Introduction:
Being the first step in a company’s formation, promotion is an important stage in the life of a business. It entails developing a business concept, gathering the necessary funding, and setting up the legal framework for the incorporation of the business. To ensure accountability, transparency, and compliance with legal requirements, company law is crucial in regulating the promotion process. The various facets of promotion of a company in accordance with company law will be covered in this essay.

Conceptualization of the Business Idea:
Starting with the conception of a business idea, a company is first promoted. Entrepreneurs or promoters seek out potential business opportunities, create business plans, and lay out the goals, organizational structure, and operational procedures of their organizations. The idea must be legal, moral, and sustainable to ensure long-term success even though company law currently does not impose strict regulations.

contracts and liabilities made prior to incorporation.
Even prior to its official incorporation, the company may enter into agreements during the promotion stage to secure resources like office space, technology, or consulting services. These agreements are enforceable under company law, and once the company is incorporated, it is then obligated to abide by them. For the sake of transparency and the protection of the company’s interests, promoters must disclose to the other party their status and any potential liabilities.

Note – Such contracts are called preliminary contracts about which we will discuss in detail.

Creation and incorporation:
The procedure for incorporation, which entails registering the company with the appropriate regulatory authority as a legal entity, is outlined by company law. The company’s Memorandum of Association (MOA) and Articles of Association (AOA) must be drafted by the promoters in accordance with the provisions of company law. In contrast to the MOA, which outlines the company’s goals, scope, and capital, the AOA outlines the internal policies, governance framework, and authority of the company’s directors and shareholders.

Fraudulent Activities are Prohibited:.
Any illegal activity during the promotion process is strictly forbidden by company law. Promoters must not make false statements, withhold information, or use dishonest tactics to entice investors to invest. Such behavior is not just unethical; it is also illegal and may have serious legal repercussions.

Promoter obligations and liabilities include:

Promoters are subject to certain obligations and liabilities under company law because of their crucial role in determining the future of the company. They must act honestly, take reasonable care, and put the needs of the business ahead of their own interests. They risk legal action from the business or its shareholders if they don’t fulfill these obligations.

Conclusion:

The foundational stage of a company’s existence is promotion, and compliance with company law during this time is crucial. Promoters can lay a solid foundation for the company’s success by abiding by the law and upholding transparency. In addition to defending the shareholders’ and promoters’ interests, company law also helps to create a supportive business environment that encourages ethical and sustainable corporate behavior. In order to maintain moral and legal operations as their operations expand and change, businesses must continue to abide by corporate governance principles.

Definition of Promoter from Various Legislations

Sec. 2(69) of the Companies Act, 2013 ―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;

[Sec 92 – Annual return. — (1) Every company shall prepare a return (hereinafter referred to as the annual return) in the prescribed form containing the particulars as they stood on the close of the financial year regarding—

(e) its promoters, directors, key managerial personnel along with changes therein since the close of the previous financial year.

Sec. 93 – Return to be filed with Registrar in case promoters‘ stake changes.—Every listed company shall file a return in the prescribed form with the Registrar with respect to change in the number of shares held by promoters and top ten shareholders of such company, within fifteen days of such change.]

A promoter is broadly defined as someone who encourages or incites a certain behavior. In corporate law, a promoter is the founder or organizer of a corporation or business venture; the person who takes the initiative to create or organize a business. The term is mostly used in the context of incorporation. A promoter would perform the conduct required for incorporating the business venture. Then, the acts by the promoter would be ratified by the formation of the board of directors and their subsequent conduct. The person signing the certificate of incorporation would be named the incorporator. The promoter is not always the incorporator of the corporate entity. (Source – https://www.law.cornell.edu/wex/promoter#:~:text=A%20promoter%20is%20broadly%20defined,create%20or%20organize%20a%20business.).

Regulation 2(oo) of SEBI (ICDR) Regulations, 2018 defines promoter as under: 2(oo) “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 capacity;

Provided further that a financial institution, scheduled commercial bank, foreign portfolio investor other than Category III foreign portfolio investor, 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;

SAST, 2011 – Regulation 2(s) – “promoter” has the same meaning as in the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 and includes a member of the promoter group;

Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 –

(zb) “promoter group” includes:

(i) (ii)

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); 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 ten per cent. or more of the

equity share capital or which holds ten per cent. or more of the equity share capital of the promoter;

(C) any body corporate in which a group of individuals or companies or

combinations thereof which hold twenty per cent. or more of the equity share capital in that body corporate also holds twenty per cent. or more of the equity share capital of the issuer; and

(iv) in case the promoter is an individual:

(A) any body corporate in which ten 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 his immediate relative is a member;

(B) any body corporate in which a body corporate as provided in (A) above holds ten per cent. or more, of the equity share capital;

(C) any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than ten per cent. of the total; and

(v) all persons whose shareholding is aggregated for the purpose of disclosing in the prospectus under the heading “shareholding of the promoter group”: Provided that a financial institution, scheduled bank, foreign portfolio investor other than Category III foreign portfolio investor and mutual fund shall not be deemed to be promoter group 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: Provided further that such financial institution, scheduled bank and foreign portfolio investor other than Category III foreign portfolio investor shall be treated as promoter group for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them;

In summary, the promoter group comprises the promoter, immediate relatives, and various related entities connected to the promoter, as outlined in the company law. The identification and disclosure of the promoter group are important to ensure transparency and provide a comprehensive understanding of the ownership and control structure of the company.

Preliminary Contracts under Company Law

It was held in Whaley Bridge Calico Printing Co v Green (1879) 5 QBD 109, that a promoter is not entitled to make a secret profit out of promotion of the company, owing to its fiduciary relation with the company.

Re Great Wheal Polgooth Co Ltd (1883) 53 LJ Ch 42 – Persons who are acting in a purely professional capacity on the instruction of a promoter, like a lawyer or chartered accountant, do not become promoters themselves. But see, if such a professional go beyond to become a director or any officeer of the company, he will be held to be a promoter (Bagnall v Carlton (1877) 6 Ch D 371).

Lagunas Nitrate Co v Lagunas Syndicate [1899] 2 Ch 392, p 422 – The first principle is that in equity the promoters of a company stand in a fiduciary relation to it, and to those persons whom they induce to become shareholders in it, and cannot bind the company by any contract with themselves without fully and fairly disclosing to the company all material facts which the company ought to know.