India has an almost unique system of promoters who own and manage much of the corporate sector. There are the eponymous promoter groups that have been around for decades such as the Tatas, Birlas, Mahindras, Bajajs, Goenkas and Godrejs. Then there are the relative newcomers such as the Ambanis of Reliance , the Mittals of Bharti, the Agarwals of Vedanta, the Biyanis of the Future Group, the Singhs of erstwhile Ranbaxy, etc.
There are also the single-company promoters such as Hamied of Cipla, Saldhana of Glenmark, the Puris of Moser Baer, Premji of Wipro, etc. In some cases, there are multiple promoters as in the case of Infosys, or professional promoters as in HDFC. In short, there are promoters of all types. What makes India such a fertile ground for the concept of promoters? And how come other countries don’t have such a wealth of promoters? Is it beneficial for India to have such a corporate landscape?
If we look at the US market, almost all entrepreneur-promoted companies move on to being run by non-promoter , professional management. Take the case of the Rockefellers and the Waltons. Even in relatively new companies such as Microsoft, eBay, Yahoo and Google, the founders have given way to others with a background in scale and complexity to manage the business. Typically, this happens once the company gets listed and other stakeholders enter the picture. In the US, the institutional investor base is organised and powerful, and pushes its interests that much harder.
There are many reasons that make the concept of promoters so sustainable in India . First, the fact that most Indian promoters own pretty sizeable chunks in their companies means that they are able to exercise significant shareholder rights that, in turn, helps them stay in control. Most promoters would today typically own more than 35-40 % of their companies. Older conglomerate groups such as the Tatas and Birlas have been busy shoring up their ownership levels. The days when the Tatas controlled Tata Steel with a lower shareholding than the Birlas’ 8% are long gone.
The second reason is the lack of a countervailing strong institutional investor base. Indian insurance companies and asset management companies do not have the maturity and ability where they can forcefully push adifferent point of view. It also does not help that most institutional investors such as insurance companies and asset management companies are controlled by the same promoter groups. In such a scenario, their incentive to rock the boat is minimal and this is revealed by a cursory look at the leading insurance companies: Tata AIG, Birla Sun Life, Bajaj Allianz, Bharti Axa, Reliance, etc.
The case of asset management companies is similar. The only large financial investors that could be considered non-promoter-driven are LIC, ICICI Prudential and HDFC. But they are also unlikely to take a more activist role given their deep ties with industry. Of course, there are genuinely independent institutional investors too and we should hope that they become more significant. One class of independent investors that hasn’t yet shown activist tendencies is foreign institutional investors and, to some extent, private equity funds investing in the public markets.