Promoters of the company

Among many of the subject matter under Companies Act, 2013, one of the most heated and topic of endless discussion is “Promoters”.  The Concept of promoters has been newly inserted and defined under Companies Act, 2013 as under the Companies Act, 1956 the reference of promoters was given but was not specifically defined. As Compared with old Act as per which subscribers to Memorandum of Association were treated as promoters of the Company as they were involved in the process of formation of Company and bringing the Company into existence were the promoters.

However, under the Companies Act, 2013 the subscribers to the Memorandum of Association may or may not be the Promoters of the Company.

As per Section 2(69) of Companies Act, 2013 the term Promoters is defined as:-

“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;

Now let us try to understand the same:-

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

The same for the year 2014-15 is a dicey / uncertain and confusing as the same is required to be identified by the Company only and subsequently in the following years, one may refer Annual Return u/s. 92 for identification of promoters of the Company. And once defined will continue forever, though there is a chance of re-classification.

b. who has control over the affairs of the Company, directly or indirectly whether as a shareholder, director or otherwise; or

This sub-clause uses the word “Control” which is defined in 2(27) of the Act which is as below:-

“control”  shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner;

The above definition has enlarged and enhanced the scope of classification of promoter(s) because of the fact being an inclusive definition. Now let us try to understand it minutely:-

The first being a right to appoint majority of directors thereby implying that the Holding Company will be a promoter of Subsidiary Company. Further, this includes the person having right to control management or policy decision in any way including by virtue of shareholding. In my view/ opinion wherein there is a shareholding of more than say 25% of capital then the same may be classified as having control over the affairs because considering an example wherein Company wants to pass a Special Resolution then the same cannot be passed unless the consent of such shareholder is obtained and therefore in my view classifies for being categorised as promoter as there is a control over affairs of the Company. However one may also note that the term used “affairs of the Company” mentioned herein may be construed as day to day business affairs of the Company, but due to lack of jurisprudence the same may be understood as any transaction which may have a bearing on the affairs of the Company and if that is being controlled or under control of that particular shareholder then the same may be classified as shareholder.   

However, it does not always mean that percentage of the shareholding is the only criteria for determining the status of Promoter.

Further, wherein a Company there exist any shareholders agreement and if the parties to agreement exercise the control over affairs off the Company by virtue of the agreement then the all the parties to shareholders agreement will be classified as Promoters and even if the party holds even one (1) share then the same will be classified as promoter. However, it must be noted that merely exercising of right on Reserved Matters or Protective Provisions or transaction requiring approval of all parties to shareholders agreement enshrined in shareholders’ agreement or by virtue of any other Agreement does not ensure the status a promoter of the Company as the party to shareholders agreement may not be involved in affairs of the Company. Yet another treatise which comes into play is that wherein there exists a shareholders’ agreement / joint venture agreement or any other agreement by virtue of which parties can exercise control by appointing a director on the board of the Company (whose promoters are to be determine) then the same may be classified as promoter because all the policies are approved by the Board in their meeting and the nominee director (director appointed by joint venture party) then such director has right of dissenting and disapproving the policy at the meeting.

Now let us try to understand the sub-clause (c) of Sec. 2(269) which states that:-

c. in accordance with whose advice, directions or instructions the Board of Directors of the Company is accustomed to act:

As per the above stated sub-clause the Managing Director / Whole-time Directors / such other directors or such other persons who exercise influence at the Board or can influence the decisions taken at the Board then such person can be considered as promoter. But if the Managing Director so appointed is acting in professional capacity then such person cannot be classified as promoter.

The topic of discussion being exhaustive and wide in scope requires an insight before deciding about the promoters of the Company. As it forms a crucial and important perspective to decide who will be classified as promoters of the Company.

For any queries / suggestions / advice you may contact the author, Mr. Sumit Talreja at at  talreja.sumit27@gmail.com.