Sethji ne bola hai is a typically authoritative command, generally heard in the corridors of big Indian firms led by promoters on matters which require courageous or controversial decisions. While this culture denotes absolute power and leads to growth, it also leads to drawbacks in running businesses such as lack of professionalism, inadequate risk management and poor succession planning.

Asian countries, in particular India, Japan and South Korea, witnessed exponential growth of family businesses over the past few decades. In India, the largest conglomerates are led by promoters. Such conglomerates are needed in emerging markets like India as they fill the institutional void by providing for soft and hard market infrastructure.

From a corporate governance perspective as well, it’s perhaps a good situation — a promoter-led board, promoter-funded company and promoter as the largest shareholder.

Effectively this means, least resistance between the management and promoter of the company.

One might ask, if everything is so rosy about promoter-driven companies, then what is all the fuss and negativity attached to them lately? For starters, it’s about absolute power, including the control over the board, which might make the promoters too attached to the businesses, and that sometimes may work against the interests of the minority shareholders.

Since the entire control remains with the promoter with very little say for such minority shareholders, the focus of corporate governance shifts to the protecting the interests of minority shareholders.

The Indian corporate sector has witnessed many such cases, where the promoter entity and minority stakeholders were seemingly up against each other — the prominent ones are arguably those relating to Infosys and the Tata group.

The most recent case is the Adani saga. Post the report of Hindenburg Research, a US-based firm funded by short-sellers which alleged lapses in the corporate governance framework, there was a free fall in most of the Adani group stocks. The report alleged many governance issues peculiar to promoter-led businesses, including related-party transactions, lack of transparency or disclosures and violation of SEBI’s listing norms.

While the allegations are yet to be proved, the market reaction has been catastrophic, specifically for retail investors. The stock price has been falling over multiple sessions now.

From the regulator’s side, SEBI has done quite a good job over the past few years in identifying corporate governance issues and providing a framework to monitor the same. SEBI has come out with a number of disclosure norms, including those on related-party transactions.

In February, SEBI came up with consultancy papers seeking public opinion on tightening a few such norms for better corporate governance practices.

One such paper, ‘Strengthening Corporate Governance at Listed Entities by Empowering Shareholders – Amendments to the SEBI (LODR) Regulations, 2015’, issued on February 21, has focused on shareholders’ rights.

The market has added many new retail investors and lot of heavy lifting has been done by domestic institutional investors lately. The regulator has responded well too, with the corporate governance framework going through lots of changes over the past few years.

But in India, concentrated ownership and promoter-led businesses will continue to dominate, and hence the role of the board should revolve around protecting minority shareholders.

However, the implementation of sound corporate governance practices in promoter-led companies remains a challenge due to the skewed nature of power distribution. This poses a challenge for regulators, even as they keep pace with the changing landscape of corporate governance.

Bhawnani is Head Treasury, India Shelter Finance Corporation, Gurgaon, and Anirvinna is Associate Professor, TAPMI School of Business, Manipal University, Jaipur

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