The Corporate Governance of Indian Unicorns

Indian companies have traditionally been closely held, controlled and monitored by concentrated shareholding structures, usually within families. Controlling shareholders, referred to in the Indian context as promoters, have usually played an all-pervasive role in the day to day management of the company. As a result, institutional investors such as venture capital and private equity funds, often seen as 'outsiders', would look to contractual measures to curb promoter opportunism. However, the rise of an entrepreneurial culture, coupled with regulatory incentives in India, have led to the creation of a large number of unicorns-startups that have achieved a high level of valuation-within the Indian economy. <div> <br> </div> <div> <p><span>This paper seeks to review the shareholding structure of such unicorns, particularly the balance of corporate control between promoters and institutional shareholders. We track and analyse the corporate governance rights contracted between promoters and institutional shareholders through a review of publicly available Articles of Association of such unicorns, which are mandated to include shareholder rights. The primary purpose of this study is to ascertain whether unicorns have ownership structures that are different from other companies, thus creating an exception to the ‘insider’ model of corporate governance seen in most Indian companies.</span></p> <p><span>&nbsp;</span></p> <p><span>As a result, this paper seeks to analyse modifications in corporate control through contracted corporate governance. We find that increased ‘outsider’ shareholding is directly linked to the creation of more professionally managed unicorns. We also demonstrate that as Indian companies attain unicorn status, they are less likely to maintain a ‘closed’ or an insider model of corporate governance, instead moving to a more dispersed model of shareholding with multiple institutional investors. As unicorns approach a dispersed model, their governance also changes, increasingly resembling public listed companies, including the appointment of independent directors, heightened reporting requirements and affirmative voting rights requiring minority investor support for critical decisions. As a result, we create a corporate governance model for other startups in developing countries to emulate if they are to achieve unicorn status.</span></p> </div>