12th April 2019 BUSINESS STANDARDIn 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
(*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:
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.