Promoter under ICDR Regulations And

Company’s Act – Legal provisions

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.
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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.