The concept of ‘promoter’ is dead

12th April 2019 BUSINESS STANDARD

In other countries, the concept of the founder/promoter of a company has relevance at the time of the founding—whose idea it was or who initiated formation of the company, a bit like the parents’ names when a child is born.

12th April 2019 BUSINESS STANDARD

R. Gopalakrishnan*

Email: rgopal@themindworks.me

(*The writer is a corporate advisor and Distinguished Professor of IIT Kharagpur. He was formerly Vice Chairman of Hindustan Unilever and Director, Tata Sons.)

In other countries, the concept of the founder/promoter of a company has relevance at the time of the founding—whose idea it was or who initiated formation of the company, a bit like the parents’ names when a child is born. Thereafter the founder/promoter becomes a mere record; certainly so, after decades have passed. The firm is supposed to be under the control of a management, overseen by directors, acting on behalf of shareholders.

In India, the concept of promoter continues forever and is stated in statutory records. This is ridiculous because the promoter is neither a trustee nor an agent of the company. The Companies Act and SEBI regulations define a promoter. Being named as a promoter appears like a privileged status (like SEBI permits access to price-sensitive information), but that status is perceived as an obligation by the public. Piquant situations may arise.

The concept of the promoter is not relevant any longer.

The legal requirement of naming a promoter may well be a legacy of the managing agent, who had rights, income and a privileged position. The family or promoter gets a sense of privilege, even if only illusory, a bit like the head of the joint family. The banks derive psychological comfort by collecting letters of comfort, sometimes meaningless ones. The government thinks that it knows whom to go after if the need arises. Being a hangover of the license-permit raj, it helps politicians to know whom to extract rent from. The media knows whose picture to display with headlines like “Kapoor-led Yes Bank.” In international papers, you will not see headlines like, “Polman-led Unilever” or “Jeff Immelt-led GE”!

Retaining the concept of a promoter coalesces a coherent, though useless, image for the relevant stakeholders.

Here are examples of the piquant outcomes:

  1. Below 25% shareholding, the promoter is a powerless monarch! In the case of l’affaire L & T and Mindtree, 13% shareholders ridiculously assume that they are the champions of all shareholders because they are classified as promoters even after two decades of the company formation. In the Infosys case, a 2% shareholder, with a promoter status, assumed the role of the conscience keeper of a shareholder-elected board.
  2. There is a psychological and philological angle to the use of this terminology. Founders think that they have a right to intervene (or interfere) in the company because “they are the mother who gave birth to the company.” The emotion evokes empathy, but no sympathy. It is as credible as a biological mother who thinks that she can intervene (or interfere) in the dietary choices or marriage ideas of her 30-year-old son!
  3. Promoters and founders argue that they have a special love and affection for the company. One startup founder has arrogantly argued that professional managers are like passengers, who get on and off the train, whereas the promoters are like engine drivers who stay with the train all through the journey. Really? Arrant nonsense. Think of Jet, Kingfisher, Sahara, Satyam, Ranbaxy, Fortis, Saradha Chit Fund or many other usurious promoters who fatten their foreign accounts through purchase contracts.
  4. If there had been no concept of promoter, then the YES Bank imbroglio of Kapoor versus Kapur would not have happened. There is a major cement company in which the non-executive chairman is regarded as a promoter even though he has sold all of his shareholding. When Infosys promoters asked to be delisted as promoters, they were denied their request by the authorities!

All in all, the legal continuation of the promoter concept in perpetuity has played out its course. There is merit in abolishing the promoter concept.

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