any definition.

9 (1913) 85 LJPC 167.

10 2 CPD 469 (1877) 541.

" AIR 1969 Mad 462.

12 Gross (n 2).
56 Journal of National Law University, Delhi [Vol. 3

Probably this was the reason that the erstwhile Indian Companies
Act, 1956 was silent as to who is a promoter but could not avoid fixing
liability on a 'promoter'.13 The joint and several liability was fixed on every
promoter who was party to the preparation of the prospectus to compensate
the investor for any loss sustained by him due to any untrue statement given
in the prospectus. The same section defined 'promoter' with reference to his
involvement in the preparation of the prospectus. i.e., on the basis of the work
done by him but did not give the meaning of.14 It excluded persons involved
in professional capacities in such preparation in order to protect them from
liability to compensate.

In 2009, Regulation 2(za) of Securities and Exchange Board of India

(Issue of Capital and Disclosure Requirements) Regulations, 2009 [SEBI
(ICDR) Regulations, 2009] defined the term by means of an inclusive
definition.1 5 This definition puts promotors in three categories namely,
persons who are in control of the issuer, who formulated the public offer
and who are named as promoters in the offer document. The definition,
therefore, limits itself to a public offer or private placement of securities
by a public company under the second category. Promoters of any private
company will not fall under second category till the company converts into
a public company. The need, therefore, is to analyse as to who are in the
control of Issuer Company and who are named as promoters in the offer
document.

Let us examine who are 'persons in control of the issuer' and 'persons
named as promoters in the prospectuses'. The SEBI (ICDR) Regulations,

13 Companies Act 1956, s 62. The provision fixes liability on every director of the
company, every person who authorised himself to be named as director, every promoter
who was party to the preparation of the prospectus and every person who authorised the
issue of prospectus to compensate for any untrue statement given in the prospectus.
14 Companies Act 1956, s 62(6). The provision explains that the expression "promoter"
as meaning a promoter who was a party to the preparation of the prospectus or of the
portion thereof containing the untrue statement.
15 According to the definition, the "promoter" includes:

(i) the person or persons who are in control of the issuer;

(ii) the person or persons who are instrumental in the formulation of a plan or programme
pursuant to which specified securities are offered to public;
(iii) the person or persons named in the offer document as promoters.
It excludes any director or officer of the issuer or a person, if he is acting merely in his
professional capacity. It further says that a financial institution, scheduled bank, foreign
institutional investor and mutual fund shall not be deemed to be a promoter merely by
virtue of the fact that ten per cent or more of the equity share capital of the issuer is held
by such person. However, they are treated as promoter for the subsidiaries or companies
promoted by them or for the mutual fund sponsored by them.
2015-2016] Promoters and Corporate Governance under the Companies Act 57

2009 have used the definition of 'control' as given by SEBI (Substantial

Acquisitions of Shares and Takeovers) Regulations, 2011.16 It has provided
an inclusive definition of the term 'control' and says that it includes the right
to appoint majority of the directors or to control the management or policy
decisions. 7 The scope of the term 'promoter' is enlarged multifold by this
definition because it includes not only the right to appoint majority of the
directors on the board of a company but also the power to take management
or policy decisions, directly or indirectly. It is a well-known fact that the
persons who promote companies generally wish to have such control in
their hands. Such control can also be exercised through shareholder's rights,
management rights, shareholder's agreements, voting agreements or in any
other manner. 8 When a promoter is a majority shareholder, it is an established
fact that he can appoint directors and take management/policy decisions. But
here even a person who may not be involved in the promotion of the company
but either through shareholder's agreement or voting agreement or in any
other manner if has control over the company will become a promoter for the
company. The obvious question will be whether he did anything to promote
the company? Should this lead to the conclusion that a person can become
a promoter of a company at any point in time during the life of a company?
It is submitted that 'promotion' has to be understood not only for the initial
promotion and incorporation of a company but during the subsistence of the
company too. Therefore, we may have promoter simpliciter and those who
become promoters at a later stage.

A person can become a promoter of a company by virtue of being named

as a promoter in the offer document of a company even if he does not fit in
the categories of promoter simpliciter and a promoter by virtue of his rights
in a company. It may be a business need for a company to name any person
as a promoter. The question to be considered is whether he will be bound
by duties and be held accountable for non-performance of his duties? What
if after the capital is raised by the company, he gives a public notification
that he is not a promoter of the company and frees himself from liabilities.
Will he be held liable for the acts of the company while he was a promoter
or can he defend himself by pleading his unawareness? It is submitted that

16 SEBI (Substantial Acquisitions of Shares and Takeovers) Regulations 2011, reg 2(e).

"control" includes the right to appoint majority of the directors or to control the
management or policy decisions exercisable by a person or persons acting individually or
in concert, directly or indirectly, including by virtue of their shareholding or management
rights or shareholders agreements or voting agreements or in any other manner: Provided
that a director or officer of a target company shall not be considered to be in control over
such target company, merely by virtue of holding such position;
17 ibid.
" ibid.
58 Journal of National Law University, Delhi [Vol. 3

if he is named as a promoter, he will be bound by duties and liabilities as

promoter simpliciter.

Here it is also necessary to examine one more definition of the term

'promoter' given by Unlisted Public Companies (Preferential Allotment)
Rules, 2003 which apply to unlisted companies.1 9 According to these Rules,
'promoter' means the person in over-all control of the company and the one
who holds himself as a promoter. Rules have not defined 'over all control'
but the word 'control' which includes the right to appoint majority of the
directors or to control the management or policy decisions exercisable by
a person or persons acting individually or in concert, directly or indirectly,
including by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner. 20 It is submitted
that the 'person who holds himself as a promoter' will include the one who
has either agreed to be named as a promoter in the offer document for private
placement or represent himself as promoter of the company in dealings of
the company.

Let us now examine the definition given by the Companies Act, 2013.21
In this definition, first category simply includes persons either named as
promoters or identified by the company as promoters in the prospectus or
annual returns filed by the company. 22 It does not provide any help as to the
meaning of the term 'promoter'. It is submitted that the person who has been
so named or identified will have to give a public notice promptly when he
comes to know in case he is not having such relationship with the company
in order to avoid liability.

19 Unlisted Public Companies (Preferential Allotment) Rules 2003, r 3(2).

"Promoter" means
-

(a) the person or persons who are in over-all control of the company; and
(b) the person or persons who hold themselves as promoters.
Explanation: Where a promoter of a company is a body corporate, the promoters of that
body corporate shall also be deemed to be promoters of the company.
20 Rule 3(3), Unlisted Public Companies (Preferential Allotment) Rules, 2003
21 Companies Act 2013, s 2(69).

The provision provides that "promoter" means a person-

(a) 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
(b) who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of
the company is accustomed to act:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely
in a professional capacity.
22 Companies Act 2013, s 2(69)(a).
2015-2016] Promoters and Corporate Governance under the Companies Act 59

Second category includes a person who has control over the affairs of
the company, directly or indirectly whether as a shareholder, director or
otherwise.23 This is again a very broad category because the control can
be exercised not only by being a shareholder or a director but otherwise
also, all categories in which control can be exercised under SEBI (SAST)
Regulations, 2011 will also fall here. 24

Third category includes any person as a promoter who may not necessarily
be a shareholder or a director of a company but he has control over the
Board of directors of the company.25 He may be a promoter simpliciter who
after incorporating the company moves out of the company but controls
from outside. This category can bring in its ambit all such people who
exercise control from outside the company as the Board of Directors of the
company is accustomed to act in accordance with their advice, directions or
instructions. Here the control is exercised through the control over the Board
of directors.

On the basis of above discussion, it is submitted that it is not necessary

for promoters to be subscribers to the memorandum of the companies for
incorporation or to be shareholders of the companies that they are promoting
and they can promote a company from outside or later on become promoter of
an incorporated company. A person need not be involved in the promotion or
incorporation of the company but he can be a promoter even if he is involved
in the process of raising capital for the company after incorporation of the
company. It is further submitted that the word 'promotion' is not restricted to
incorporation of the company, it includes incorporation, formation, financing
and making the company a going concern. Can it be concluded here as
was proposed by Joseph H. Gross that the legislature no longer believes the
term to be a business term and is confident that it will not be possible for
any person in the position of a promoter now to escape from liability as the
definition is a very wide one?

III. WHAT IS HIS RELATIONSHIP WITH COMPANY PROMOTED

BY HIM AND WHAT IS His DUTY AND LIABILITY?

The questions which have been raised repeatedly earlier about relationship
of promoter with the company that he promotes include whether this is a
fiduciary relationship, whether he is an agent of the company promoted
by him, whether he is liable on pre-incorporation contracts, or should the

23 Companies Act 2013, s 2(69)(b).

24 SEBI (n 16).
25 Companies Act 2013, s 2(69)(c).
60 Journal of National Law University, Delhi [Vol. 3

principle of estoppel or assignment be applied.26 These questions have been

more or less settled over the years.

The business of promotion of companies offers advantageous position to

promoters. Therefore, the courts have been inclined towards treating him as
a fiduciary agent for the company. Lord Cairns in Erlangerv. New Sombrero
Phosphate Co 27 said, "They stand, in my opinion, undoubtedly in a fiduciary
position. They have in their hands the creation and moulding of the company.
They have the power of defining how and when, in what shape and under
what supervision the company shall start into existence and begin to act as a
trading corporation." The Madras High Court 28 also observed that the basic
element in duty is something that needs no saying, namely, their duty is to
promote the interests of the company.

Since it is established that promoter stands in a fiduciary relation to the

company promoted by him, the question arises should he be allowed to make
profits from his dealings with the company? The question was answered in
Omnium Electric Palaces Ltd v. Baines that there is no duty that a promoter
must restrain himself from making any profit whatsoever in the business of
promotion. 29 In the case, a company was incorporated for the purposes of
buying property of a promoter where the payment was to be made from the
shareholders' money. It was held that the chief duty of a promoter as a fiduciary
agent is to disclose to the company his position, his profit and his interest in
the property which is the subject of purchase or sale by the company.30 It is,
therefore, clear that there is no objection to profit making by promoters of
companies if they do it after making full disclosures to the company. Brian
also agreed that a promoter can keep his profits if profits are earned after
making a full, frank and complete disclosure particularly where promoter is
selling his property to the company or the company is incorporated to take
over his assets. As compared with the promoter, an ordinary seller of goods
is under no obligation to disclose his profit to the buyer. Promoter is, on the
other hand, obligated to do so because of his fiduciary relationship with the
company. He further says that the company has all remedies against him as
it has against any seller of goods if he does not act honestly. The promoter
here is in advantageous position in comparison to an ordinary seller but if
we do not allow him to sell at market value of the property, it will not be
justified. 3
'

26 Nathan Isaacs, 'Promoter: A Legislative Problem' (1925) 38 Harv L Rev 887.

27 (1878) 3 App Cas 1218, 1236.
28 AIR 1969 Mad 462.
29 (1914) 1 Ch 332 CA,
30 Avtar Singh, Company Law (16th edn, EBC 2015) 131.
31 Brian E McCrea, 'Disclosures of Promoters' Secret Profits' (1969) 3(3) University of
British Columbia Law Review 183.
2015-2016] Promoters and Corporate Governance under the Companies Act 61

It is also established that disclosure is not the proper word to use when
a person who plays many parts announces to himself in one character what
he has done and is doing in another. 32

It is submitted that fiduciary relationship is true for all categories of

promoters whether they are involved in formation and incorporation of the
company or financing and making the company a going concern. Such
fiduciary relationship comes to end when a promoter ceases to have the
relationship of promotorship with the company. Obviously this relationship
will cease to exist when any promoter occupies the position of an ordinary
shareholder of the company and does not continue in the position of the
promoter.

If we examine promoters' liability for pre-incorporation contracts, we

find that it is well established that such contracts can be ratified by the
company after coming into existence.33 Where a promoter makes a pre-
incorporation contract, if it is warranted by the terms of incorporation, the
company may adopt and enforce it. 34 The other party may also enforce the
contract if the company after incorporation adopts it and it is within objects
of the company.35 Where promoter incurs personal expenses for incorporation
purposes, the company can reimburse him in the form of issuing shares or
debentures to him or he may like to become ordinary shareholder of the
company.

Let us now discuss duties and liabilities imposed by the Companies Act,
2013. Following duties have been imposed on promoters by the Act:

a. Incorporation of companies: Promoters are put under liability along

with the first directors of the company under section 447 of the Companies
Act which provides punishment for frauds.36 In order to avoid such a
liability, a promoter has to ensure that no fraudulent act is committed or
no false, incorrect information or representation is made in the documents
or declaration is submitted to Registrar of Companies for incorporating
a company. He has also to ensure that no material fact or information is
concealed through the documents or declarations.

32 Gluckstein v Barnes 1900 AC 240,247 (Lord Macnaughten).

33 Under Common law after incorporation a company can accept pre-incorporation
contracts entered into by promoters on its behalf. The Indian Specific Relief Act 1963
has provided specifically for such pre-incorporation contracts under ss 15 and 19.
34 Specific Relief Act 1963, s 15.
35 Specific Relief Act 1963, s 19.
36 Companies Act 2013, s 7.
62 Journal of National Law University, Delhi [Vol. 3

b. Alteration of memorandum and variation in terms of contract or objects

in prospectus: Section 13, Companies Act imposes a restriction on the
company which has issued prospectus and raised money from the public.
Such a company cannot alter its objects for which money was raised unless
the company passes a special resolution and details are published. The
promoters and shareholders in control of the company are under an obligation
to provide exit opportunity to dissenting shareholders in accordance with
SEBI regulations in this regard. Under section 27, a company cannot vary
the terms of a contract or objects referred in the prospectus issued to public
except by way of special resolution. Promoters and controlling shareholders
are under a liability to provide exit opportunity to dissenting shareholders
as per the terms of SEBI regulations.

c. Issue of prospectus: Section 26, Companies Act, 2013 requires particulars

regarding legal actions against promoters of the company to be disclosed in
the prospectus. 37 Every promoter is under a duty to disclose any litigation
or legal action pending or taken against him during the last five years
immediately preceding the year in which the company issues the prospectus.
Such litigation or legal action may be taken against him by a Government
Department or any statutory body. Such a disclosure is mandatory not only
when the prospectus is being issued at the time of incorporation of the
company but whenever a prospectus is issued by the company during the
life of the company. It is important to note that section 26 has very clearly
provided that its requirements have to be fulfilled irrespective of whether the
prospectus is issued on behalf of company or any person who is interested
or engaged in the formation of the company and whether it is issued during
incorporation or at any time subsequently to the formation of the company.38
Therefore, the promoter is under a statutory liability for ensuring that all
particulars are stated in the prospectus as per the section. He also has to
ensure that all required reports are provided and declare that all compliances
are made. 39 It is clear now that even if he is not directly associated with
raising of funds or financing activities but only is a promoter simpliciter of
the company he is under a duty to see that all statutorily required matters

37 The provisionprovides for matters to be stated in the prospectus.

38 Companies Act 2013, s 26(1). Every prospectus issued by or on behalf of a public
company either with reference to its formation or subsequently, or by or on behalf of any
person who is or has been engaged or interested in the formation of a public company,
shall be dated and signed.
39 Companies Act 2013, s 26(1)(c). The provision requires a declaration to be made
about the compliance of the provisions of this Act and a statement to the effect that
nothing in the prospectus is contrary to the provisions of this Act, the Securities Contracts
(Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992 and
the rules and regulations made thereunder.
2015-2016] Promoters and Corporate Governance under the Companies Act 63

are stated in the prospectus being a promoter of the company. Any omission
or inclusion of a statement which may mislead investors should also not be
given in the prospectus. The golden rule as to the framing of prospectus
must be followed by them. "The public is at the mercy of the company
promoters. Everything must, therefore, be stated with strict and scrupulous
accuracy."40

d. Liability for mis-statements in prospectus: Criminal liability for mis-

statement in the prospectus is provided by section 34 of the Act. Under
the section, a promoter will be jointly criminally liable if he authorised
issue of prospectus containing untrue or misleading statement or included or
omitted some information which becomes misleading for investors. Section
35 provides for civil liability for mis-statements in prospectus. Promoters
may be held liable with all directors, experts and others who authorised issue
of the prospectus of the company along with the company for compensation.
Compensation is given to the person who trusting the mis-statement or
omission or inclusion in the prospectus, invested in the securities and
suffered loss or damage. Under section 36, any person who fraudulently
induces others to invest money in the company can be held liable under
section 447. Although the section does not mention specifically the liability
for promoters but they can be held liable under the section.

e. Liabilityfor private placement: The Companies Act, 2013 has provided

for offer or invitation for subscription of securities on private placement for
the first time under section 42. If such a private placement is in contravention
of the section, promoters along with directors and company can be held
liable for a penalty.

f Disclosure in the statement for special notice for general meeting of the
company: Section 102 provides for statement to be annexed with the notice
for special business to be transacted at a general meeting of the company.
It states that a statement about nature of concern or interest, whether
financial or otherwise about each item of special business for every director,
key managerial person and their relatives should be given. Although the
promoters are not specifically mentioned but under sub section (4) promoters
and others may be held liable for non-disclosure or insufficient disclosure.
Such a liability will be imposed only if any benefit accrues to him or others.
They will be required to hold such benefit in trust for the company. They will
also be liable to compensate the company to the extent of the benefit received
by them. Such a liability does not affect any other liability which may be

40 New Brunswick and Canada railway and Land Co v Muggeridge (1860) 3 LT 651
(Kindersley VC).
64 Journal of National Law University, Delhi [Vol. 3

imposed upon them. Further, if any default is made in following the section,
promoter shall be punishable along with the company and directors.

g. Appointment of directors in case of vacation of office: The promoters

have a duty to appoint the required number of directors in case all the
directors vacate their office due to any of disqualifications given by section
167. Such directors hold office till the company in general meeting appoints
directors.

h. Cooperation with company liquidator: The promoters are under a duty

to extend full support to the company liquidator in the discharge of his
functions and duties when winding up starts under section 284.

i. Application to the Tribunal to apply to get an opportunity to revive and

rehabilitate the company: The promoters of a company can apply for
reviving the company even after passing of winding up order by the Tribunal
if they feel that the company can be revived. 41

j. Duty to appearbefore the Tribunal: In case of a company under winding

up, if the Company Liquidator reports that any fraud has been committed in
the company by any person in the promotion, formation, business, or conduct
of affairs of the company since its formation, the Tribunal has the power to
examine the promoters of the company. The promoter will be under a duty
to appear before the Tribunal.42

Let us now look at the obligations of promoters under the Securities and
Exchange Board of India (SEBI) Regulations:

a. Disclosures under Clause 35 of the listing agreement: Promoters

are required to disclose shareholding pattern of the companies and
disclose their shareholding, changes in shareholding pattern and
provide a statement on locked in shares. This disclosure requirement
is applicable on promoter groups as well as persons acting in concert
with promoters.
b. Minimum Promoter Contribution: Under SEBI (Issue of Capital and
Disclosure Requirements) Regulations, 2009, promoters of a public
issuer are under a duty to contribute as per regulation 32 which provides
for minimum promoters' contribution in different types of issues.
When a company is coming up with an initial public offer, promoters
have to contribute not less than 20% of the post issue capital size and

41 Companies Act 2013, s 289.

42 Companies Act 2013, s 300.
2015-2016] Promoters and Corporate Governance under the Companies Act 65

in case of further public offer, this should be either to the extent of

20% of proposed issue size or post issue capital. Such contribution is
also provided for composite issues and issue of convertible securities.
It also provides for cases where promoters' contribution requirement
will not be applicable. Eligibility of securities of promoters for the
purposes of promoters' contribution is provided by regulation 33.
Such contribution is non-transferable and should be locked-in as per
Regulations 35 and 36 for a period of three years.
c. Delisting of equity shares: Promoters along with other persons are
under a duty to be honest towards the shareholders and the company.
They are prohibited to use any manipulative device, scheme or
artifice for delisting purposes or giving exit opportunity or engage in
transactions which may be fraudulent or constitute any deceit upon
any shareholder or other person. Promoter is under duty to fix the exit
price in compliance with the regulations and maintain the amount in
the escrow account.
d. Disclosurefor acquisitions: Under SEBI (Substantial Acquisition of
Shares and Takeover) Regulations, 2011 the promoters of any target
company are required to disclose their shareholding and voting
rights at the time of acquisition and they are under duty of continual
disclosure for every financial year. They also have to disclose the
securities encumbered by them.

Under Unlisted Public Companies (Preferential Allotment) Rules, 2003,

there is requirement of disclosure of intention by promoters/directors/key
management persons to subscribe to the offer of preferential allotment and
the company is required to disclose shareholding pattern of promoters and
others classes of shares before and after the offer.

Restrictions or prohibitions imposed on promoters are as under:

1. Maximum shareholding of promoters: Maximum shareholding of

promoters in the company promoted by them is limited to seventy five
percent only. This limit was imposed by SEBI in 2011 and the deadline for
reduction of shareholding was 2013. Many methods were suggested by SEBI
for the purpose and opportunities were given but still many promoters were
not able to meet the deadline and reduce their shareholding. 43

43 Minimum Public Shareholding under Securities Contracts (Regulation) Rules

1957 <www.sebi.gov.in/cms/sebi data/boardmeeting/1350559669479-a.pdf> accessed
12 August 2016; Press Trust of India, 'Sebi Warns Promoters on Minimum Public
Shareholding', (NDTV Profit, 26 May 2013) <http://profit.ndtv.com/news/corporates/
article-sebi-warns-promoters-on-minimum-public-shareholding-322659> accessed 12
August 2016.
66 Journal of National Law University, Delhi [Vol. 3

2. Where promoters become ineligible for preferential allotment of

securities:

a. Regulation 72, SEBI (ICDR) Regulations: When any promoter or

person belonging to the promoter group has sold his equity shares
in the issuer during the six months preceding the relevant date for
preferential allotment, the promoter and promoter group 44 becomes
ineligible for allotment of specified securities on preferential basis.
b. Where any promoter or person belonging to the promoter group had
previously subscribed to warrants of an issuer but failed to exercise
the warrants, they become ineligible for issue of specified securities
of such issuer on preferential basis for a period of one year.

3. Institutional Placement Programme under regulation 91 G of the

SEBI (ICDR) Regulations: The promoter or promoter group cannot make
institutional placement if the promoter or any person of the promoter group
had purchased or sold the eligible securities during the twelve weeks period
prior to the date of the programme. They are prohibited from purchasing or
selling eligible securities during the twelve weeks period after the date of
the programme:

4. Use of funds of the company during delisting: Regulation 4 of SEBI

(Delisting of Equity Shares) Regulations, 2009 provides that no promoter
shall directly or indirectly employ the funds of the company to finance an
exit opportunity. When securities of a company are compulsorily delisted
by the stock exchange, the company, its promoters and any other company
promoted by them are restrained from accessing the securities market or
seek listing of equity shares for a period of ten years.

Although SEBI has put promoters under many duties, obligations and
restrictions but we find that manipulations and frauds relating to securities
of the companies by their promoters are increasing. As per the BSE, 4578
promoters of different listed companies have been debarred by SEBI either
from accessing securities market or buying, selling dealing in any particular
security since 2007.45 Promoters have been banned from accessing securities
market due to their inability to maintain mandated minimum public
shareholding in listed companies, misuse of IPO proceeds, 46 manipulations

44 SEBI (ICDR) Regulations 2009, s 2(1)(zb).

45 'SEBI Debarred Entities' (BSE) <www.bseindia.com/investors/debent.aspx?expandable
=4> accessed 12 August 2016.
46 ET Bureau, 'Sebi Bans 3 Bankers and 7 Companies for IPO Violations Including
Atherstone Capital, PNB Investment Services' The Economic Times (Mumbai, 29 December
2011) <http://articles.economictimes.indiatimes.com/2011-12-29/news/30568791 1
merchant-banking-listing-day-ipo-proceeds> accessed 12 August 2016.
2015-2016] Promoters and Corporate Governance under the Companies Act 67

in share prices before and after the preferential allotment of securities 47

and generating fictitious long term capital gains. In the recent Sahara case,
promoters were banned because the company did not provide adequate
disclosures while raising money form public through sale of convertible
debentures. 48 Where promoters are not able to maintain minimum public
shareholding, their voting rights, dividends and other benefits in respect to
their excess shareholdings are being suspended by SEBI. 49 Many promoters
pledge their securities in order to meet their financial needs even securities
which fall under promoters' contribution are pledged by them. 50 Many
promoters lose their money when pledged securities are converted by the
lenders.

IV. ROLE IN CORPORATE GOVERNANCE AND

ACCOUNTABILITY

A promoter simpliciter who is involved in the formation and incorporation

of the company has to comply with the requirements relating to incorporation
as provided by the Companies Act, 2013. All documents required for
incorporation have to be prepared and filed with the registrar of companies.
He has to arrange for the funds for making the company a going concern and
select competent directors for the company. His duty to provide independent
board of directors under common law and under the Company Law when
he is a majority shareholder for the company which he is promoting is an
important aspect of the corporate governance especially for closely held
companies.

When a promoter occupies the position of a director, his obligations

become many fold. He has to follow the duties prescribed for directors under
the common law and the Companies Act, 2013. The Companies Act, 1956 did

47 ET Bureau, 'Sebi Bans 260 Entities from Markets; Accused of Misusing Exchanges'
The Economic Times (20 December 2014) <http://articles.economictimes.indiatimes.
com/2014-12-20/news/57257601_1_securities-market-artificial-volume-rajeev-kumar-
agarwal> accessed 12 August 2016.
48 Sachin P Mampatta, 'Sebi Bans Sahara Promoters from Raising Funds' DNA (25
November 2010) <www.dnaindia.com/money/report-sebi-bans-sahara-promoters-from-
raising-funds-1471686> accessed 12 August 2016.
49 Ashwin Punnen, 'Top Guns to be in Sebi's Line of Fire' Financial Chronicle (28
July 2014) <www.mydigitalfc.com/news/top-guns-be-sebi's-line-fire-222> accessed 12
August 2016.
50 Dev Chatterjee and Sachin P Mampatta, "Promoters Cash in on Bull Run to get their
Pledged Shares Released' Business Standard (13 June 2014) <www.business-standard.
com/article/companies/promoters-cash-in-on-bull-run-to-get-their-pledged-shares-
released-114061300234_1.html> accessed 12 August 2016.
68 Journal of National Law University, Delhi [Vol. 3

not impose any statutory duty on directors except for duties in preparation of
financial statements and accounts. S. 166 of the Companies Act, 2013 has not
only prescribed six duties to be followed by directors but has also prescribed
punishment for contravention of such duties.51

In dual capacity a promoter has to ensure that he promotes the objects of

the company in good faith. As a promoter he will be influential in finalizing
the articles, he has to ensure that such articles are workable, administrable
and in compliance with the Companies Act. His fiduciary obligation will
be limited not only towards the company but also towards the whole body
of the members of the company. He will have to act for the best interests
of company, its employees, community and environment. He has to ensure
independence of judgment and avoid conflict of interests. This is a strict
duty in view of the popular and preferred type of companies incorporated
in India where promoters are mostly family members and also the majority
shareholders. Promoters generally keep important decisions to themselves
and do not share with directors of the companies.

When a promoter is a majority shareholder of the company, he has to

ensure that he provides an independent board of directors for the company.
In view of the increasing cases of corporate frauds, the Companies Act,
2013 has mandated every listed public company to have one third of total
number of directors to be independent directors. 52 He has to prevent exercise
of majority power which hinders the exercise of minority rights. Promoters
and other shareholders in control of the company are required to provide
exit opportunities to dissenting shareholders in relation to alteration of
memorandum 53 and variation of contracts or objects in prospectus. 54 His duty

51 1. Directors are required to act according to articles of the company.

2. Directors have to act in good faith in order to promote the objects of the company.
They should act for the benefit of the all members of the company and in the best
interests of not only the company but its employees, shareholders, the community
and for protection of environment.
3. Directors should be diligent in performing their duties and should take due and
reasonable care in such performance. They have to work with independent judgment
in such performance.
4. Directors are prohibited to involve themselves in any conflict of interest situation
either directly or indirectly.
5. Directors are prohibited to make any undue gain or take any undue advantage for
himself or his partners, relatives and associates. They will have to compensate the
company with the amount equal to such gain.
6. The last duty prohibits a director from assigning his office to any other person.
52 Companies Act 2013, s 149(4).
53 Companies Act 2013, s 13(8)(ii).
54 Companies Act 2013, s 27(2).
2015-2016] Promoters and Corporate Governance under the Companies Act 69

will be to follow obligations relating to securities of the company imposed

on him especially in relation to private placement of securities. 55

The promoters now fall under the definitions of 'officer' and 'officer who
is in default' which makes them more accountable towards the company.56
The definition of 'officer' under s. 2(59), Companies Act, 2013 includes
any person in accordance with whose directions or instructions the board of
directors is accustomed to act. If not all directors even if any one or more
of the directors is or are accustomed to act under directions or instructions
of a person, that person will be an officer of the company. Therefore, a
promoter can be held liable as an 'officer' as well as an 'officer who is in
default'. S. 2 (60) while defining 'officer who is in default' includes any
person in accordance with whose advice, directions or instructions the board
of directors of the company is accustomed to act.57 Such an officer in default
can be held liable to any penalty or punishment.

Besides this, a blanket penalty provision is provided by s. 450, Companies

Act, 2013. It provides for punishment in cases where no specific penalty
or provision has been provided by the Act. This provides punishment for
contravention of any provision, rule or any condition, limitation or restriction
by a company or any officer, or any other person. Any approval, sanction,
confirmation, recognition, direction etc. regarding a matter should have been
given on the basis of such condition, limitation or restriction. As an officer,
now promoter can also face penalty under this section.

V. CONCLUSION

The definition of 'promoter' was intentionally not given in order to

enlarge the scope in the given circumstances to put liability on persons
by bringing them under the term 'promoter' and common law was found
sufficient in this respect earlier. Promoters in Indian companies being closely
held companies are no doubt in an advantageous position in comparison to
other shareholders or directors in the company. They often take advantage
of their position in financial transactions of the company. SEBI being a
securities market regulator in India had to define the term 'promoter' because
promoters were found involved in frauds and manipulations relating to public
offerings and private placements of securities. The Companies Act, 2013
has also defined the term in order to identify persons who are involved in
management or business decisions of a company. As we have seen it has

5 Companies Act 2013, s 42.

56 Companies Act 2013, ss 2(59) and 2(60).
5 Companies Act 2013, s 2(69)(c).
70 Journal of National Law University, Delhi [Vol. 3

also provided statutory duties of promoters to make them accountable to

the company and other shareholders of the company. The duties fixed by
the Companies Act are similar to existing common law duties for promoter
simpliciter or in case of a promoter director.

Pledging of shares and rigging of issue proceeds by promoters has

been a continuous issue in Indian companies. 58 Even the securities received
under the requirement of minimum contribution at the time of public issues
are pledged by the promoters. SEBI is trying to overcome such issues by
providing more regulations but it also increases complexity. SEBI cooperated
with promoters in order to help them in reducing their shareholding to
have minimum public shareholding but still many have not been able to
meet the deadline. Promoters started applying to SEBI to reclassify them
as public shareholders. After the deadline for reducing promoters' stake,
many promoters reclassified themselves as ordinary shareholders. 59 SEBI
has worked out the process and conditions under which it will be possible
to remove promoter tag and become ordinary shareholders. 60 In view of
increased obligations imposed on promoters by the Companies Act and
SEBI, perhaps this trend will become common. 61 They play an important
role in corporate governance of a company due to their decision making
capacity in their companies. It's not uncommon to find that directors of
companies are often not aware of long term strategies of promoters.

Both the law and regulations are trying to prevent promoters from
manipulations, exploiting their relatively important position in companies
and have increased their accountability. We have to wait and watch to come
to a conclusion whether the provisions under the Companies Act, 2013 will
have desired effect in making the promoters accountable and improve the
corporate governance of companies in India.

58 'Promoters who have Pledged the Maximum Shares in their Company' (CNBC TV18)
<www.moneycontrol.com/bse/shareholding/promoters-pledged-company.php> accessed
12 August 2016.
59 Jayashree P Upadhay, 'Shareholder Reclassification put on Hold' Business Standard
(5 August 2015)<www.business-standard.com/article/markets/maintain-status-quo-on-
shareholder-classification-nse-115080400920_1.html> accessed 12 August 2016.
60 Press Trust of India, 'Sebi Approves New Norms for Re-Classification of Promoters'
The Economic Times(23 Jun 2015)<http://articles.economictimes.indiatimes.com/2015-
06-23/news/63746385_1_promoters-draft-norms-new-norms> accessed 12 August 2016.
61 Press Trust of India, 'Sebi Issues Norms for Reclassifying Promoters as Public
Shareholders' Business Today (30 December 2014) <http://businesstoday.intoday.in/
story/sebi-norms-for-promoter-as-public-shareholders/1/214077.html> accessed 12
August 2016.