I cannot count the number of times I have spotted people confusing between directors, promoters and management. Even read articles in national newspapers with the wrong classification. I believe that there are 2 reasons for this. First, often the same person(s) act in all these capacities. Second, mostly these articles are written by journalists and not legal experts. This does not change the fact that there are fundamental differences in the role, liabilities and duties based on the capacity in which a person acts.
This post covers only the duties and liabilities of the promoters. For a post on the role and duties of directors, read here.
Who is a Promoter?
As per the Companies Act 2013, Promoter means a person—
- 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
- who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
- 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.
SEBI Issue of Capital and Disclosure (ICDR) Regulations has a far more elaborate definition applicable to publicly listed companies. In the ICDR ‘promoter’ is defined as (in 2 za & zb):
- the person or persons who are in control of the issuer;
- the person or persons who are instrumental in the formulation of a plan or programme pursuant to which specified securities are offered to public;
- the person or persons named in the offer document as promoters:
Provided that a director or officer of the issuer or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter:
‘Promoter group’ includes:
- the promoter;
- 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);
- in case promoter is a body corporate:
- a subsidiary or holding company of such body corporate;
- any body corporate in which the promoter holds 10% or more of the equity share capital or which holds 10% or more of the equity share capital of the promoter;
- any body corporate in which a group of individuals or companies or combinations thereof which hold 20% or more of the equity share capital in that body corporate also holds 20% or more of the equity share capital of the issuer;
- in case the promoter is an individual:
- anybody corporate in which 10% 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 his immediate relative is a member;
- anybody corporate in which a body corporate as provided in (a) above holds 10% or more, of the equity share capital;
- any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than 10% of the total;
provided 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 10 % or more of the equity share capital of the issuer is held by such person.
_________________________
Typically, promoter(s) is the person who starts or promotes a business. Their name is so registered in the prospectus and in the annual report of the company. In general, a promoter will have a majority stake in the business. A promoter may sit on the board (of directors) of the company and may also serve as its Chief Executive Officer (CEO) or Chief Financial Officer (CFO) or in any other managerial capacity.
Similarly, a director may act in managerial capacity and may also become a promoter. It is important to understand the consequences of this classification when assessing the integrity and competence of the management.
Test for a Promoter
- The best way to examine a promoter, both under companies act and as per the ICDR is by focusing on clause (b) and (c) of the definition above. To explain as a law professor- “if the board of directors and the management of the company acts as per someone’s directions or orders, for whatever reasons, then that person is a promoter. It does not matter if that person makes everyone act as per his direction by pointing a gun at them every day or by abducting people close to the board. So long as he gets his way, he is a promoter.”
- In addition, even if a person does not fall under clause (b) and (c) above, he may still be a promoter if he is named as a promoter in the annual report and/ or in the prospectus. You could call this second category as – ‘statutory promoters’, if you are so inclined.
Promoter’s Liabilities – What happens if you are a promoter?
Under the Companies Act:
A Promoter becomes personally liable for any untrue statements made in the prospectus of the company on the basis of which a person subscribes to shares of the company. The promoter must also disclose his profits in full in the prospectus. If a person suffers any loss due to such untrue statements, the promoter will be sued for damages and may also be prosecuted criminally. Further, promoters of the company are held liable for all pre-incorporation contracts.
Under the ICDR Regulations:
Promoters are like the anchors of a ship. Unfortunately, there are many fly by night operators whose only intention is to float a business plan, collect public funds, siphon those funds and leave the shareholders with a failed company. Under the ICDR regulations, promoters have a much higher liability.
First, the promoters must make a minimum contribution. When a company plans an Initial Public Offering (IPO), the promoters of the company must contribute at least 25% of the post issued capital of the company. This is to ensure that the promoters are serious about the venture or at least serious enough to contribute a meaningful portion of their own capital to the business.
Second, this minimum contribution of 25% made by the promoters shall be locked in for at least 3 years. This means that the promoter cannot sell these many shares for a period of 3 years from the date of allotment of shares in the IPO. In addition, anything over and above the minimum contribution (of 25%) which the promoter holds shall be locked in for a period of 1 year from the date of allotment of share.
Third, if you are the promoter, it brings with it a long list of compliance things to do!
Amongst others things, the promoters have to:
- Disclose all litigations filed and pending against them in the offer document.
- State that there name is appearing as a wilful defaulter in the records of Credit Information Bureau of India Limited (CIBIL), if that is the case.
- They must disclose if they are debarred from accessing the capital markets (in which case they can no longer be named as promoters in the offer document / prospectus).
- The promoter must disclose their shareholding in the company at the end of every quarter.
- Disclose and get shareholder approval for all their Related Party Transactions.
In addition there are restrictions on the number of shares they can buy or sell in the company in a single financial year.
In case the promoter is found violating any of the provisions mentioned above, he risks not only a civil / criminal action against him but also risks being barred by SEBI from accessing the capital markets i.e. from raising funds from the market in future.
Can you cease to be the Promoter?
For many years, the general principle had been – ‘Once a promoter, always a promoter’. In particular, based on the clause (both in the Companies Act and in the ICDR) which states that a promoter is someone who has been named as such in a prospectus, it becomes a lifelong designation.
There may be instances where a promoter may not want to be bound by all these compliance requirements. What if the promoter sells his entire stake or a majority of his stake? What if the company is now being run by / under the direction of a different group/ person(s)?
The fact that I promoted a business venture and the company behind it and that my name appears as a promoter in the incorporation document should not follow me forever. This is especially important in the present day business environment where newer businesses are being started and sold by serial entrepreneurs.
In past there have been many instances where companies ceased to treat certain promoters as such. This was done by a simple notification in the form of corporate announcement made to the stock exchanges where shares of the company were listed and to the Registrar of Companies (ROC). In all cases one thing was common, the promoters who wished to be de-classified as such reduced their holding in the company to at least below 5%, in most cases for below than that.
SEBI is now working on rules to enable a promoter to de-classify themselves as such. Once a person ceases to be a promoter, he will no longer have to comply with the above requirements.
The plan is to permit re-classification in 3 cases:
- In consequence of an open offer – this is mostly for cases where a new group takes over.
- Where there is a separation agreement between the promoters. This is meant to take care of business reorganisations especially between family run groups.
- Where the shareholding of the relevant promoter/promoter group is below 5% – to cover situations where people have moved away from business for whatever reason and hence would not like to be held liable on account of promoter’s compliance requirements.
In all cases, the de-classified person must not exercise any control on the company, nor hold any key management positions. In addition, such de-classification must be notified to and approved from both, the stock exchanges and from the registrar of companies.
Note that in the first case, no minimum shareholding criterion is set. So a person may well hold 20-30% stake in the company and yet may no longer be a promoter if he can prove that he exercises no control. This may be either because there is another (bigger) group taking care of the company’s affairs, or for any other reason. This however is hard to imagine.
Strategic stake holders– I believe that a big shareholder (say someone holding 20-25%), could be classified as a public shareholder in the (quarterly) regulatory filing of shareholding pattern. However, he must disclose that he is not exercising any control and is not a promoter in a separate filing. Just as a good practice if not to be doubly sure! That said, the issue gets murkier for a former promoter who may continue to hold a strategic stake.
The above content is not exhaustive. There are many other occasions and reasons for which promoter(s) may be liable for failing to perform their duty or for any act of omission and commission.
If you would like to discuss any particular situation, you can get in touch with me.
About Author
IF IN LISTED COMPANY PROMOTERS (HAVING LESS THAN 5% SHARES SELL ALL SHARES. ALL DIRECTORS RESIGN. NEW DIRECTORS APPOINTED. THEN CAN THE BUYER OF SHARES BE NAMED PROMOTER OF THE COMPANY?
Yes
The wife of a promoter director appointed as a director will be part of the promoter group but will she be categorised as a promoter director too.
No. She will be a director and part of the PAC Group. To be honest, there is no such thing as a promoter director as per the Companies Act or ICDR, I am not sure what you mean? Unless you feel that a promoter who is also a director, is a promoter director.
whether promoter Director’s brother’s wife will come under Promoter Group and relative?
I will need more facts. Call my office and seek time.
Sir
Ours is a Private Limited Company with 25 Lakh Capital. There are 3 directors who are promoters. Apart from them there are 4 more directors who are not related to the promoters. But form DIR-12 to be filed before ROC has only three Category for Directors – Promoter – Independent – Professional. So are the other 4 directors also Promoters for Private Company
Sir,
Can anyone tell me if in a listed company,some shares are held by Promoter son and daughter in law. promoter son is not a director but he comes under the definition of promoter group. but what about the holding of shares by daughter in law. should it considered in promoter group?
Mostly yes, bear in mind that the answer to this is not as simple. I can count many instances where she will / could be excluded from the Promoter Group depending upon the circumstances.
We have found certain instances where daughter in law/ son in law being excluded from being part of the Promoter group. Can you please elaborate on such situation
Sir,
is there any provision for promoter or promoter group to purchase share from public through stock exchange 5% or more in a financial year?please give me clarification by noted sation or regulation if any.Thank you in advance.
Yes there is.
Please tell if one promoter holding 0.01% share in company and sold his entire share in open market then will his name still be there in shareholding pattern or not ??
No it wont be. But he will still remain a promoter.
sir do a promoter need to subscribe for qualification shares to be a director or managing director? Although act says in case of IPO by unlisted company promoter has to subscribe at least 20% of post issue capital..do he need to contribute anything else??
If a Promoter wants to be managing director do he need to subscribe for qualification shares? And as per act a promoter need to purchase 20% of post issue capital in a new unlisted company..do these shares count in qualification??
No and you are Incorrect on 20%
if a company is cover under the promoters list of another public listed , and promoter dnt wnat to be the promoter of the company . The company which is promoter transfer his holding to another promoter .
what are compliance required to be filled with respect to stock excahnge regarding we are no longer of promoter of company ??
Please write in to me with your detailed query at – rajat@sanasecurities.com for a fee quote
WHAT IS THE PROCEDURE TO NOT BEING A PROMOTER ??
I DNT WANT TO BE PROMOTER OF xyz ltd ? WHAT SHOULD I DO ?? PLEASE REPLY THANKU IN ADVANCE
Please write in to me with your detailed query at – rajat@sanasecurities.com
Husband and wife are the promoters of the company and in the present year 2016-17, husband shares is increased to 60%(last year it was 29.17%) and wife held 7% (last year it was 37.46%), rest of the shares are held by Family Trust, HUF and parents. Now company wants to show wife as non – promoter, is it possible ?
No.
I have been investing in the stock markets and mutual funds for about 15 years. Can I invest in a company in which my real sister (married) is a director and so is her husband and father-in-law (Promoter). Does my shareholding need to be disclosed by them to SEBI/Exchanges/MCA etc. Will my shareholding in that company be classified under the promoters category? My shareholding is not even 0.1% in that company.
Ive replied to you on your email.
Helo,sir. If in a company there are two or more promoters every promoter having its own different capital to show , or a combined capital of a company ?
Can any promoter gives more capital after first invested at any time ? Is there any legal formalities
Capital disclosure where?
Yes and Yes to your last 2 questions.
For a more detailed view write in to me at rajat@sanasecurities.com
Question: Can an Independent Director be categorized as a Promoter?
What the Act says: Companies Act, 2015 says promoter means a person who has control over the affairs of the person, directly or indirectly, as a shareholder, directors or otherwise.
Argument: Board of Directors collectively control the affairs of the Company. Regardless of whether the Director acts directly or indirectly, they have a say in the matter discussed by the Board and in essence they control the affairs of the company. Doesn’t it imply then that by virtue of holding the position of a director, be it independent or non-independent, a Director should always be categorized as ‘Promoter’.
Yours thoughts will be much appreciated. Thanks.
Sure, if you think that such a person is able to control the outcome of meetings then he should be classified as a Promoter, irrespective of how silly this may sound. In practice however, it is hard to imagine such a situation. Least because if an independent director controls the affairs of a company no matter how insignificantly, he is likely to be changed very quickly by the executive, for obvious reasons.
Sir,
In our group there are two types of promoters. Both are neither relative nor associate to each other. Now one wants to quit from promotership.
My query is:
Can that second shareholder de-classified as promoter by merely intimation to stock exchange? or he has to reduce its shareholding to below 10% or so. is there any particular procedure with SE or SEBI for declassification of promoter.
Thank you so much in advance!!
Best Regards,
Ila
Not an easy one to answer, with 10% shareholding, it would be difficult to declassify even if he was not on the board. Please seek guidance from SEBI. Write in to formally for a fee quote if you need an opinion.
Can you be a part of a Promoter Group even though you hold ZERO shares?
Yes absolutely
And what about their responsibility and liability as a promoter if their shareholding in the company is NIL ?
If in a private company a person is named as a promoter and there is a person who is having major shareholding in the company who is deemed to be promoter. if a company commit any offence or non compliance, how can be held liable?
For calculating 20% holding of the promoters/ imm. relatives in a body corporate, is it collective holding or individual holding? Let say, the promoter and imm. relative both holds 10% each in a body corporate?