Home / Opinion / Views /  Our great unicorn migration must avoid three pitfalls

The contempt for ‘Start-up India’ a few years ago was rooted in theoretical economic models incapable of predicting that India, a $2,500-per-capita-income country, will have 5 million people writing software, 3 billion monthly real-time digital payments, $20 billion of global private equity capital raised this year, and $3 trillion in public market capitalization. This migration represents wonderful openness by Indian regulators and investors to an American innovation: valuing companies based on their addressable market, top-line growth and future bottom-line. The innovation of private equity has made Indian capitalism more meritocratic, but we make a case for using this opportunity and asking our public markets to skip three US practices.

This analysis may violate the wonderful warning of American poet Walt Whitman: Be curious, not judgemental. It may also be ungrateful; we have both benefited greatly from American capital, ideas and institutions. It may even be delusional; America has 5% of the world’s population but generates 48% of business activity, houses eight of the world’s 10 most valuable companies, and has created nearly half of the 19 new companies of the last 25 years that are now worth over $100 billion. For a first-generation entrepreneur, there is no better place than America to be born, incorporate your company, or raise money. But latecomers have an opportunity (and obligation) to learn from pioneers.

American-style initial public offers (IPOs) for unicorns in India mark the culmination of an entrepreneurial revolution catalysed by the end of the licence raj that includes lower founder equity shareholding because of private equity, a sharper distinction between executive/board/shareholder roles, younger and multiple founders, and a closer focus on intangible assets over regulatory arbitrage or fixed assets. Private equity is moving India away from funding entrepreneurs for their connections or surnames by evaluating the courage in their heart, the strength of their back and the sweat on their brow.

These IPOs represent a learning from the US, but as Mahatma Gandhi wisely said, “I don’t want my house to be walled in on all sides and my windows to be stuffed. I want the cultures of all lands to be blown about my house as freely as possible. But I refuse to be blown off my feet." The relatively fragile legitimacy of Indian capitalism—the unfortunately common prejudice of ‘behind every great fortune lies a great crime’—calls for proactive thinking on checks and balances for public companies. Reflecting on the US public-market experience suggests we should not adopt American practices in three significant areas:

Unrestrained CEO compensation: We love meritocracies that pay their best people well. But American CEO compensation has become an unconstrained arms race driven by conflicted and self-referential compensation consultants who legitimize rigged benchmarking, irrational signing-on bonuses, golden parachutes, and unconditional stock grants. These tend to encourage short-term thinking instead of vaccine-pioneer Jonas Salk’s advice of being “good ancestors" by balancing the next quarter and next quarter-century. Compensation caps are a bad idea, but higher transparency compensation, outcome and sustainability-linked compensation and payouts over longer horizons are good ideas. Maybe CEO compensation beyond certain thresholds should not be tax-deductible for companies.

Lightly governed CEOs: Publicly-listed companies are held to a higher standard because retail investors often suffer information asymmetry, skill gaps, or attention shortages. Combining the CEO’s role and the board chair’s role tends to weaken corporate governance. The decline of General Electric captured by Ted Mann and Thomas Gryta’s book Lights Out: Pride, Delusion, and the Fall of General Electric has this story of a tenured board director responding to a new director’s question on role expectations with one word: “applause". Everybody needs hearing aids to protect them from themselves; we should not defer next year’s deadline for large listed Indian companies to have a non-executive board chair.

Tweaking the one-share-one vote norm: Democracies are built on the principle of one-person-one-vote because anything else implies agreeing with poet Iqbal’s unfair lament, “Jamhooriyat ek tarz-e-hukumat hai jisme logon ko gina jaata hai tolaa nahin (democracy is a system where people are counted, not weighed)." Non-voting stock or super-voting power is rare beyond a few tech firms in America (which too may eliminate this narcissistic tool in the future). News reports suggest that some Indian founders pushing for this potentially-dangerous provision are being heard out by our authorities. We hope the government and regulators resist undermining shareholder democracy.

As China implements what locals call ‘guojin mintui’ (the state advances as the private sector retreats), we hope public companies in India will accept the three constraints outlined above in exchange for the privilege of going public on a relaxed set of criteria.

Talented Kenyan Kipchoge reminds us that the first half of a marathon is run on your legs and the second half on your mind. The great unicorn migration that’s underway in India will move our public equity markets to the second half of their marathon. Our public markets and entrepreneurs are strong, but will become stronger by reflecting on the global experience, skipping bad practices, and accepting constraints that protect them from themselves.

Manish Sabharwal & U.K. Sinha are, respectively, vice chairman of Teamlease Services and former chairman of the Securities and Exchange Board of India

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