Corporate control is a 200-year-old problem in India

By Andy Mukherjee

Nearly 200 years ago, India made a unique contribution to the annals of corporate governance by inventing managing agencies, a system for separating control from ownership very different from the executive-led corporation that would emerge later in the US. These were typically British partnerships that ran, with little capital of their own, everything from jute factories and cotton mills to tea gardens and collieries on behalf of their owners, who were often wealthy Indians.

Under colonial administration, the agency system spread to other parts of Asia. For much of the 19th century, Jardine Matheson Holdings Ltd., one of the “hongs” that made modern-day Hong Kong, charged firms commissions for 16 different services, from shipping, insurance and debt settlement to managing their estates. Over time, Jardine came to exercise effective control over industrial concerns in China.

Many of today’s Indian conglomerates also began life this way. In 1958, more than a decade after the departure of British rulers, the Tata Group had nine agencies managing 60 companies. The Birla Group had 13, which operated 46 firms. Most agents had “very little resources of any kind.”

Now the agencies of yore are defunct. India outlawed them in 1970. The stewardship of joint-stock companies is in the hands of boards. Yet, the vestiges of the old system continue to thrive in a new tyrannical avatar: the company promoter. Minority investors are as much at the mercy of their new overlords as they were of managing agents who stuffed boards with family and friends and rode roughshod over other investors.

A promoter is usually not a term of law, but of business, a way of designating those who set in motion the machinery for incorporating a company. In India, though, both the Companies Act and the securities law define promoters — who are typically founders — very specifically. They are persons who “exercise control,” or in accordance with “whose advice, directions or instructions” the board of directors “is accustomed to act.” The promoters are named in annual returns and are required to hold at least 20% of the post-public-issue capital.

The lock-in period ends after 18 months, but the privilege endures — often with very little skin in the game. Agency contracts, too, used to last a long time. Some were for life. The promoter isn’t substantially different.

A Colonial Legacy.

Take Subhash Chandra, the media mogul who brought satellite television to India in the early 1990s. Today, the founder of Zee Entertainment Enterprises Ltd. is controlling the homegrown network, a publicly held firm, with just a 3.99% stake held by the family. Recently, Sony Group Corp.’s India unit cancelled a $10 billion merger with Zee. The Japanese were reluctant to appoint Punit Goenka, Chandra’s son and Zee’s chief executive officer, as the CEO of the combined entity. The father-son duo is being investigated by the market regulator for siphoning off funds. In six years, Zee has lost three-quarters of its near-$9 billion value, and yet the board remains in thrall of Chandra. After all, he’s the promoter.

But problematic promoters are seldom a part of the solution. Shivinder Singh and Malvinder Singh, heirs to an empire that included India’s No. 1 drugmaker, and later its second-biggest hospital chain, lost their businesses and went to jail. By 2020, when Religare Enterprises Ltd., their holding company for financial services, asked the stock exchanges to declassify the brothers as promoters, it had lost 96% of its 2011 value.

In invalidating Elon Musk’s $55 billion Tesla Inc. pay package, a US court has given a flavor of the zeitgeist: Even iconic entrepreneurs can’t have it all. In India’s family-run business milieu, the first step toward protecting public shareholders may be to acknowledge the promoters’ power. The second may be to let them manage, while outsourcing governance to board service providers, a novel idea floated by a couple of legal scholars. The agency system outsourced management while leaving weak boards in charge of governance. It’s time to go the other way. Unlike independent directors who are easily swayed by overbearing promoters, an external franchise will have a reputation to protect. That won’t always stop a professional board-services firm from misbehaving, but it could still be an improvement over what exists now.

Managing agencies used to charge their associate firms. The 3/8 of a penny per pound of yarn commission is history now. Or perhaps not. In 2019, Rakesh Gangwal, the US-based promoter of IndiGo, India’s No. 1 airline, complained to the securities regulator that Rahul Bhatia, his India-based counterpart, had built “an ecosystem of other companies that would enter into dozens of related-party transactions with IndiGo.” Bhatia argued that those relationships — from crew accommodation to flight-simulator training for pilots and ticket sales — had all been disclosed. The feud ended in 2022: Gangwal left the board and decided to dilute his stake.

Of late, it’s the short sellers questioning the more prominent promoters. Early last year, New York-based Hindenburg Research accused the Indian infrastructure tycoon Gautam Adani of using PMC Projects Pvt., a contracting firm controlled by a Taiwanese family, “to suck money out of the Adani Group’s publicly listed entities.” The conglomerate, whose flagship is promoted by brothers Gautam and Rajesh Adani, denied the allegation. A few months later, though, Deloitte raised red flags about payments by Adani’s ports company to Howe Engineering Projects (India) Pvt., which now contains the core operations of PMC. The accounting firm resigned as auditor in August, citing lack of sufficiently wide oversight over the conglomerate’s accounts. Adani maintains neither PMC nor Howe are related to it.

Investors have moved on: Adani’s ports unit shares have jumped more than 150% from their post-Hindenburg lows. But the saga involved more than just stock prices. At its core, it was about the meteoric rise of a businessman considered close to Prime Minister Narendra Modi. Managing agencies, too, worked with the government of the day. Martin Burn, an Anglo-Indian venture, managed several crucial water and power utilities. Their politics, though, was more nuanced. Some — like Ghanshyam Das Birla — were important facilitators of India’s freedom movement.

Today’s promoters have thrown in their lot with Modi. They are scrambling be on the national team, with some 100 private jets showing up at the recent consecration of a Hindu temple, presided over by the strongman leader. How long this alignment lasts, which promoter benefits, and what it means for minority shareholders, may be a topic for future historians.