position – duties and

PROMOTERS liabilities
remuneration
–
of
promoter contracts
Who is a promoter?
In Whaley Bridge Calico Printing Co v. Green, (1880) LR 5 QBD
109, Bowen LJ observed that, “the term promoter is used to sum
up “in a single word a number of business operations,
familiar to the commercial world, by which a company is
generally brought into existence”.
In Emma Silver Mining co v. Lewis., Lindley J 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. Hence, the term
has no very definite meaning”.
In Jacobus Marler Estates Ltd v. Marler, (1913) 85 LJPC 167., the
court observed that, the advantage of having a flexible definition
is that only those would be subjected to the strict duties of a
In Bosher v. Richmond Land Co, 89 Va 455 (case collected from
Canfield and Wormser – Cases on Private Corporations), the court
observed that, “a promoter is a person who brings about the
incorporation and organization of a corporation. He brings
together the persons who become interested in the
enterprise, aids in procuring subscriptions and sets in
motion the machinery which leads to the formation itself”.
In Twycross v. Grant, (1877) 2 CPD 469, 541., Cockburn. CJ.,
observed that, a promoter is one who undertakes to form a
company with reference to a certain project and to set it
going, and who takes the necessary steps to accomplish
that purpose. The Court held that, “the defendants were the
promoters of the company from the very beginning can admit of
no doubt. They framed the scheme, they do not only provisionally
formed the company, but were, in fact, to the end its creators,
they found the directors, and qualified them, they prepared the
prospectus, they paid for printing and advertising, and the
expenses incidental to bringing the undertaking before the world”.
The expression “promoter” has not been defined in the 1956
Act.
Section 2(69) of the Companies Act, 2013 define “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 in directly whether as a share holder, 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;
In Weavers Mills Ltd v Balkis Ammal, AIR 1969 Mad. 462, Madras High
Court held as follows:
“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 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
movable and immovable 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”
Further the court held that, as to the exact legal status of promoters,
the statutory provisions, both in England and in this country, are silent in
most part except for a couple of sections in the Specific Relief Act,
both old and new one. It appears that a promoter is neither an agent
nor a trustee of the company under incorporation but certain
fiduciary duties have been imposed on him both under the English
 Duty and Liability
In Erlanger v. New Sombrero Phosphate Co. (1878) LR 3 AC
1218, 1236., Lord CAIRNS observed the following:
“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 Court fixed the responsibility of a fiduciary agent to
the promoters.
In Omnium Electric Palaces Ltd v. Baines (1914) 1 Ch 332.,
the court observed that, “the promoter is in the situation
akin to that of a trustee of the company, and his
The promoters are the persons who are behind the
formation of the company.
They are buying property for the company, using the
capital contributed by the shareholders, hence, they
must be faithful to disclose all facts relating to the
property.
If they conceal any fact in relation to the character or
value of the property or their personal interest in the
proposed sale, the company will be entitled to set
aside the transaction or recover compensation for its
loss. They are guilty of breach of trust, if they sell the
property to the company with out informing the company
that the property belongs to him or they may commit any
breach of trust by accepting a bonus or commission from a
person who sells the property to the company.
To whom such disclosure is to be made?
The House of Lords in Erlanger v. New Sombrero
Phosphate Co., that it should be made to an
independent and competent board of directors.
A group of persons headed by E purchased an island
containing phosphate mines for 55000/- pound. A
company was then incorporated to take over the
island and to work the mines. E named 5 persons
as directors. Two were abroad. Of the three others, two
were persons entirely under E’s control. These 3
directors purchased the island for the company
at the price of 1,10,000/- pound. A prospectus was
then issued and many subscribed the shares. The
purchase of the island adopted by the
The only contention raised by the promoter was
that the company’s board of directors had full
knowledge of the facts.
The Lord Cairns rejected this contention and
observed that: “if they (promoters) propose to
sell their property to the company, it is
incumbent upon them to take care that they
provide the company with an executive body who
shall both be aware that the property which they
are asked to purchase is the promoters property
and who shall be competent and impartial
judges as to whether the purchase ought or
ought not to be made. They should sell the
property to the company through the medium of a
But in all the cases, it is not possible for the
promoters to give to the company an
independent board. For example, in Salomon
v. Salomon, the company consists of only
family members, it is just not possible to
constitute an independent board of directors in
such case.
In such case the promoter should disclose
his interest and profit to the shareholders
of the company. But, it will not be enough
to disclose the truth to the first few
shareholders. The disclosure should be
made to the whole body of persons who
In Gluckstein v. Barnes (1900) AC 240., A syndicate of
persons was formed to raise a fund, buy a property, called
“Olympia” and resell it to a company. They first bought up
some of the charges upon the property for sums below
the amount which the charges afterwards realized,
and thereby made a profit of 20000/- pounds. They
bought the property for 1,40,000/- formed a limited
company and resold the property for 1,80,000/- to the
company, of which they were first directors. They
issued a prospectus inviting applications for shares and
disclosing the two prices of 1,40,000/- and 1,80,000/- but
not the profit of 20,000/-. Shares were issued but the
company afterwards went into liquidation.
It was held that the promoters ought to have disclosed to
the company the profit of 20,000/-. The defendant, who
was one of the promoters, contended that the fact was
“it is too absurd to suggest that a disclosure to
the parties to this transaction is a disclosure to
the company. They were there by the terms of
the agreement to do the work of the syndicate,
that is to say, to cheat the shareholders; and
this, forsooth, is to be treated as a disclosure to the
company, when they were really there to hoodwink
the shareholders, and so, far from protecting them,
were to obtain from them the money, the produce of
their nefarious plans. (at p. 242).
In Emma Silver Mining Co. v. Lewis., it was held that
the duty continues even after incorporation
until the profits are fully disclosed and fully
accounted for.
In Re, Leeds & Hanley Theatres of varieties Ltd case
(1902) 2 Ch 809, it was held that, where rescission
is not possible, that is, the company is not in a
position to return the property, it can recover the
damages for breach of the duty of good faith,
though the measure of damages is the profit which
the promoter made form the breach of duty.
Further the definition of promoter is included in the
definition of related party defined under section 2(76)
of the Companies Act, 2013. Hence all restriction
stated in Section 188 shall be applicable to
promoters.
Further more, the SEBI regulations on Minimum
promoter holding, Lock in period of shares, insider
Promoter’s contracts:
According to the Common Law prevailing in England, a company
cannot enter into a contract before its incorporation because it
does not yet exist as legal person.
For the same reason, it is not bound by the contracts made
by agents on its behalf before its incorporation. (Pre-
incorporation contracts).
It is however open to the company to enter into a fresh
contract after its incorporation. Under the general
principles, it cannot even ratify such contracts made by the
promoters before its incorporation.
Section 51 of the English Companies Act, 2006 deals with ‘pre-
incorporation contracts, deeds and obligations’ and sub-section
(1) provides that a contract that purports to be made by or
on behalf of a company at a time when the company has
not been formed has effect, subject to any agreement to
Position in India: In India there is a marked deviation
from the principles of the common law.
Section 15 (h) of the Specific Relief Act, 1963 enables the
company to enforce the specific performance of the
contracts entered into by the promoters for the
purposes of company before its incorporation, if the
contract is warranted by the terms of incorporation.
e.g. by inclusion in the articles of association.
Similarly, under section 19 (e) of the same Act, specific
performance may be enforced against the company by
other parties in respect of contracts entered into by
the promoters for the purpose of the company,
provided the company has adopted the contract after
its incorporation; the acceptance thereof is
communicated to other party; and the contract is
warranted, by the terms of incorporation.
Pre-incorporation contracts may be undertaken
by the company after its incorporation either by:
(a) incorporating the contract in the terms of
incorporation, or
(b) by entering into a fresh contract with the
other party or with the promoters, or
(c) By accepting the benefits from the
contract, either expressly or impliedly.
To this extent, the pre-incorporation contract
becomes legally enforceable against the company in
India.
In Weavers Mills v. Balkis Ammal, AIR 1969
Mad 462 at 470., Madras High Court held that
where the defendants acting as the
promoters of a company purchased
certain properties expressly stating that they
did so as representatives of the company to be
formed, and that on incorporation the
company assumed possession of the
properties and improved them, these
facts clearly showed that the company
adopted the benefit of the purchase. The
property therefore belonged to the
Reg. 2 (oo) of SEBI (ICDR) Regulation 2018 define
“promoter”, shall include a person:
i) who has been named as such in a draft offer
document or offer document or is identified by
the issuer in the annual return referred to in
section 92 of the Companies Act, 2013; or
ii) who has control over the affairs of the issuer,
directly or indirectly whether as a shareholder,
director or otherwise; or
iii) in accordance with whose advice, directions or
instructions the board of directors of the
issuer is accustomed to act:
Provided that nothing in sub-clause (iii) shall apply to
a person who is acting merely in a professional
Provided further that a financial institution,
scheduled commercial bank, foreign portfolio
investor other than individuals, corporate bodies
and family offices, mutual fund, venture capital
fund, alternative investment fund, foreign
venture capital investor, insurance company
registered with the Insurance Regulatory and
Development Authority of India or any other category
as specified by the Board from time to time, shall
not be deemed to be a promoter merely by
virtue of the fact that twenty per cent. or more
of the equity share capital of the issuer is held
by such person unless such person satisfy other
requirements prescribed under these regulations;
Reg. 2(1)(pp) of SEBI(ICDR) Regulation, 2018
“promoter group” includes:
i) the promoter;
ii) an immediate relative of the promoter (i.e.
any spouse of that person, or any parent, brother,
sister or child of the person or of the spouse); and
iii) in case promoter is a body corporate:
A) a subsidiary or holding company of such
body corporate;
B) any body corporate in which the promoter
holds twenty per cent. or more of the equity
share capital (associate company); and/or any
body corporate which holds twenty per cent.
or more of the equity share capital of the
iv) in case the promoter is an individual:
A) any body corporate in which twenty per cent.
or more of the equity share capital is held by
the promoter or an immediate relative of the
promoter or a firm or Hindu Undivided Family in
which the promoter or any one or more of their
relative is a member;
B) any body corporate in which a body corporate
as provided in (A) above holds twenty per cent.
or more, of the equity share capital; and
C) any Hindu Undivided Family or firm in which
the aggregate share of the promoter and their
relatives is equal to or more than twenty per
cent. of the total capital;
Provided that a financial institution, scheduled bank, foreign
portfolio investor other than individuals, corporate bodies
and family offices, mutual fund, venture capital fund,
alternative investment fund, foreign venture capital investor,
insurance company registered with the Insurance Regulatory
and Development Authority of India or any other category as
specified by the Board from time to time, shall not be
deemed to be promoter group merely by virtue of the
fact that twenty per cent. or more of the equity share
capital of the promoter is held by such person or entity:
Provided further that such financial institution, scheduled
bank, foreign portfolio investor other than individuals,
corporate bodies and family offices, mutual fund, venture
capital fund, alternative investment fund and foreign venture
capital investor insurance company registered with the
Insurance Regulatory and Development Authority of India or
SEBI (ICDR) Regulation 2018
Reg. 5 - Entities not eligible to make an initial public offer
(1) An issuer shall not be eligible to make an initial
public offer –
(a) if the issuer, any of its promoters, promoter group or
directors or selling shareholders are debarred from
accessing the capital market by the board (SEBI).
(b) if any of the promoters or directors of the issuer is a
promoter or director of any other company which is
debarred from accessing the capital market by the Board.
(c) if the issuer or any of its promoters or directors is a
wilful defaulter or a fraudulent borrower.
(d) if any of its promoters or directors is a fugitive
economic offender.
Reg.14 - Minimum promoters’ contribution
(1) The promoters of the issuer shall hold at least
twenty per cent. of the post-issue capital:
Provided that in case the post-issue shareholding of the
promoters is less than twenty per cent., alternative
investment funds or foreign venture capital investors or
scheduled commercial banks or public financial institutions
or insurance companies registered with Insurance Regulatory
and Development Authority of India or any non-individual
public shareholder holding at least five per cent. of the
post-issue capital or any entity (individual or non-
individual) forming part of promoter group other than the
promoter(s) may contribute to meet the shortfall in
minimum contribution as specified for the promoters,
subject to a maximum of ten per cent. of the post-
issue capital without being identified as promoter(s).
Reg.16 - Lock-in of specified securities held by the
promoters
(1) The specified securities held by the promoters shall not be
transferable (hereinafter referred to as “lock-in”) for the
periods as stipulated hereunder:
(a) minimum promoters’ contribution including
contribution made by alternative investment funds or
foreign venture capital investors or scheduled commercial
banks or public financial institutions or insurance companies
registered with Insurance Regulatory and Development Authority
of India or any non-individual public shareholder holding at least
five per cent. of the post-issue capital or any entity (individual or
non-individual) forming part of promoter group other than the
promoter(s) referred to in proviso to sub-regulation (1) of
regulation 14, shall be locked-in for a period of eighteen
months from the date of allotment in the initial public
offer:
(b) promoters’ holding in excess of minimum
promoters’ contribution shall be locked-in for a period of
six months from the date of allotment in the initial public
offer.
Provided that in case the majority of the issue proceeds
excluding the portion of offer for sale is proposed to be
utilized for capital expenditure, then the lock-in period
shall be one year from the date of allotment in the initial
public offer.
Explanation: For the purpose of this sub-regulation, “capital
expenditure” shall include civil work, miscellaneous
fixed assets, purchase of land, building and plant and
machinery, etc.
SEBI (LODR) Regulations 2015 - Reg. 5 General
obligation of compliance.
The listed entity shall ensure that key managerial
personnel, directors, promoters or any other person dealing
with the listed entity, complies with responsibilities or
obligations, if any, assigned to them under these
regulations.
Reg. 17(1)(b) Provisio - Provided that where the regular
non-executive chairperson is a promoter of the listed
entity or is related to any promoter or person
occupying management positions at the level of board
of director or at one level below the board of directors, at
least half of the board of directors of the listed entity
shall consist of independent directors.
Reg. 17(6)(e) - The fees or compensation payable to
(i) the annual remuneration payable to such executive
director exceeds rupees 5 crore or 2.5 per cent of the
net profits of the listed entity, whichever is higher; or
(ii) where there is more than one `such director, the
aggregate annual remuneration to such directors
exceeds 5 per cent of the net profits of the listed
entity:
Provided that the approval of the shareholders under this
provision shall be valid only till the expiry of the term of
such director.
Reg. 31A - Conditions for re-classification of any person
as promoter / public
(1) For the purpose of this regulation: (a) “promoter(s) seeking
re-classification” shall mean all such promoters/persons
belonging to the promoter group seeking re-
classification of status as public.
(b) “persons related to the promoter(s) seeking re-
classification” shall mean such persons with respect to that
promoter(s) seeking re-classification who fall under sub-clauses
(ii), (iii) and (iv) of clause (pp) of sub-regulation (1) of
regulation 2 of Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2018.
(2) Re-classification of the status of any person as a promoter
or public shall be permitted by the stock exchanges only
upon receipt of an application from the listed entity
along with all relevant documents subject to compliance
(3) Reclassification of status of a promoter to public shall be
permitted by the stock exchanges only upon satisfaction of the
following conditions:
(a) an application for reclassification has been made by the
listed entity to the stock exchanges within thirty days from
the date of approval by shareholders in general meeting
after ensuring that the following procedural requirements have
been fulfilled:
 (i) the promoter(s) seeking reclassification has made a request
for reclassification to the listed entity along with a rationale for
the same and a description as to how the conditions specified in
clause (b) of sub-regulation (3) of this regulation are satisfied;
 (ii) the board of directors of the listed entity has analyzed such
request in the immediately next board meeting or within
three months from the date of receipt of the request from its
promoter(s), whichever is earlier and has placed the same before
the shareholders in a general meeting for approval along with
the views of the board of directors on the request:
(iii) the request of the promoter(s) seeking reclassification
has been approved in the general meeting by an
ordinary resolution in which the promoter(s) seeking
reclassification and the persons related to him/her/it
have not voted to approve such reclassification
request:
Provided that the provisions of this sub-clause shall not
apply in cases: a where the promoter(s) seeking
reclassification and persons related to the
promoter(s) seeking reclassification, together, do not
hold more than one percent of the total voting rights
in the listed entity; b where reclassification is
pursuant to a divorce.
(b) the promoter(s) seeking re-classification and
persons related to the promoter(s) seeking re-
classification shall not:
(i) together, hold more than ten percent of the total
voting rights in the listed entity;
(ii) exercise control over the affairs of the listed
entity directly or indirectly;
(iii) have any special rights with respect to the listed
entity through formal or informal arrangements
including through any shareholder agreements;
(iv) be represented on the board of directors
(including not having a nominee director) of the
listed entity;
(v) act as a key managerial personnel in the listed entity;
(vi) be a ‘wilful defaulter’ as per the Reserve Bank of India
Guidelines;
(4) The promoter(s) seeking re-classification, subsequent to
re-classification as public, shall comply with the following
conditions:
(a) he/she shall continue to comply with conditions mentioned
at sub-clauses (i), (ii) and (iii) of clause (b) of sub-regulation 3
as specified above at all times from the date of such re-
classification failing which, he shall automatically be
reclassified as promoter/ persons belonging to promoter
group, as applicable;
(b) he/she shall comply with conditions mentioned at sub-
clauses (iv) and (v) of clause (b) of sub-regulation 3 for a
period of not less than three years from the date of
such re-classification failing which, he shall
automatically be reclassified as promoter/ persons
belonging to promoter group, as applicable.
(5) If any public shareholder seeks to re-classify itself as
(7) A listed entity shall be considered as ‘listed entity with no
promoters’ if due to reclassification or otherwise, the entity
does not have any promoter;
Reg. 30 - Disclosure of events or information.
(1) Every listed entity shall make disclosures of any events or
information which, in the opinion of the board of directors of the
listed company, is material.
(11) The listed entity may on its initiative also, confirm or deny any
reported event or information to stock exchange(s)
Provided that the top 100 listed entities and thereafter the top 250
listed entities with effect from the date specified by the Board, shall
confirm, deny or clarify, upon the material price movement as
may be specified by the stock exchanges, any reported event
or information in the mainstream media which is not general in
nature and which indicates that rumour of an impending
specific event or information is circulating amongst the
investing public, as soon as reasonably possible but in any case not
later than twenty four hours from the trigger of material price
(11A) The promoter, director, key managerial personnel or
senior management of a listed entity shall provide
adequate, accurate and timely response to queries
raised or explanation sought by the listed entity in
order to ensure compliance with the requirements
under sub-regulation 11 of this regulation and the listed
entity shall disseminate the response received from
such individual(s) promptly to the stock exchanges.
Reg. 31 - Holding of specified securities and
shareholding pattern.
(2) The listed entity shall ensure that hundred percent of
shareholding of promoter(s) and promoter group is in
dematerialized form and the same is maintained on a
continuous basis in the manner as specified by the
Board.
Reg. 98 - Liability for contravention of the Act, rules
or the regulations.
(1) The listed entity or any other person thereof who
contravenes any of the provisions of these regulations,
shall, in addition to liability for action in terms of the
securities laws, be liable for the following actions by
the respective stock exchange(s), in the manner
specified in circulars or guidelines issued by the Board:
(a) imposition of fines;
(b) suspension of trading;
(c) freezing of promoter/promoter group holding of
designated securities, as may be applicable, in
coordination with depositories.
(d) any other action as may be specified by the Board from
time to time