Difference Between Promoters And Shareholders Under The Companies Act, 2013

The main question that this article tried to answer was whether the term promoter and shareholder is the same, or different? The two being different from each other, the difference between them was tried to be explained.
Estimated Reading Time: 12 minutes

Introduction

For a business start-up, there can be various formats which can be chosen, based on various factors related to the availability of investment, number of interested parties, type of business etc. One such format is that of a company. A company is an invisible, artificial and an intangible person which exists only as a fiction of law, in the contemplation of law. It does not have enough capacity i.e. brain and body to make decisions and put them to action. Therefore, it is compelled to act through others[1]. The term ‘Company’ does not have a strict definition, even though it is defined in the Companies Act, 2013 (hereinafter referred to as ‘the Act’) under Section 2(20). It means a body corporate registered under the Act or any previous law. It includes all companies, whether they are public or private. A company is a public entity, so to say. The business transacted by any company is available for public scrutiny through various modes.

Company is one of the most organised and regulated systems of conducting business. It gets preference because of the said factor. A company is systematized right from the beginning. When a company is intended to be formed, various formalities need to be fulfilled. The onus of ensuring the incorporation of the company lies on the Promoters. Promoters are a group of persons who conceive the idea of setting up a company. They are liable for performing the formalities associated with the incorporation of the company. In simpler terms, the promoters are the persons who are associated with the company since the beginning. After the company is formed and starts its functioning, another important set of people come into existence. They are the shareholders of the company. Shareholders, as the term suggests, are the people who own the shares of the company. They invest in the company and are technically its owners. A promoter may also become the shareholders if they retain any share in the company which was initially subscribed by them through the Memorandum of Association (hereinafter referred to as ‘MOA’) of the company. The position of a promoter is necessary for the incorporation of the company and stays vital until the commencement of business by the company. On the other hand, a shareholder is the one who invests his capital in an existent entity i.e. the company.

The two positions are not in competition from each other. Neither is there a clash of interest between them. A promoter can become a shareholder a current shareholder could have been a promoter initially. This article provides an insight on the positions of Promoters and Shareholder in a company, their qualifications, requirements and the difference in role played by the two of them so to clarify the general misunderstanding that the two are the same positions.

Promoters

A promoter is a person or a group of persons who take the responsibility to organize and establish a business enterprise, directly or indirectly[2]. The term is very wide and cannot be clustered into an exhaustive legal definition. Yet, the term Promoter is defined in Section 2(69) of the Act to mean the following-

  • A person who has been named as the Promoter in the prospectus or the annual returns of the company.
  • A person who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise.
  • A person in accordance with whose advice or instructions the board of directors of a company is accustomed to act.

A person advising in professional capacity shall not fall under this definition. Therefore, if a company secretary or a legal counsel tendering advice to the company in professional capacity shall not be termed as promoters. The definition of ‘promoter’ under the Indian Corporate law is inclusive in nature and not exhaustive. Its scope is very broad and it includes any person who has been associated with the organisation and establishment of the company in a personal capacity. 

A promoter is a person who decides to establish a business. The promoter plans the business, carries out the required formalities for the establishment of the business and ensures the commencement of business in the company[3]. Any person can become a Promoter i.e. an individual, a firm, a company or an association of persons.

In the case of Lagunas Nitrate Co v. Lagunas Syndicate[4] it was held that a promoter does not need to be necessarily associated with the formation of the company since initial days. The one who subsequently joins and arranges to float of its capital shall be regarded as a promoter equally.

Types

There is no strict demarcation when the jurisprudence of Promoters comes into existence. There is a broad classification on the types of promoters but it may overlap. The following are the types of promoters-

  1. Professional Promoters- A professional promoter is a person who professionally does the work of promoting a company and as the company is established, the promoters transfer it completely to the shareholders of the company. These kinds of promoters are prevalent in developed economies but this system hasn’t developed enough in the developing nations.
  2. Occasional Promoters- These are the promoters who are not in this business per se. They take up promotion for one company and then go back to their original profession. For example, if a lawyer floats a company, he shall be an occasional promoter. People generally become an occasional promoter for personal reasons.
  3. Financial Promoters- The financial institution in the corporate world are monetarily involved in the business of promoting companies who involve themselves in the financing of companies when the financial environment is favourable.
  4. Managing Agents- The managing agents of a company can also be promoters. Such persons float companies and then become the managing agents of the company once the company is established. Managing agency system is now abolished in India.

Legal Position

The law does not give a term to the status of the promoters vis–a-vis the company. It has been categorically stated that a promoter is neither a trustee nor an agent of the company. The relationship of a promoter exists with the company even before its incorporation as a company. Therefore, there is no specific status which is granted to promoters. But, they indeed are in a fiduciary relationship with the company[5]. The Act or any previous law in this regard does not specify any obligation and liability for the promoters. The courts have identified different obligations of the promoters while they are dealing with the company. The fiduciary position puts an obligation on them to act in good faith when they are dealing with or on behalf of the company. The promoters shape the company and bring it into existence. The law puts a duty on him to assure maximum benefits for the company to the best of his capabilities. He is barred from making any secretive benefits for himself while dealing on behalf of the company. He must deposit all the money received by him on behalf of the company with the company. He is legally bound to exercise due diligence and care while he performs his duties for the company. If he enters into any contract for the establishment of the company, he shall be liable for them personally till the time the contracts are verified by the company once it is incorporated and comes into existence for law[6]. If any of the statement of a promoter is found to be untrue, he can be made personally liable to compensate the aggrieved party[7].

Functions

Promoters are the persons who envision the idea of a business. Their functions include all the works related to the formation of a company. It is their duty to investigate all the legal requirements for the company and fulfil them. The functions of a promoter, in easiest terms, shall consist of the following-

  • Promoters are liable to find a name for the company based on its mass appeal as well as legal apprehensions. The promoters must get the name registered with the registrar of companies.
  • The promoters decide upon the content of the MOA and Articles of Association (hereinafter referred to as ‘AOA’) of a company. It is their duty to ensure that the two documents are made in consonance with the law for the same.
  • The promoters propose the appointment of directors, bankers, auditors and other professionals for the company.
  • They are the ones who decide where the company shall be located, where its head office will exist and where it shall be registered.
  • The promoters are liable for the preparation of all documents regarding the incorporation of a company. They have to inquire if any licenses are required for incorporation of their business. They must procure any license if the requirement is found.

A promoter, therefore, is an important position for a company. They occupy a significant role as they have wide powers in relation to the company. As the legal position of a promoter is also not clear, it becomes more interesting. The company and the promoter share a fiduciary relation, which makes this position intriguing and worth discussion.

Shareholders

The shareholders are generally seen as the owner of the company. They invest their capital in the company, thereby; they own the ultimate right to control the affairs of the company. Shareholders are a part of a company. A shareholder must be a legal entity; all persons can be shareholders, an individual, a company, a firm or an association of persons. All companies must have at least one shareholder, whereas, there is no limit on the number of maximum shareholders for companies.

It is necessary to be known and understood that a company is a separate legal entity; it is recognised as a legal person and it enjoys all the legal rights that are bestowed by law on all legal persons. All the assets and liabilities of the company are owned by the company only. Therefore, it is wrong to suggest that the shareholders are the owners of the company. The company is a separate entity and not owned by anyone. Shareholders, instead, have a greater say in running the company through which they assert their control in the company. The company virtually acts on the directions of the shareholders as it is their capital which is being invested in the business.

The term ‘Share’ is defined in the Act under section 2(84) to mean that the share capital of a company and includes stock. Therefore, any person who holds the shares shall be the shareholders. The position of shareholders of a company is very important and the scope of their functioning is very wide. Therefore, it becomes imperative that the same is categorically laid down by the statute.

Rights of Shareholders

The shareholders are given wide powers in relation to the management of affairs of the company and the power to make alterations and changes in the company are also entrusted in the shareholders. The following is a list of the rights provided to the shareholders-

  • They are the only authority for any alteration in the MOA or AOA. Any alteration in the AOA or MOA of the company can be made only through a resolution passed in the general meeting which is attended by the shareholders. For major amendments, a special majority of 75 per cent shareholders may also be required.
  • They have a right to call for an extraordinary general meeting if the shareholders holding more than 10 per cent of the paid-up capital of the company request for it to the board of directors. The meeting shall be called within 21 days of making such a request.
  • All the companies are bound to hold one Annual General Meeting (hereinafter referred to as ‘AGM’) each year. In regards to the AGM, the shareholders have a right to get a notice of the meeting, the right to attend such meeting, vote for or against any resolution passed at such a meeting[8].
  • They have a right to transfer their shares freely like a movable property. For a private company, this right may, however, be restricted by the AOA of the company.
  • In proportion to the profits made by the company, the dividends are to be distributed among the shareholders of the company.
  • The minority shareholders are afforded special protection in cases of any oppression and mismanagement by the majority shareholders[9]. The Company Law Tribunal protects the interests of the public in general and minority shareholders in specific under Section 397 and 398 of the Act[10].

Liabilities of Shareholder

Company is a separate legal entity and its shareholders are not liable for the obligations of the company. This status exists due to the concept of limited liability which is a prominent feature of the company. The shareholders are not liable for any loss that the company faces. The liability of a shareholder is in the following regards-

  • The liability is limited to the extent of the unpaid amount on the shares held by them.
  • Any other liability which has been provided for, in the AOA of the company, or the shareholders’ agreement of shareholding.
  • The shareholders are considered to be directors if they are exercising the powers that lie with the directors. In such a case, the shareholders are supposed to fulfil the duties of a director as well[11].

The above mentioned are the main duties of a shareholder. In addition to this, some specific duties can be laid down for the shareholders of a private company through its articles. For the shareholders of a public company, no additional duties can be bestowed. Therefore, the position of a shareholder seems to be secure as there are very less duties and a wide range of rights and other mechanisms are available for the protection of their interests.

The shareholders play an important role in the functioning of a company. The shareholders enjoy multiple rights which effectively keep the control of the company in their hands.

Difference between a Promoter and a Shareholder

It is a difficult task to differentiate between a promoter and a shareholder in a company, primarily because there are no grounds to differentiate upon. The two are the top positions in a company comprising important decision-making power but the two positions are unrelated. A promoter is the one who conceives the idea of a specific business, completes the formalities for the commencement of the business, and ensures the incorporation of the company. The position is wide and its importance can be traced from the fact that they play an important role in the establishment of the company. They are associated with the company even before it comes into existence. When the company is getting incorporated, the promoters subscribe to the MOA of the company. They are the ones to buy the shares of the company and invest their money in the company. On the other hand, the term shareholder is very specific and means any person who invests his capital in the company. A shareholder can buy the shares of the company for which it pays money to the company. It is a manner of raising capital for the company. By subscribing to the shares of the company, a person becomes a shareholder, irrespective of when the shares were bought by the person. The shares may be bought from the primary or secondary market, which is irrelevant with regard to his position as a shareholder. Therefore, the two terms, promoters and shareholders are different and have very different approaches.

Conclusion

Nonetheless, the only confusion in the two positions is probably whether a person can be both,a promoter and a shareholder for a company, at the same time? The answer to the question is in positive.A person who involves himself in the establishment of a company is a promoter. They are also the initial subscribers to the MOA of the company i.e. they already are the shareholders of the company as they already have to hold the shares of the company. The term shareholders mean nothing more than the persons who own shares in a company. Therefore, if the promoters decide to retain their shares, they will automatically come under the definition of shareholders and will be expected to perform the duties of and enjoy the rights of, a shareholder. The promoters may choose to become the shareholders or not. If they do, they shall become shareholders. Whereas, for a shareholder, there is no pre-condition that the person shall be a promoter for the company. A person may invest in the company at a later point and will still be termed as a shareholder and will enjoy all the rights of a shareholder. The two positions must not be confused even if they are held by the same person. Even in such a case, the duties and role played by the person in the two capacities remain different and the person shall be expected to perform the functions related to both offices separately. The main question that this article tried to answer was whether the term promoter and shareholder is the same, or different? The two being different from each other, the difference between them was tried to be explained. The reason for differentiation between the two ensures that the terms are not used interchangeably. The article tried to clarify this doubt of the readers and hopes to be of help in the same.


[1] Lennard’s Carrying Co Ltd v. Asiatic Petroleum Co Ltd, 1915 AC 705.

[2]Twycross v. Grant, (1877) 2 CPD 469.

[3]Bosher v. Richmond Land Co., 455:16 SE 360.

[4] (1889) 2 Ch. 392.

[5]Kelner v. Baxter, (1866) LR 2 CP 174.

[6] Weavers Mills Ltd v. BalkiesAmmal, AIR 1969 Mad 462.

[7]Prabir Kumar Misra v. RamaniRamaswamy, (2010) 104 SCL 174

[8] Jackson v. Dear and Anor, (2012) EWHC 2060 (Ch).

[9] Sri Ramdas Motor Transport Ltd. v. TadiAdhinarayana Reddy and others, 1997 (3) SCR 1160

[10] Rajahmundry Electric Supply Corpn Ltd v. Nageshwar Rao, AIR 1955 SC 213

[11] Baker v. Hodder, (2018) NZSC 78.

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