Sebi has come out with a discussion paper on reclassifying promoters as public shareholders in certain circumstances. In fact, it is desirable to dump the nomenclature promoter altogether. The real issue is control and who wields it. ‘Promoter’ is a relic from the specificity of India’s industrialising past. As the Sebi discussion paper points out, once a promoter, always a promoter, because the rules and regulations deem it so. People acting in concert to acquire and exercise control is a relevant category. Promoters are vestiges of vestigial glory that modern companies can dispense with.
The same goes for promoter group as well. People acting in concert constitute a more coherent and empirically verifiable grouping. That category would fully overlap with a promoter group exercising or trying to exercise control and extend to others not covered by the term promoter group but relevant in the context of gaining or exercising control. In a company that has grown, expanded and diluted its capital significantly, the badge of promoter simply serves to give some individuals the opportunity to wield control and access information in excess of what their shareholding warrants. That the promoter is more a cultural hangover than an economic category is evident, when we compare ‘founders’ of startups and their evolution in the companies they set up, as the companies grow and expand. They might wield considerable moral authority but cease to be material figures in the running of the company once they have ceded control to professional managers, after having, in many cases, moved on to founding other enterprises. Other providers of capital do not hold them in awe, nor do their family members expect exalted treatment from the company’s professional managers.
‘Promoter’ is inseparably mixed up with ‘personal guarantee’ of directors and the culture of eviscerating limited liability that has marred India’s credit practice. The one should follow the other into that place where stone tools, droit du seigneur and fax machines have disappeared.
This piece appeared as an editorial opinion in the print edition of The Economic Times.