Promoters and Corporate Governance Under the Companies Act, 2013 and Allied Acts in India

Date01 August 2015
Published date01 August 2015
Subject MatterArticle
Harpreet Kaur*
The term ‘promoter’ has been a term of frequent occurrence
in company matters in India. T he Indian Companies Act, 1956
used the term to fix liability on promoters but did not d efine
it and accepted their established position under the Co mmon
law principles. The Securities and Exch ange Board of India,
however, defined the term ‘promoter’ in its Regulations. The
Indian Companies Act, 2013 has defined the term for the first time .
The author has proposed this study to kn ow how the definition
of the term ‘promoter’ has evolved, what is the role of promoters
in corporate governance, how duties of promoters have been
enlarged from time to time and how obligations have been placed
on them in order to increase their accountability. The au thor
will trace the evolution of the term from the period when it was
said that the term ‘promoter’ has no def inite meaning1 or has
never been clearly defined either judicially or legislatively2 or was
defined in terms of duties performed by them or the d efinition was
kept flexible to bring only those under str ict duties who will fulfil
the functional concept of the def inition.3
I. Introduction
The financial and secur ities markets in India have grown at a very fast
pace in the last decade. The fact that Indian companies are mostly fami ly
owned and closely held companies gives a stronghold to promoters in their
companies. Increasing complexity in the nature of business transactions
* Professor of Law at National Law University, Delhi. The author had presented the draft
paper under the title ‘Promoters, Cor porate Governance and the Compan ies Act, 2013’
at CLTA Annual Conference 2015 organised by Melbourne Law School, University of
Melbourne under the theme ‘Cor porate Law: Local and Global d imensions’, Feb 1-3,
1 Emma Silver Mining C o v Lewis (1879)4 CPD 396 (Lindley J).
2 Joseph H Gross, ‘Who is company promoter(1970) 8 6 LQR 493.
3 Jacobus Marler Estates L td v Marler (1913) 85 LJPC 167.
Journal of National Law University, Delhi [Vol. 354
relating to companies and securities market, the promoters’ involvement in
such transactions makes the company and other shareholders vulnerable.
Therefore, it is necessary to understand the need to define the t erm ‘promoter’
and the role played by him in the company promoted by him. Promoter’s
obligations towards the company, statutory duties and liabilities imposed
upon him from time to time will b e explored in the study in order to analyse
his importance in cor porate governance.
II. ‘Promoter’: who he is?
Th e qu est io n ra is ed b y Na th an I sa acs 4 in his paper in 1924, “can or should
anything be done by statute to clarify t he exact legal status of the promoter”
has been answered by the Indian Companies Act in 2013 by defining the
term ‘promoter’.5 The question which now arises is why it took years in
defining the term and why no need was felt to define the term earlier? In
order to find an answer to the question we have to trace the evolution of the
term ‘promoter’ first.
In 1877, Cockburn, C.J observed in the case of Twycross v. Grant,6
“a promoter, I apprehend, is one who undertakes to form a company with
reference to a certain project, and takes certa in steps to accomplish that
Bowen, J said as early as 1879 in the case of Whaley Bridge Priniting
Company v. Green7 that the ‘term promoter is a term not of law but of
business, us efully sum ming up i n a single word a nu mber of busine ss
operations familiar to the commercial world by which a company is generally
brought into existence.’
Lindley J in Emma Silver Mining Co v Lewis observed that the term
‘promoter’ has no definite meaning. “As used in conne ction 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.8
It was pointed out in Jacobus Marler Estates Ltd v Marler that it is
advantageous to keep the definition flexible in terms of duties performed by
4 The Promoter: A Legislative Problem, 38 Harv L Rev 887 1924-1925
5 Companies Act 2013, s 2(69) .
6 2 CPD 469 (1877) 541.
7 5 QBD109 (1879).
8 Lindley (n 1).

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