THE HERO-PRENEUR'S FALLACY: GOVERNANCE, DELUSION AND THE DISCLOSURE REMEDY IN INDIA'S STARTUP ECOSYSTEM

This piece is authored by Aditi Anand, a fourth-year, B.A.LL.B. student, at the Chanakya National Law University, Patna.

INTRODUCTION

The prevailing perspective on the governance of Indian corporations is built largely around the idea of “the promoter”, that is, the family of its founder exerting long-term, centralized control over the company. However, a closer examination of India's unicorn ecosystem reveals a far more complex reality: what appears to be promoter dominance is, in many respects, a carefully constructed illusion. This piece argues that the governance of Indian unicorns must be understood as a dynamic equilibrium shaped by competing forces. The founders who succeed are not those who fight the structural dispersion of power, but those who learn to trade accountability for credibility at exactly the right moment.

THE EQUITY MIRAGE AND THE BOARDROOM REALITY

Empirical scholarship on the governance of Indian unicorns has already established that the appearance of promoter dominance is frequently illusory. Arjya B. Majumdar’s study demonstrates that while promoters appear, on the face of the shareholding pattern, to retain substantial equity (Reliance Industries, over 50%; TCS, over 71%), the underlying capital structure is typically composed of convertible securities issued to private-equity and venture-capital investors. Upon full conversion of these instruments, founder ownership is markedly diluted. Securities and Exchange Board of India’s (“SEBI”) mandate to fully convert convertibles pre-Initial Public Offering (“IPO”) exposed the structural dilution of founder ownership. The dilution was wrought by successive PE/VC rounds and convertible issuances, as Paytm, Zomato, PB Fintech, and Delhivery demonstrate, each listing with founders holding very small stakes. Notably, the pattern has persisted in recent offerings as Swiggy listed in 2024 as a professionally managed company with no identifiable promoter, its founder Sriharsha Majety retaining a single-digit holding (4.5-6% in subsequent filings). In each case the formal equity position of the founders remained modest once convertibles had fully converted, confirming the structural dilution that Majumdar’s earlier dataset first quantified.

Further, empirical examination of Articles of Association yields an equally unambiguous picture of board-level control. Investor-nominated directors outnumber founder-nominated directors in roughly 75% of the companies reviewed; quorum rights are vested in investors in a large majority of cases; and affirmative veto rights over material corporate actions are near-universal. Majumdar also notes that V.B. Rangaraj v. V.B. Gopalakrishnan binds the company only if special rights under a  shareholders’ agreement are incorporated into the Articles. This forced transparency ensures that the dispersion of control cannot remain hidden, and it is on that visible structure that founders later negotiate the promoter tag and regulators design responses.

SEBI'S PROMOTER DEFINITION PROPOSAL

In November 2025, SEBI's Primary Market Advisory Committee (“PMAC”) came up with proposals for a complete revamp of the criteria for identifying promoters of companies intending to go public. Therein, SEBI intended for the companies to “justify their promoter identification in offer documents” and emphasise on “actual control and influence,” and not on past affiliation. Some of the key features of the proposal constitute removing the informal 15% voting rights threshold, disclosure of significant beneficial owners, and companies not being subject to reclassification rules until they go public. The regulator noted that that promoter disclosures often misrepresent control when companies are effectively being controlled by PE firms, yet their founders remain listed as promoters.

This proposal is currently at an internal discussion stage as of September 2026, and there has been no public consultation paper. However, if adopted, a control-based definition would require PE-backed companies to ascertain where the control lies, which in practice would be the institutional investors, rather than the legacy founders. This would resolve the uncertainty associated with signalling commitment via the promoter tag, even as investors are in control.

THE ACCOUNTABILITY GAME AND THE NUCLEAR OPTION

The question, then, is why founders actively seek promoter status when their control is so limited.  In July 2025, Lenskart's Peyush Bansal used Rs 222 crore for the purchase of shares to cross the 10% threshold to get the promoter status. He is not the only one; the cases surrounding this shift have been thoroughly ventilated. However, let's take into account the contrary trend:  Rapido's co-founders gave up their promoter status ahead of their planned IPO, as did many others. This divergence demonstrates that the status of promoter is not only concerned with control but also with accountability signalling. The promoter tag implies greater levels of disclosure requirements, lock-ins, and related-party transactions liability. Thereby, upon its use by the founder, regulatory burden is traded for market credibility. Not adopting the tag may reduce regulatory scrutiny, but it may also sacrifice the credibility it signals. Two forces define this equilibrium:  the Signalling Force compels founders to embrace the promoter tag as credible commitment to investors; the Dispersion Force erodes their control through convertibles, board rights, and vetoes. One draws them toward accountability and the other divests them of control. Their friction sustains the unstable equilibrium examined here.

In 2025, nearly 76% of privately founded companies with VC funding permit removal of vested shares as well, in addition to the unvested ones, if the founder is removed due to cause. Only 2.8% have provisions that give founders vested equity after such a termination. Notably, the BharatPe debacle took a landmark turn when BharatPe initiated an arbitration with a demand to take back the unvested shares of Grover. The Gensol-BluSmart controversy has also further added to this trend; SEBI's interim order showed that the Gensol promoters diverted funds for their personal use, prompting the regulators to declare Jaggi brothers ineligible for any office in any listed company.

It is here that a structural paradox at the heart of VC governance emerges.

The Nuclear Option creates a commitment problem wherein investors establish a governance mechanism they are structurally disincentivized to deploy because removing the founder can hurt the company. Such rights will be enforced more readily by corporate-backed ventures and family offices since they have the ability to manage the enterprise without the founder. In the case of VC funds, however, the organization is structurally unsuited to taking over; its investment philosophy revolves around diversification and power-law returns, not operational management. Moreover, the founder is not just the agent but the crucial human capital whose exit could mean destruction of what the investor wants to preserve. The solution, herein, is to mandate disclosures. If investors were required to publicly disclose decisions not to enforce forfeiture clauses, the dynamics would change. Mandatory disclosure would place reputational costs on investors who never enforce their governance mechanisms without having to resort to expensive legal processes.

THE PSYCHOLOGICAL TRAP AND THE EMPLOYEE STOCK OWNERSHIP PLAN (“ESOP”) PARADOX

Regardless of all structural anatomy, there is a deeper truth of the founder's psychology and a system that incentivizes delusion. Governance failures are attributed to the “illusory truth effect,” the tendency to believe false information after repeated exposure, exemplified by startup decks claiming “30-50 crore Indians will be investing by 2027” despite only ~6 crore filing income tax returns at the time. The venture fund is motivated to encourage rapid expansion in a business due to “the fact that failure frees up investor focus on companies with more upside potential.” On the other hand, the entrepreneur faces the threat of extinction as he has only one firm and thus his experience with failure is quite different from that of the venture fund. This results in a vicious circle where the entrepreneurs are enticed by the investors into overpromising, making them susceptible to the very governance lapses that trigger the Nuclear Option.

The ESOP paradox exacerbates the illusion of governance. In June 2025, SEBI amended the SBEB Regulations to include an exception where the founders who are categorized as promoters in the IPO process can retain ESOPs issued at least one year before the IPO. The definition of promoter under the Companies Act, 2013 precludes promoters from availing of ESOPs. Yet founders often structure their compensation through ESOPs rather than salaries; this makes their entitlement legally vulnerable to prohibition. This may cause cognitive dissonance, making founders reluctant to accept promoter status because doing so would require them to relinquish their ESOPs.

CONCLUSION

Therefore, this equilibrium is not stable. If the PMAC's plan were adopted, the Signalling Force would be shrunk, and the Dispersion Force would become a requirement. Moreover, this enforcement gap calls for a complementary regulatory response: mandatory disclosure of decisions not to enforce forfeiture clauses would be consistent with the stewardship code template of accountability through transparency. While not necessarily changing the terms of the corporate contract or the residual rights of control, a disclosure duty would provide an alternative that would enable institutional investors to influence governance but not compromise the long-term growth objectives of the founders. 

India lacks the complementary institutions of shareholder activism, plaintiffs' bar, judicial rulings on governance obligations, and activist shareholders to enforce governance commitments. Layering enforcement-heavy mandates onto that vacuum only widens the gap between theory and practice. However, a narrow duty to disclose and explain the rejection of minority-backed proposals works with the grain of India's institutional reality, without undue interference in corporate governance. The founders who will build the institutions of tomorrow are those who recognise that governance is not a static structure but a continuous negotiation. The governance mirage is real but so is the opportunity to see through it.