Mega Offer Avail 65% Off in CA IPCC and 50% Off in all CA CS CMA subjects.Coupon- IPCEXAM65 & EXAM50. Call: 088803-20003

CA Final Online Classes
CA Classes

Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

Section 92 - An identity crisis for promoters

Sundharesan Jayamoorthi 
on 18 March 2015

LinkedIn


Section 92 –An Identity Crisis for Promoter

92 of the Companies Act, 2013 (“Act”) require all companies including private companies to list out details in the prescribed format containing particulars as they stood on the close of the financial year regarding inter alia, promoters, directors, key managerial persons along with changes therein since the close of previous financial year.

Promoter in simple terms is a person who has promoted the company, but the annual report seems to be misleading us to identify a promoter as a person who is the largest or dominant shareholder and not the person who conceived the idea and the Company. Take the instance of a large IT Company where all the founders and promoters have quit as directors, these persons were named in the prospectus as promoters, whereas in the annual return that is required to be filed for the year March 31, 2015 the name of the promoter may be the largest shareholder of the company that may be a Foreign Financial Institution (FII). Let us analyse this issue of this identity crisis for a promoter.

Identity crisis

Identifying a promoter who is or may not be a promoter will be an issue before filing the Annual Return for the year 2015. The regulator seems to have suddenly woken up to lot of scams and wants to fix this issue of identifying the promoter.

The Small & Medium Enterprise Company (Laalla Company) may not have a problem as the promoter is the person who has incorporated the company, with only bank borrowings to fall back, this entity will not have an identity crisis for a promoter.

The Multi National Company (Bholla Company) has one large shareholder and another small shareholder, as there are no other shareholder, this entity will also not have an identity crisis for a promoter.

The Family Owned Company (Saalla Company), which have many shareholders and in some companies that is funded by angels’, venture capitalist or a private equity, this entity may actually run into an identity crisis. The issue can be on account of too many shareholders to choose from, to identify a promoter.

The Listed entity is the one that can have a huge problem in identifying and naming a Promoter as it will have to apply the entire test laid down in section 2(69) read with 2(27) of the Act. The onus is on the professional to identify the identity of a promoter and to compile and complete the data on promoters before filing the Annual return.

Definition of a Promoter

Section 2(69) “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

Naming the Promoter Test – 2(69)(a)

Interpreting section 2(69)(a) does not seem to be difficult as the responsibility lies with the promoters of a company and based on the prospectus, one can identify the promoter.

The second part to this section deals with identification of a promoter by the company in the annual return, here the onus is on the board and professionals to identify who a promoter is and once identified the next task is to name the person, a simple interpretation can be to ignore the shareholding test and only name the person.

Identifying a promoter based on an interpretation of sub clause (a) may be considered only for those companies, which has issued prospectus to raise capital failing which a promoter has to be identified based on the Shareholding Test only as listed out in sub-clause (b).

Control Issues – Shareholding Test – Section 2(69)(b)

Before proceeding to name a promoter under sub clause (a), we need to analyse section 2(69)(b) and there seems to be some confusion as it speaks of control which means it includes two test one is name the person and such person has to pass the shareholding test, which is direct and indirect holding. But Control is defined in section 2(27) to mean “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;

Sub-clause (b) can be considered for all those companies, which has not issued a prospectus. Control over the company directly or indirectly can mean the shareholder who is holding 26 % of the shares can also control a private limited or closely held public company, this seems contrary to the shareholding test where a private equity or investor who is holding 74% will be identified as a promoter and who has the right to appoint majority of directors and control of management and is a probable to be named as a promoter in the Annual Return.

Take the case of a listed company in spite of the promoter’s holding being very low which can be 5% or even less, such person is protected on account being named in the prospectus as a promoter and hence can continue to be named as a promoter in the Annual Return.

As per the above explanation, in case of an unlisted company where the investors are private equity firm, they will be treated as promoters. In case of a listed company, where the promoters named in the prospectus have exited the company, the dominant shareholder will have to be named as Promoter.

Control Issues – Boardroom Test – 2(69(c)

The Director or a Managing Director who has control over the affairs of the company that is to say who has the right to control the management or policy decisions of the company can be named as a Promoter. It can also mean that a Resident Director of a Multi National Company (MNC) who is a whole-time director can be named as a Promoter based on the Boardroom test.

The confusion is thus further aggravated when a Managing Director or a Resident Director who is not a shareholder, but on account of their exercising control over the affairs of the company can be identified as Promoter.

Chairman Emeritus – is he a promoter

Section 2(69)(c) says a promoter is one in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. The chairperson or any person, who also hold shares in the company and under whose advice the board is accustomed to act can be identified as a promoter. He may be a person who has retired from active business, but as the company has appointed him as a Chairman Emeritus, he offers advice, directions and instructions to the Board of Directors, hence his name will be identified and will be entered in the Annual return.

Fortunately, the Act exempts a person who is acting as a Chairman in his professional capacity.

A Private Equity/ Angel Investors/ Venture Capital – as a promoter

If a company names a private equity as a promoter then the tax authorities may have a different view of the issues relating to permanent establishment and may probe into the issues of the fund,

Dominant Shareholder vs Promoter

The definition of promoter is not clear as to whose name has to be identified and entered in the annual return under section 92 as a promoter of company. For those companies which is not covered under sub clause (a), which is a promoter named in the prospectus, and which is not a wholly owned subsidiary company, it might be difficult to conclude as to who is the promoter.

There are no signs of Removal of Difficulty (ROD) whereas the Act has created Addition of difficulty (AOD) to corporates that seem to arise at the time of identifying and giving details of promoters in Annual Return under section 92.


Tags :



Category Corporate Law
Other Articles by -
Sundharesan Jayamoorthi 

Report Abuse

LinkedIn



Comments


update