How to Resolve a Dispute between the Investor and Promoter?

Investors and Promoters

The most frequent and popular way to become a shareholder in a startup is to invest in the company at a predetermined valuation that is set using widely accepted commercial criteria. Yet, the Investor makes their investment in the company based mostly on the representations and warranties made by the company’s founders and promoters, who are responsible for its performance. Typically the promoters come up with the idea to start the company, and the investors come in later to invest money to scale the idea.

Investors and promoters are essential components for any organisation, whether it is an early-stage startup or an established corporation. The active involvement of shareholders or investors in the corporation and its business practices has significantly increased over time.

Investors and promoters

An investor is a person who chooses to invest money in a specific bank, business, or institution without guaranteeing a profit. Investors frequently use their capital for retirement, business, and even education. In the hopes of generating profitable financial returns in the future, some people also invest in mutual funds, stock exchanges, real estate, corporate stocks, etc.

Promoter is defined as any of the following individuals by Section 2(69) of the Companies Act of 2013[1]:

  • A person mentioned as a promoter in the prospectus or listed by the firm in Section 92 of its annual report.
  • A person who has direct or indirect influence over a company’s operations, whether as a shareholder, director or in another capacity.
  • A person who the Board of Directors of a corporation is used to acting in accordance with when giving orders, recommendations, or instructions.

A promoter employs a variety of strategies to raise capital for a company. Stock promoters frequently use traditional stocks and bonds, but they may also encourage partnership opportunities through limited liability or direct investing activities. The promoter may be free to choose their own incentives or be limited to using only certain offers.

It is important to remember that there are various categories of investment promoters while examining the definition of a promoter. The following are a few of the most typical promoter examples:

  • Investment Promoter
  • Government-based trade promoters
  • Casual promoter
  • Penny stock promoters

Recent Disputes

There are still disputes between investors and promoters nowadays. These have long been sources of worry for both investors and promoters. The shareholders of Signature Bank were the most recent to join the list. They filed a proposed class action lawsuit against the bank and three of its former senior executives, alleging that the bank had misled them about its sound financial position just three days before a state regulator took over. 

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Conflicts between Texas Pacific Group, Bain Capital, and the promoters of Lilliput Kidswear Ltd. in the past have been blamed on poor corporate governance and financial mismanagement. In the end, the issue prompted Lilliput to submit a request for corporate debt restructuring. It also significantly damaged the Lilliput brand’s reputation and caused several of its stores to close in 2012. Similar problems with financial mismanagement have surfaced in the Baring PE Asia-backed KS Oils and New Silk Road.  

Reason for the Disputes 

There are some complaints on the side of promoters, which leads to a big dispute between the investors and promoters.

There are many, but the following are the main ones:

  • A promoter may present a company with a negative reputation as positive, leading customers or investors to make poor investment decisions. One of the most substantial criticisms about promoters is that they give a false perception of a firm.
  • Promoters are frequently overzealous to the extent that they falsely portray them as more successful than others.
  • Since some promotion activities have frequently been connected to investment fraud and scams, not all promotion activities in the stock market are legal.
  • Investors are frequently misinformed by promoter’s dishonesty and skewed information.

Steps that investors should take before investment

Lack of sufficient due diligence by investors, competition between investors and promoters for control of the investee company, and a lack of emphasis on promoters’ corporate governance are contributing factors to these disputes. So, before making an investment in the company, investors must: 

  • Carry out thorough legal and financial due diligence and an Environment, Social, and Governance (ESG) audit.
  • Background checks on the management of the investee company and the promoters.
  • Regular audits of the legal, secretarial, and financial systems.

The steps mentioned above will lessen the likelihood of a dispute between the parties while also protecting their investment in the investee company.

Other strategies to avoid disputes

Investors must also arrange their exit strategy at the time of the actual investment.

Popular exit strategies include:

  1. Arrangement in private: This alternative is favoured as there is less promoter interference with such exits. Investment agreements typically contain restrictions on such sales, which might take the form of put and call options, rights of first refusal or first offer, among other things. However, the transaction must follow the pricing and other restrictions outlined in the Indian foreign exchange control legislation and SEBI regulations if FDI is engaged in such agreements (in the case of a listed company). 
  2. Put Option: The investors may also include a mandatory Put Option in the transactional documents so they can withdraw if the promoters and the investee company materially breach the agreement.
  3. Corporate Restructuring: If the investee company announces any plans to merge or acquire another company, the investors may use this as a chance to sell their shares of the investee company entirely or in part after evaluating the prospective financial gain from that move.
  4. A simple exit strategy for investors is an IPO: After the investment’s lock-in term expires, they may consider this choice. IPOs frequently provide investors with returns greater than their initial investment.
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The investee company and its promoters must also carefully select the investor. The process should include other significant considerations in addition to financial values, such as the investor’s contacts, brand image, mentoring, and other variables. The promoters will also need to make decisions regarding the level of control they are willing to give the investors, board seat reservations for investors, veto rights, liability limitations, non-compete and non-solicitation agreements, etc.

The partnership principle is expanded upon in business ventures. For the investors to become confident in the project, the promoters must routinely provide financial and other business updates to the investors. The investors should be included in the company’s important business decisions. These simple actions can significantly reduce the likelihood of disagreements and disputes arising between investors and promoters.

Given the impending threat of the Covid pandemic followed by the global financial crisis, investors and promoters must make wise business decisions after carefully considering all potential outcomes and carrying out adequate due diligence. Both parties to the deal would do well to get competent legal advice and assistance with preparing the transactional agreements and completing due diligence.

Possible Ways to Resolve the Differences and Disputes

There are practical steps that can be taken to try and reduce the likelihood of conflicts, and even if those prove impractical or ineffective, directors may still be able to prevent litigation or disruptive investor action.

It is usually advisable for an investor to have the ability to perform financial audits on the firm and its current financial situation. Investors who purchase a sizeable part of the company’s share should emphasise their right to assent to important decisions.

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Every investor conflict should be resolved in general meetings. However, other solutions might need to be considered if problems are not successfully solved during these meetings. Parties should review the investor’s agreement and the company’s articles of association to determine the options accessible to investors. Moreover, other possibilities for resolving investors’ and promoters conflicts include the ones listed below:

  • Arbitration – The most popular method for resolving disputes is arbitration. Investor agreements contain arbitration clauses to settle disagreements and are governed by Indian law. 
  • Negotiation – It may be possible to settle shareholder conflicts without having to invest the time and money necessary for legal proceedings. A resolution may be reached by direct negotiation between parties or their legal representatives. 
  • Mediation – Also, mediations have a reputation for being more productive and efficient. As an alternative, mediation facilitated by a neutral third party could help resolve the conflict. In addition, parties to commercial disputes must attempt mediation and settlement before filing a lawsuit unless immediate interim relief is required.

Everyone concerned wants conflicts to be resolved quickly and effectively; doing so calls for a properly thought-out plan that considers all relevant conditions, risks, facts, and repercussions that might affect the outcome. Before choosing one technique of resolution over another, dispute resolution options must be carefully analysed.


When a dispute arises despite the best efforts of all parties, it should, whenever feasible, be handled through mediation to allow the parties to participate in coming up with a solution that they can both agree on. Other options for resolving the concerns include arbitration and litigation. However, each of these depends on the decision made by the arbitrator or court in each case. The company’s best interests should always come first for all investors and shareholders, and they should be able to cooperate to find the most workable solutions.

Also Read:
A Brief Understanding on Investment in Equity Shares & Tax planning
Registration of Indian Insurance Companies: Compliance Requirements

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