[Guest post by Priya Garg, a 4th year law-student at West Bengal National University of Juridical Sciences (WBNUJS)]
Introduction
The recent turf battle within the Tata Group is likely to become a subject matter of study for various disciplines, including the subject of corporate law and governance.[1]
The Tata-Mistry dispute giving rise to corporate governance issues needs to be considered against the backdrop of the Tata Group’s corporate structure and India’s corporate governance laws. This dispute holds significance to the study of India’s corporate governance laws because Tata Group, being a promoter-driven conglomerate represents, the scenario of a ‘typical’ large-sized, promoter-driven company in India.[2] Therefore, the problems that came to the forefront in the controversy laid bare the realities of substantial concerns relating to the corporate governance regime in India.
India’s corporate governance laws have been largely developed by taking a cue from the US’s Sarbanes Oxley Act, whereas corporate structure in India is different from that in the US.[3] In the US, shareholding pattern is dispersed and there is a need to enhance the board’s accountability and efficiency to reduce the agency problem, and to ensure that the board does not misuse the significant powers it possesses. However, in India, in several corporate giants, there is concentration of share-ownership in a few hands. Hence, India’s corporate governance problems are in a sharp contrast to those existing in the US. Unlike US, in India, the presence of a relatively ‘weak’ board is an issue in large promoter-driven conglomerates; and concerns regarding the exploitation of minority shareholders at the hands of majority shareholders loom large. These two concerns materialized in Tata-Mistry tussle as well.[4]
Identification of Corporate Governance Issues and Presentation of Recommendations
Existence of a ‘weak’ board and instances of excessive interference by majority shareholders/promoter group
The ousted Cyrus Mistry stated that, during his tenure as the Chairman, he was not conferred with enough independence to carry out his operations and that the continued interference by the then ‘Emeritus’ Chairperson, Mr. Ratan Tata reduced him to a ‘lame duck’ chairman.[5] The larger corporate governance issue that this statement points towards is the broader implications of creating ‘honourable positions’, like those of chairman emeritus, director emeritus, and the like in conglomerates, mostly in favour of promoters.[6] Presently, there exist no formal rules and regulations defining the powers, duties, rights, disabilities, privileges, and so on, of people holding such positions. Similarly, it has not been defined that if, similar to a chairperson, an emeritus chairperson/director also owes fiduciary obligations towards the corporation.
Further, in India, where concerns regarding prevention of excessive influence of, and interference by, promoter and maintaining the segregation of ownership and management in corporations prevail, regulating the involvement of company’s promoters in the company’s managerial affairs in the capacity of honourable positions becomes crucial. It is suggested that in the beginning these regulations can be implemented as guidelines and could be converted into mandatory regulations thereafter, provided they turn out to be effective.
Furthermore, when an independent director (ID) was removed by Tatas apparently for presenting an opinion contrary to the views of majority shareholders,[7] the ease with which independent directors can be removed from company’s board came into limelight.[8] It highlighted yet another form of the board’s weakness under Indian corporate set-up. Presently, the removal of IDs requires passing of an ordinary resolution.[9] As also highlighted by the Securities and Exchange Board of India (SEBI), this requirement of ordinary resolution appears low in light of the existence of large shareholdings by promoters or promoter groups in large-sized Indian companies, as well as on account of the unawareness and inactive role of majority of retail investors into the matters of company’s management, including the passing of resolutions for removal of IDs.[10] Retail investors mostly demonstrate interest in obtaining material financial gains on their shareholdings.[11] They thereby play a passive role in company’s management, due to which shareholding percentage of promoters/promoter groups further gets strengthened while counting votes in case of any resolution due to the reduction in the size of the denominator. Therefore, as suggested by SEBI, the process for removal of IDs should become more stringent to strengthen their position.[12] Further, initiatives need to be taken for encouraging the participation of retail investors in company’s management and enhancing their level of awareness regarding corporate matters.
Furthermore, the Tata-Mistry controversy also displayed another manner in which shareholders strategize to render the decision/stance adopted by the Board as ineffective while staying within the legal contours. For instance, in the present case, upon the emergence of the possibility that Mr. Mistry may not be removed from the company’s Board as chairman because of the prospect of IDs backing him, shareholders were called upon by Mr. Tata to oust Mr. Mistry as the company’s director.[13] This was done because Mr. Mistry’s removal as a director would automatically debar him from being the company’s chairperson. This type of interference by shareholders, rendering the Board’s decision ineffective, cannot be possibly regulated by law; instead the solution lies in ‘internalizing’ the discipline among shareholders/promoters in giving a due share of autonomy and powers to the board in the matters of company’s management.
Majority-minority shareholder imbalance
Another major corporate governance issue that arose was the possibility of under-representation of minority shareholders’ views and interests and the likelihood of domination of majority shareholders’ opinion due to the conferment of significant authority upon the directors appointed (or nominated) by majority shareholders (i.e., Tata Trusts). In this case, upon Mr. Tata’s retirement as the chairperson, the company’s articles of association were amended wherein the majority of the directors nominated by the Tata Trusts were vested with the authority of ‘affirmative voting’ in relation to the appointment and removal of Tata Sons’ chairman.[14]
This concentration of managerial powers in the hands of a few directors appointed (or nominated) by majority shareholders by amending the company’s articles cannot per se be termed as illegal, unless these powers are used in a manner which amounts to oppression or mismanagement under the Companies Act.[15] Therefore, this issue of imbalance of power among the board’s members can majorly be resolved by promoting the participation of smaller investors in company’s decision-making (at least on major matters), specifically by way of their participation in company’s resolutions. This would ensure that the requirement of passing any resolution with special or ordinary majority under Companies Act can serve as a roadblock in the path of conferment of exceedingly imbalanced powers in the hands of a few directors. In the case of listed companies, corporate governance literacy also needs to be enhanced among retail investors to enable them to take informed decisions for the company.
Poor governance at public trusts
Mr. Mistry also complained against the mis-governance at the Tata Trusts, which holds 66% of shares in Tata Sons,[16] which in turn is a holding company in the Tata Group. He argued that mis-governance at Tata trusts had put the corporate governance in the Tata Group in jeopardy.[17]
This concern of his, whether well found or not, deserves attention regarding the need to improve governance at the level of public trusts by amending the laws relating to such trusts, specifically when these public trusts are majority shareholders in a company.
Presently, the public trust laws in several states are regulatory in nature, and their ambit is confined to ‘supervising’ or ‘administrating’ the affairs of public trusts; these laws do not extend to regulating the ‘governance’ of public trusts wherein the terms ‘administration’ and ‘governance’ carry distinct meanings. Governance means the act of governing whereas administration deals with the implementation of the products of governance.[18] Governance involves the manner of, or the procedure for, framing laws and policies whereas administration involves implementing the laws and policies so framed. Presently, the primary matters that the public trusts legislation in India deal with are ordinary matters of administration such as maintenance of accounts, reporting requirements, mechanism for sale of trust property, management of trust property, delegation of powers by the trustees, broad duties of trustees, trustees’ remuneration and removal of trustees. These laws do not provide for rules related to ‘governance’ of trusts, such as number of meetings to be held in a year, need for maintenance of the minutes of meetings,[19] need for having the diversity on the board of trustees, quorum requirements, etc. Instead, these matters of ‘governance’ are left to be decided by the private instrument of trust.
The public trusts law should also regulate some governance matters such as need to appoint independent trustees on the board, enhance the board’s diversity, form sub-committees,[20] hold certain minimum number of trustees’ meeting in a year, furnish timely notice for the meetings, etc.
However, a caveat is that these reforms should apply to large, well-established trusts, i.e., for instance those that hold a certain prescribed fraction of share capital in a body corporate. Improved levels of governance among the public trusts holding significant shares in a corporate would also contribute towards improving corporate governance in India.
Miscellaneous Corporate Governance Issues
Additionally, other corporate governance issues found as existing in Tata Group or its constituent companies are (a) lack of succession planning within the group, which became evident when the former chairperson Mr. Tata had to take over as an interim chairman when Mr. Mistry departed, as the group could not immediately find a successor to take over the chairperson’s responsibilities,[21] (b) challenges posed by cross-holdings among the businesses within a conglomerate to effective corporate governance, and (c) board of directors acting as agents of the shareholders instead of discharging their duties as company’s fiduciaries,.
Conclusion
The latest Global Financial Stability report of the International Monetary Fund suggests that corporate governance standards took a dip in India between 2006 and 2014.[22] The Tata-Mistry controversy points to the need for Indian lawmakers to frame the corporate governance laws in India while keeping in mind the typical characteristics that India’s corporate world possesses. Given that the SEBI has appointed a committee to review corporate governance norms in India following some recent episodes, one can expect changes in the near future.
– Priya Garg
[1] Devina Sengupta & Sreeradha Dasgupta Basu, Cyrus Mistry vs Ratan Tata, a Valuable Lesson for B-School Students, The Economic Times (03/11/2016), available at http://economictimes.indiatimes.com/news/company/corporate-trends/cyrus-mistry-vs-ratan-tata-a-valuable-lesson-for-b-schools/articleshow/55213511.cms.
[2] Poonam Rajharia & Dr. Bhawana Sharma, Corporate Governance in India Evolution, Issues and Challenges for the Future, 2(12) International Journal of Scientific Research and Management 1815, 1819-20 (2014), available at http://www.ijsrm.in/v2-i12/12%20ijsrm.pdf.
[3] Jayati Sarkar, Ownership and Corporate Governance in Indian Firms, available at https://www.nseindia.com/research/content/CG_9.pdf.
[4] Prabal Basu Roy, The Tata-Mistry Face Off: A Litmus Test for Corporate Governance in India, available at https://www.linkedin.com/pulse/tata-mistry-face-off-litmus-test-corporate-governance-prabal-basu-roy.
[5] Ravi Krishnan & Shrija Agrawal, Cyrus Mistry’s E-Mail Warns of $18 Billion Writedown at Tata Group, Livemint (27/10/2016), available at http://www.livemint.com/Companies/29Hsv3bCEppKxLxw10cI0L/Cyrus-Mistry-in-email-to-Tata-Sons-board-says-group-face.html.
[6] George Mathew & Khushboo Narayan, Tata Boardroom Battle: Spat Raises Pertinent Questions, The Indian Express (08/11/2016), available at http://indianexpress.com/article/business/companies/cyrus-mistry-tata-group-tussle-tata-shareholders-corporate-governance-4316569/; Press Trust of India, Anil Agarwal is SESA’s Chairman Emeritus, Business Standard (01/04/2014), available at http://www.business-standard.com/article/companies/anil-agarwal-is-sesa-s-chairman-emeritus-114033100443_1.html.
[7] Dev Chatterjee, Tata Boardroom Coup: Independent Director Nusli Wadia Likely to Back Cyrus Mistry, Business Standard (09/11/2016), available at http://www.business-standard.com/article/companies/tata-boardroom-coup-independent-director-nusli-wadia-likely-to-back-cyrus-mistry-116110801365_1.html.
[8] Suresh P Iyengar, SEBI Accepts Tata View on Corporate Governance Issues Raised by Mistry, Business Line (22/01/2017), available at http://www.thehindubusinessline.com/companies/sebi-accepts-tata-view-on-corporate-governance-issues-raised-by-mistry/article9496336.ece.
[9] S. 169, Indian Companies Act, 2013; Varun Sriram, Why Removal of Independent Directors is not an Ordinary Affair, Economic Times (08/07/2017), available at http://economictimes.indiatimes.com/small-biz/legal/why-removal-of-independent-directors-is-not-an-ordinary-affair/articleshow/59502056.cms.
[10] Will Tatas Snare Mistry in Their Shareholding Web?, The Hindu (06/11/2016), available at http://www.thehindu.com/business/Industry/Will-Tatas-snare-Mistry-in-their-shareholding-web/article16439160.ece; Appointment and Removal of Independent Directors: Need for Reform?, IndiaCorpLaw, available at http://indiacorplaw.blogspot.in/2016/12/appointment-and-removal-of-independent.html.
[11] Lisa Pallavi Barbora, Retail Investors are Missing the Equity Action, Livemint (19/08/2014), available at http://www.livemint.com/Money/9zbcTIranoPTnOkxmw7I9I/Retail-investors-are-missing-the-equity-action.html.
[12] Suresh P Iyengar, supra 16; Reena Zachariah, SEBI Seeks Changes in Companies Act; Independent Directors’ Ouster May Get Tougher Now, Economic Times (12/06/2017), available at http://economictimes.indiatimes.com/news/company/corporate-trends/sebi-seeks-changes-in-companies-act-independent-directors-ouster-may-get-tougher-now/articleshow/59099740.cms, last seen on 15/07/2017.
[13] How Corporate Governance Has Become Complicated, BusinessLine (09/11/2016), available at http://www.thehindubusinessline.com/companies/how-corporate-governance-has-become-complicated/article9325048.ece; Ratan Tata Says Mistry Was Given a Chance to Step Down Voluntarily, Mistry Calls That a ‘Lie’, HuffPost (08/12/2016), available at http://www.huffingtonpost.in/2016/12/07/ratan-tata-says-mistry-was-given-a-chance-to-step-down-voluntari_a_21623005/; Ratan Tata-Cyrus Mistry Spat: Here’s The Timeline of Biggest Corporate Battle of 2016 in a Graphic, Firstpost, available at http://www.firstpost.com/business/ratan-tata-cyrus-mistry-spat-heres-the-timeline-of-biggest-corporate-battle-of-2016-in-a-graphic-3177202.html; see S. 169, Indian Companies Act, 2013.
[14] Ravi Krishnan & Shrija Agrawal, supra 9; Ravi Krishnan, Cyrus Mistry vs Ratan Tata: A Guide to The Key Issues Involved, Livemint (27/10/2016), available at http://www.livemint.com/Companies/0F1R1KoI1wugK6jq9r1ZFK/The-TataMistry-spat-All-you-need-to-know.html; Ravi Krishnan, Cyrus Mistry Ouster: Tata Trusts Has Powers to Remove Tata Sons Chairman, Livemint (26/10/2016), available at http://www.livemint.com/Companies/6Zs2IQ9ZaEaQURlKHAp3bM/Cyrsu-Mistry-ouster-Tata-Trusts-has-powers-to-remove-Tata-S.html.
[15] See sections 241 to 244 of the Companies Act, 2013.
[16] Nachiket Kelkar, Tata vs Cyrus Mistry: All You Want to Know, Hindustan Times (08/11/2016), available at http://www.hindustantimes.com/business-news/tata-vs-cyrus-mistry-all-you-want-to-know/story-YCAFIau0p6oEg02ArjPR0K.html.
[17] Megha Mandavia, Cyrus Mistry Asks Government to Intervene in Tata Trusts, The Economic Times (06/12/2016), available at http://economictimes.indiatimes.com/news/company/corporate-trends/cyrus-mistry-asks-government-to-intervene-in-tata-trusts/articleshow/55813639.cms.
[18] Ron Mitchell, The Crucial Difference between Governance and Management, available at https://www.inphilanthropy.org/sites/default/files/resources/Crucial%20Difference%20Between%20Governance%20%26%20Management-AKT%20LLP-2011.pdf.
[19] Compare with Charity Meetings: Making Decisions and Voting, Gov.UK, available at https://www.gov.uk/guidance/charity-meetings-making-decisions-and-voting.
[20] See David O. Renz, Nonprofit Governance and the Work of the Board, Midwest Center for Nonprofit Leadership, University of Missouri, available at http://bloch.umkc.edu/mwcnl/resources/documents/overview-nonprofit-governance.pdf.
[21] Rashmi Pratap, Tata Cyrus: A Clear Case of The Need for Succession Planning, BusinessLine (25/10/2016), available at http://www.thehindubusinessline.com/companies/tata-cyrus-a-clear-case-of-the-need-for-succession-planning/article9267984.ece.
[22] Sachin P. Mampatta, Has India Slipped Down the Ladder of Corporate Governance?, Livemint (26/10/2016), available at http://www.livemint.com/Politics/iIRIjW77lTvqx3s6bJOPrI/Has-India-slipped-down-the-ladder-of-corporate-governance.html.