I cannot count the number of times I have spotted people confusing between directors, promoters and management. Even read articles in national newspapers with the wrong classification. I believe that there are 2 reasons for this. First, often the same person(s) act in all these capacities. Second, mostly these articles are written by journalists and not legal experts. This does not change the fact that there are fundamental differences in the role, liabilities and duties based on the capacity in which a person acts.

This post covers only the duties and liabilities of the promoters. For a post on the role and duties of directors, read here.

Who is a Promoter?

As per the Companies Act 2013, Promoter means a person—

  1. 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
  2. who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
  3. 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.

SEBI Issue of Capital and Disclosure (ICDR) Regulations has a far more elaborate definition applicable to publicly listed companies. In the ICDR ‘promoter’ is defined as (in 2 za & zb):

  1. the person or persons who are in control of the issuer;
  2. the person or persons who are instrumental in the formulation of a plan or programme pursuant to which specified securities are offered to public;
  3. the person or persons named in the offer document as promoters:

Provided that a director or officer of the issuer or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter:

‘Promoter group’ includes:

  1. the promoter;
  2. an immediate relative of the promoter (i.e., any spouse of that person, or any parent, brother, sister or child of the person or of the spouse);
  • in case promoter is a body corporate:
  1. a subsidiary or holding company of such body corporate;
  2. any body corporate in which the promoter holds 10% or more of the equity share capital or which holds 10% or more of the equity share capital of the promoter;
  3. any body corporate in which a group of individuals or companies or combinations thereof which hold 20% or more of the equity share capital in that body corporate also holds 20% or more of the equity share capital of the issuer;
  • in case the promoter is an individual:
  1. anybody corporate in which 10% or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of his immediate relative is a member;
  2. anybody corporate in which a body corporate as provided in (a) above holds 10% or more, of the equity share capital;
  3. any Hindu Undivided Family or firm in which the aggregate shareholding of the promoter and his immediate relatives is equal to or more than 10% of the total;

provided that a financial institution, scheduled bank, foreign institutional investor and mutual fund shall not be deemed to be a promoter merely by virtue of the fact that 10 % or more of the equity share capital of the issuer is held by such person.


Typically, promoter(s) is the person who starts or promotes a business. Their name is so registered in the prospectus and in the annual report of the company. In general, a promoter will have a majority stake in the business. A promoter may sit on the board (of directors) of the company and may also serve as its Chief Executive Officer (CEO) or Chief Financial Officer (CFO) or in any other managerial capacity.

Similarly, a director may act in managerial capacity and may also become a promoter. It is important to understand the consequences of this classification when assessing the integrity and competence of the management.

Test for a Promoter

  • The best way to examine a promoter, both under companies act and as per the ICDR is by focusing on clause (b) and (c) of the definition above. To explain as a law professor- “if the board of directors and the management of the company acts as per someone’s directions or orders, for whatever reasons, then that person is a promoter. It does not matter if that person makes everyone act as per his direction by pointing a gun at them every day or by abducting people close to the board. So long as he gets his way, he is a promoter.”
  • In addition, even if a person does not fall under clause (b) and (c) above, he may still be a promoter if he is named as a promoter in the annual report and/ or in the prospectus. You could call this second category as – ‘statutory promoters’, if you are so inclined.

Promoter’s Liabilities – What happens if you are a promoter?

Under the Companies Act:

A Promoter becomes personally liable for any untrue statements made in the prospectus of the company on the basis of which a person subscribes to shares of the company. The promoter must also disclose his profits in full in the prospectus. If a person suffers any loss due to such untrue statements, the promoter will be sued for damages and may also be prosecuted criminally. Further, promoters of the company are held liable for all pre-incorporation contracts.

Under the ICDR Regulations:

Promoters are like the anchors of a ship. Unfortunately, there are many fly by night operators whose only intention is to float a business plan, collect public funds, siphon those funds and leave the shareholders with a failed company. Under the ICDR regulations, promoters have a much higher liability.

First, the promoters must make a minimum contribution. When a company plans an Initial Public Offering (IPO), the promoters of the company must contribute at least 25% of the post issued capital of the company. This is to ensure that the promoters are serious about the venture or at least serious enough to contribute a meaningful portion of their own capital to the business.

Second, this minimum contribution of 25% made by the promoters shall be locked in for at least 3 years. This means that the promoter cannot sell these many shares for a period of 3 years from the date of allotment of shares in the IPO. In addition, anything over and above the minimum contribution (of 25%) which the promoter holds shall be locked in for a period of 1 year from the date of allotment of share.

Third, if you are the promoter, it brings with it a long list of compliance things to do!

Amongst others things, the promoters have to:

  • Disclose all litigations filed and pending against them in the offer document.
  • State that there name is appearing as a wilful defaulter in the records of Credit Information Bureau of India Limited (CIBIL), if that is the case.
  • They must disclose if they are debarred from accessing the capital markets (in which case they can no longer be named as promoters in the offer document / prospectus).
  • The promoter must disclose their shareholding in the company at the end of every quarter.
  • Disclose and get shareholder approval for all their Related Party Transactions.

In addition there are restrictions on the number of shares they can buy or sell in the company in a single financial year.

In case the promoter is found violating any of the provisions mentioned above, he risks not only a civil / criminal action against him but also risks being barred by SEBI from accessing the capital markets i.e. from raising funds from the market in future.

Can you cease to be the Promoter?

For many years, the general principle had been – ‘Once a promoter, always a promoter’. In particular, based on the clause (both in the Companies Act and in the ICDR) which states that a promoter is someone who has been named as such in a prospectus, it becomes a lifelong designation.

There may be instances where a promoter may not want to be bound by all these compliance requirements. What if the promoter sells his entire stake or a majority of his stake? What if the company is now being run by / under the direction of a different group/ person(s)?

The fact that I promoted a business venture and the company behind it and that my name appears as a promoter in the incorporation document should not follow me forever. This is especially important in the present day business environment where newer businesses are being started and sold by serial entrepreneurs.

In past there have been many instances where companies ceased to treat certain promoters as such. This was done by a simple notification in the form of corporate announcement made to the stock exchanges where shares of the company were listed and to the Registrar of Companies (ROC). In all cases one thing was common, the promoters who wished to be de-classified as such reduced their holding in the company to at least below 5%, in most cases for below than that.

SEBI is now working on rules to enable a promoter to de-classify themselves as such. Once a person ceases to be a promoter, he will no longer have to comply with the above requirements.

The plan is to permit re-classification in 3 cases:

  1. In consequence of an open offer – this is mostly for cases where a new group takes over.
  2. Where there is a separation agreement between the promoters. This is meant to take care of business reorganisations especially between family run groups.
  3. Where the shareholding of the relevant promoter/promoter group is below 5% – to cover situations where people have moved away from business for whatever reason and hence would not like to be held liable on account of promoter’s compliance requirements.

In all cases, the de-classified person must not exercise any control on the company, nor hold any key management positions. In addition, such de-classification must be notified to and approved from both, the stock exchanges and from the registrar of companies.

Note that in the first case, no minimum shareholding criterion is set. So a person may well hold 20-30% stake in the company and yet may no longer be a promoter if he can prove that he exercises no control. This may be either because there is another (bigger) group taking care of the company’s affairs, or for any other reason. This however is hard to imagine.

Strategic stake holders– I believe that a big shareholder (say someone holding 20-25%), could be classified as a public shareholder in the (quarterly) regulatory filing of shareholding pattern. However, he must disclose that he is not exercising any control and is not a promoter in a separate filing. Just as a good practice if not to be doubly sure! That said, the issue gets murkier for a former promoter who may continue to hold a strategic stake.

The above content is not exhaustive. There are many other occasions and reasons for which  promoter(s) may be liable for failing to perform their duty or for any act of omission and commission.

If you would like to discuss any particular situation, you can get in touch with me.

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