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India’s corporate governance system has a long history, dating back nearly 200 years when the country introduced managing agencies. Unlike the executive-led corporations that emerged in the US, managing agencies allowed for the separation of control from ownership. These agencies, often British partnerships, operated various businesses on behalf of wealthy Indian owners, managing everything from jute factories and cotton mills to tea gardens and collieries. The concept of managing agencies spread to other parts of Asia, with companies like Jardine Matheson Holdings Ltd. exercising control over industrial concerns in China.
Even after India outlawed managing agencies in 1970, the remnants of this system continue to thrive in a different form: the company promoter. While the stewardship of joint-stock companies now rests with boards, promoters still hold significant power and influence over decision-making. Promoters, typically founders, are defined by both the Companies Act and securities law in India. They are individuals who exercise control or whose advice and directions the board is accustomed to follow. Promoters are required to hold at least 20% of the post-public-issue capital and are named in annual returns.
This enduring influence of promoters can lead to problems for minority investors. Many problematic promoters prioritize their interests over those of shareholders, resulting in financial losses and even legal troubles. For instance, media mogul Subhash Chandra, founder of Zee Entertainment Enterprises Ltd., controls the publicly held firm with just a 3.99% stake held by his family. Similarly, heirs Shivinder Singh and Malvinder Singh lost their businesses and faced legal consequences after their holding company, Religare Enterprises Ltd., lost 96% of its value.
To protect public shareholders, it may be necessary to acknowledge the power of promoters in India’s family-run business environment. One potential solution is to outsource governance to board service providers while allowing promoters to manage the company. This model would be a departure from the past, where managing agencies handled management while weak boards oversaw governance. By engaging external franchise firms with a reputation to protect, there is a higher likelihood of improved governance compared to the current system, where independent directors may be swayed by overbearing promoters.
Additionally, conflicts of interest between promoters and their associated companies remain a concern. For instance, Rakesh Gangwal, the US-based promoter of IndiGo, accused his India-based counterpart, Rahul Bhatia, of engaging in related-party transactions that benefited his other companies. While Bhatia argued that these relationships were disclosed, the dispute led to Gangwal leaving the board and reducing his stake.
Promoters’ actions have also attracted attention from short sellers. Hindenburg Research accused infrastructure tycoon Gautam Adani of using a contracting firm to siphon money out of his publicly listed entities. While Adani denied the allegations, concerns were raised by Deloitte regarding payments made by Adani’s ports company to another entity. Investors have since moved on, with Adani’s ports unit shares rebounding, but the episode raised questions about the relationship between businessmen and political leaders like Prime Minister Narendra Modi.
In conclusion, India’s corporate governance system still grapples with the influence of promoters, which can negatively impact minority investors. Exploring alternative governance models, such as outsourcing to board service providers, may offer a solution to mitigate potential conflicts of interest and improve overall governance standards. While the alignment between promoters and political leaders may have short-term benefits, its long-term impact on minority shareholders remains uncertain.
Corporate control has been a persistent issue in India for over two centuries. Dating back to the British colonial era, when large corporations were established to exploit India’s resources, the problem has continued to plague the country even after gaining independence. These corporations have often wielded immense power, dominating key sectors and influencing government policies to serve their interests. This control has resulted in economic inequality, limited opportunities for smaller businesses, and exploitation of workers and natural resources. Addressing this long-standing problem requires comprehensive reforms to ensure fair competition, promote transparency, and safeguard the rights of all stakeholders.
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