Difference Between Promoters And Shareholders Under The Companies Act, 2013

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 clashof interest between them. A promoter can become a shareholder a currentshareholder could have been a promoter initially. This article provides aninsight on the positions of Promoters and Shareholder in a company, theirqualifications, requirements and the difference in role played by the two ofthem so to clarify the general misunderstanding that the two are the samepositions.

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 ashareholder, director or otherwise.
• A person in accordance with whose advice or instructions the board of directors of a company isaccustomed to act.

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

A promoter is a person who decidesto establish a business. The promoter plans the business, carries out therequired formalities for the establishment of the business and ensures thecommencement of business in the company[3].Any person can become a Promoter i.e. an individual, a firm, a company or anassociation 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 whenthe jurisprudence of Promoters comes into existence. There is a broadclassification on the types of promoters but it may overlap. The following arethe 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 whoenvision the idea of a business. Their functions include all the works relatedto the formation of a company. It is their duty to investigate all the legalrequirements for the company and fulfil them. The functions of a promoter, ineasiest terms, shall consist of the following-

• Promoters are liable tofind a name for the company based on its mass appeal as well as legalapprehensions. The promoters must get the name registered with the registrar ofcompanies.
• The promoters decideupon the content of the MOA and Articles of Association (hereinafter referredto as ‘AOA’) of a company. It is their duty to ensure that the two documentsare made in consonance with the law for the same.
• The promoters proposethe appointment of directors, bankers, auditors and other professionals for thecompany.
• They are the ones whodecide where the company shall be located, where its head office will exist andwhere it shall be registered.
• Thepromoters are liable for the preparation of all documents regarding theincorporation of a company. They have to inquire if any licenses are requiredfor incorporation of their business. They must procure any license if therequirement 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 thelegal position of a promoter is also not clear, it becomes more interesting.The company and the promoter share a fiduciary relation, which makes thisposition intriguing and worth discussion.

Shareholders

The shareholders are generally seenas 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. Shareholdersare a part of a company. A shareholder must be a legal entity; all persons canbe 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 onthe number of maximum shareholders for companies.

Itis necessary to be known and understood that a company is a separate legalentity; it is recognised as a legal person and it enjoys all the legal rightsthat are bestowed by law on all legal persons. All the assets and liabilitiesof the company are owned by the company only. Therefore, it is wrong to suggestthat the shareholders are the owners of the company. The company is a separateentity and not owned by anyone. Shareholders, instead, have a greater say inrunning the company through which they assert their control in the company. Thecompany virtually acts on the directions of the shareholders as it is theircapital which is being invested in the business.

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

Rights of Shareholders

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

• Theyare the only authority for any alteration in the MOA or AOA. Any alteration inthe AOA or MOA of the company can be made only through a resolution passed inthe general meeting which is attended by the shareholders. For majoramendments, a special majority of 75 per cent shareholders may also be required.
• Theyhave 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 forit to the board of directors. The meeting shall be called within 21 days ofmaking such a request.
• All the companies are bound to hold one Annual General Meeting (herein after referred to as ‘AGM’) each year. In regards to the AGM, the shareholders have aright to get a notice of the meeting, the right to attend such meeting, votefor or against any resolution passed at such a meeting[8].
• Theyhave a right to transfer their shares freely like a movable property. For aprivate company, this right may, however, be restricted by the AOA of thecompany.
• Inproportion to the profits made by the company, the dividends are to bedistributed among the shareholders of the company.
• The minorityshareholders are afforded special protection in cases of any oppression andmismanagement by the majority shareholders[9].The Company Law Tribunal protects the interests of the public in general andminority shareholders in specific under Section 397 and 398 of the Act[10].

Liabilities of Shareholder

Company is a separate legal entityand 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 theshareholders’ 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 veryless duties and a wide range of rights and other mechanisms are available forthe protection of their interests.

The shareholders play an important role in the functioning of a company. Theshareholders enjoy multiple rights which effectively keep the control of thecompany 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 theestablishment 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 forthe 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.

Evenin 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.

References:

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

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

[3]Bosher v. RichmondLand 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 andAnor, (2012) EWHC 2060 (Ch).

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

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

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