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It is perhaps for the first time in the corporate history of India that a court has stipulated the date for a meeting of a board of directors, set its main agenda, directed a decision be taken and, finally, subject that board decision to a judicial review. This is unprecedented even by the current standards of judicial activism.

Much as the press has spiced it and played it up as a family squabble, the real issue at stake here is the very concept of a board-run, professionally managed company. In other words, corporate governance itself. What has happened so far severely questions that and has the potential to compromise the powers of the board.

It is for these reasons that the Yes Bank board meeting on 27 June is important. It has the potential to be a landmark meeting that can set forth serious issues relating to structure and conduct of corporate governance.

Given the larger issues involved, the board meeting must go beyond the issue of a family, squabble or no squabble. The board must see it not from perspective of the family of promoters or promoter group, who, however defined, hold just about 26% of the company. Instead, they must see it from the perspective of those who hold nearly three times more shares in the bank: the investor. Indeed, also from the perspective of all widely held board-led professionally managed companies.

What l’affaire Yes Bank brings into focus is the inadequately defined but more than adequately interpreted concept of a promoter in the Indian corporate context. It originally appears in The Companies Act, 1956, but isn’t defined in any law. It does, though, find mention in a number of statutes, like the Substantial Acquisition of Shares Takeovers (Sebi) Regulation.

Although promoter is a generic term that refers to the person who started the company, in certain exceptional cases, it can even mean the person who is not in control of the company. Also, there is nothing that legally links or binds promotership with ownership. But the way things are, promoters are the only shareholders in the corporation when it is set up.

Till the corporation goes public, it is clear and unambiguous. Indeed, if the promoter is the only shareholder, the corporation may, in compliance with the rule of the US Securities and Exchange Commission, need to disclose the information prior to selling shares to the public. The moment a company goes public, the notion and definition of a promoter must change. After a company goes public, the promoter, technically speaking, becomes an investor.

If she holds a large stake, indeed a majority stake, she will exercise her right through and in line with the corporate governance processes, be it the annual general meeting, extraordinary general meeting, the board or the nomination committee. This is, of course, in line with the regulatory norms.

After having gone public, seeking of extraordinary rights outside the corporate governance structure is a problem not peculiar among the India promoter class. What complicates matters in India is that a promoter is by and large a family. To some extent, it does reflect their lack of faith in corporate governance. But, more importantly, this mindset of extraordinary privileges is engendered by the way huge liabilities are put on them in the Indian Company Act even after their shareholding is not a majority one. It is this that gets the promoters to seek greater privileges.

If after divesting, even less than the majority stake the liability continues to rest on them, the promoters continue to feel it is them and not the board and management that is liable. Indeed, the listing norms and other regulatory statues still treat promoters share as a category superior to others.

In the case of Yes Bank, by seeking a board seat on the strength of a 12% stake in the company, what is sought to be done is to establish a causal link between shareholding and board seats. By questioning the induction of directors who have been approved by the annual general meeting, a promoter group is seeking to overrule the mandate of the rest of the shareholders. This is unacceptable.

Be that as it may, articles of association cannot allow any promoter or investor to bypass the nomination committee or the board, nor can they make it a fait accompli to a consensus between a niece and an uncle, as is being suggested. It is the mandate of the nomination committee and that of the board not only to assess the fit and proper criteria—which is in the nature of a qualifying criteria and not a selection criteria—but to select a board member after evaluating the effectiveness of individual directors as well as the board as a whole.

The board, which is to discuss the induction of a director nominated by a promoter as directed by the Bombay high court, must follow these processes not only in letter but also in the spirit of the corporate governance code.

Haseeb A. Drabu is an economist, and writes on monetary and macroeconomic matters from the perspective of policy and practice. Comments are welcome at haseeb@livemint.com

To read Haseeb A. Drabu’s earlier columns, go to www.livemint.com/methodandmanner-

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