New Delhi: The 'Raja' model of running a company, where promoters act as monarchs may be favourable to them but hurts minority shareholders and the overall business confidence in the country, a Sebi panel on corporate governance said on Thursday.
Submitting its report to the regulator for overhaul of corporate governance norms for listed companies, the panel headed by eminent banker Uday Kotak instead favoured a 'custodian or trusteeship' model for running a company that works on 'Gandhian principles'.
In his foreword to the report, Kotak said leading corporates in India are often seen as role models by budding entrepreneurs, but if one investigates further, weaknesses become visible.
"This is where the contention between letter and spirit comes to light. By and large most leading corporates in India follow rules and regulations, and if their governance practices are put to test, they will likely stand scrutiny of
the law.
"However, if one delves deeper, one could find that while the letter of the law may have been complied with, the spirit of regulations has not necessarily been embraced wholeheartedly," he said.
Kotak said that there are broadly two styles of running a company the 'Raja' (monarch) and the 'custodian' (trusteeship) model in the country. In the 'Raja' model, promoter interest -- self-interest -- precedes interests of 'Praja' other stakeholders.
Given the sizeable number of promoter-led companies that are present in the Indian market, the challenges India Inc faces are inherently unique.
"There are instances of promoters carrying out actions that are favourable to them but detrimental to the interests of minority shareholders. This has affected confidence in India Inc," he said.
The 'custodian' model works on 'Gandhian Principles' and is relevant for both promoter as as well as professionally managed entities. Under the model, promoters, boards and management wear the hat of 'trustees' and act in the interest of all stakeholders, investors, employees and customers keeping
stakeholder interests before self-interest.
He suggested that corporate India needs to move in 'custodian' model direction. The panel, which submitted its report today, was set up by Sebi in June this year with a view to enhancing the standards of corporate governance of listed entities in India.
The committee, consisted of officials from the government, industry, professional bodies, stock exchanges, academicians, lawyers and proxy advisors, was asked to submit its report within four months.
