Professional Documents
Culture Documents
I. 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
Jacobus Marler Estates Ltd v Marler (1913) 85 LJPC 167.
54 Journal of National Law University, Delhi [Vol. 3
them to bring only those under strict duties of promoters who will fulfil the
functional concept of the definition.9
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.
9
(1913) 85 LJPC 167.
10
2 CPD 469 (1877) 541.
11
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.
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
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.
18
ibid.
58 Journal of National Law University, Delhi [Vol. 3
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.
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
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
Let us now discuss duties and liabilities imposed by the Companies Act,
2013. Following duties have been imposed on promoters by the Act:
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
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
e. Liability for 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.
Let us now look at the obligations of promoters under the Securities and
Exchange Board of India (SEBI) Regulations:
41
Companies Act 2013, s 289.
42
Companies Act 2013, s 300.
2015-2016] Promoters and Corporate Governance under the Companies Act 65
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
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
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
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
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.
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
55
Companies Act 2013, s 42.
56
Companies Act 2013, ss 2(59) and 2(60).
57
Companies Act 2013, s 2(69)(c).
70 Journal of National Law University, Delhi [Vol. 3
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.