Who is a Promoter in a Company? (And More Legal Questions)

A promoter, although the term creates connotations of someone in the building and construction industry, is actually a generic term associated with the person who starts a business. In common parlance, this person is also referred to as the founder of the business.The founder has various privileges and benefits associated with his status as the person who kick-started the operations. Apart from the obvious financial reward of having the majority of the equity stake in the business, the founder also has legal rights because he / she is typically an executive director in the business, and the promoter or his nominees also control majority of the board.

But let us step back for a moment and understand what the roles and duties of the promoter are, and also examine pre-incorporation contracts a little more closely.

A promoter typically is responsible for raising capital, targetting initial leads and chasing initial business opportunities, entering into the initial contracts for the business formation and incorporating the company.

Can the promoter be someone other than the founder of the business?

Although the term “Promoter” has not been defined in any law, it finds mention in a number of statutes - for instance, the Substantial Acquisition of Shares Takeovers (SEBI) Regulation states that the promoter is:

(a) any person who is in control of the target company

(b) any person named as promoter in any offer document of the target company or any shareholding pattern filed by the target company with the stock exchanges pursuant to the listing agreement, whichever is later;

So the logical meaning of this is that although the promoter ordinarily means the person who started the company, in certain exceptional cases, it can even mean the person who is in control of the company even if he / she did not actually start the company.

A common doubt most people have with regard to a promoter is with reference to the contracts, documentation and expenses incurred by the promoter prior to the incorporation of the company - these are called “pre-incorporation expenses” and most people want to know how they can be recovered from the company after the incorporation.

To cut a long story short, any expenses incurred by the entreperneur in the actual incorporation itself - i.e. on the process of incorporation, can be written off by the firm in the profit and loss account of the firm.

Any expenditure apart from the preliminary expenses can also be written off, but it depends on the nature of the expense, and there is no set formula for this treatment.