Corporate Governance in India : Tata Crisis

Background

 Tata Group’s recent Board Room crisis has shaken up the India Corporate world. The events gradually unfolded one after the other appears to be the episodes of a best-selling Corporate Thriller. Before we go into the chain of events and its possible implications, we take a quick look on the legal framework of Corporate Governance in our country.  

The Companies Act 1956 and the Companies Act 2013 (recently enacted and partly in effect) (together, Companies Act) are the principal legislations governing companies in India.

In addition to the Companies Act, companies are governed by the Securities and Exchange Board of India Act 1992 (SEBI Act) and various regulations notified under the SEBI Act, particularly the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015.  Companies are also bound by the standard listing agreement of BSE/NSE.

Companies are required to comply with accounting standards issued by the Institute of Chartered Accountants of India, the national professional accounting body of India.  The Companies Act requires the financial statements of a company prepared in accordance with the prescribed accounting standards to provide a true and fair view of its state of affairs.

Companies are also required to comply with the secretarial standards issued by the Institute of Company Secretaries of India, an organisation for the regulation and development of the profession of company secretary in India.

The Ministry of Corporate Affairs, Government of India has also prescribed the Corporate Governance Voluntary Guidelines 2009 in the background of global financial crisis and large format corporate failures in India.  These Guidelines are voluntary in nature and intend to develop a transparent, ethical and responsible corporate governance framework in India.

1.3        Current topical issues, developments, trends and challenges in corporate governance

A key problem regarding corporate governance in India revolves around the conflicting interests of the dominant shareholders versus the minority shareholders.  This issue is present in three main types of Indian companies:

(i)           public sector undertakings, which have the government as a majority shareholder;

(ii)          trans-national corporations with a foreign parent as the majority shareholder;

(iii)        and family-owned business conglomerates with large promoter holdings.  The regulatory response to this problem has largely favoured moving towards a regime of greater disclosure and mandating an independent board structure.

Related party transactions, which represent potential conflicts of interest that may compromise a management’s duties to shareholders, have been a recurring theme of concern in Indian companies.  The prevalence of value destroying related party transactions has given a fillip to shareholder activism in India, which still remains at a nascent stage.  For instance, Maruti Suzuki Limited, a dominant automobile manufacturer in India, was required to defend its proposal of purchasing cars on a ‘no profit, no loss’ basis manufactured in India by its parent company, ostensibly to conserve capital which would be required for setting up the manufacturing facility itself.  In another instance, the bondholders of Subex Limited, a mid-sized software company, caused a promoter exit as part of a restructuring exercise, due to the inability of the company to service bonds resulting from various issues, including corporate governance issues.

The issue of excessive executive compensation in Indian companies has also arisen from time to time, and India has also seen the trend of recently formed proxy advisory firms gaining traction by highlighting corporate governance issues in companies and helping public shareholders exercise their voting right by taking informed decisions.

Shareholders

2.1        Rights and powers of shareholders in the operation and management of the corporate entity/entities

While shareholders are not entitled to directly participate in the operation and management of companies, they have the right to:

·         appoint directors to the board of the company;

·         attend and vote at general meetings of the company;

·         receive copies of the company’s financial statements;

·         inspect statutory registers and minutes’ books maintained by the company; and

·         initiate winding-up of the company.

Shareholders’ resolutions are generally of the following types: (i) ordinary resolution, for which the number of votes supporting the resolution must exceed the number of votes opposing the resolution; and (ii) special resolution, where the number of votes supporting the resolution must be at least three times the number of votes opposing the resolution.

Companies are required to obtain prior shareholders’ approval for certain matters such as appointment of directors, alteration of constitutional documents, issue of securities by the company, declaration of dividend, winding-up of the company, voluntary winding-up of the company, etc.

2.2        Responsibilities of shareholders as regards the corporate governance of their corporate entity/entities

Shareholding is typically not associated with statutory duties on corporate governance of companies.  For instance, while shares enable their holders to vote at a shareholders’ meeting, there is no obligation to exercise that right.

However, in the event that (i) a company’s affairs are being conducted in a manner which is prejudicial to the interests of the company itself or any shareholder, or (ii) if there is any material change in the management or control of a company which is likely to result in the company’s affairs being conducted in a manner prejudicial to any shareholder, then affected shareholders (constituting at least 100 in number or one-tenth of the total number of shareholders or holding at least 10% of the issued capital of the company) have the right to move to the  National Company Law Tribunal (NCLT) for relief.  This right may be seen in the context of the majority shareholders typically being in management of companies in India, and therefore having the responsibility to conduct the affairs of the company without oppression of minority shareholders or mismanagement of the company.

2.3        Commonly Held  Shareholder Meetings and Their Rights .

Shareholder meetings in India can be classified as: (i) annual general meetings (AGMs); (ii) extraordinary general meetings (EGMs); and (iii) court convened meetings.  These shareholder meetings vary in their frequency and hold different points of discussion.

Companies are required to hold an AGM every year for conducting ‘ordinary business’ such as disclosing financial performance of the company and management initiatives or (re-) appointment of directors.  The duration between two AGMs cannot exceed 15 months.

A meeting of shareholders held between two AGMs is designated as an EGM.  EGMs are typically conducted for the consideration of urgent issues which arise prior to holding of the next AGM.  The board of directors usually convene an EGM, although it can be initiated at the request of the shareholders as well.

Court convened meetings are held in the form of an AGM or an EGM for the consideration of all schemes of arrangement, and the resolutions proposed in such meetings need to be approved by a majority in a number representing three-quarters in value held by the shareholders (either in person or through proxy voting).  Such schemes also require an in-principle approval from the Securities and Exchange Board of India (SEBI) prior to their filing in court.  The Companies Act proposed to institute the NCLT for handing such schemes.

The Companies Act also provides for certain business items (such as alteration of object clause of the company’s memorandum of association) to be necessarily approved by postal ballot instead of a physical meeting, with a view to encouraging wider shareholder participation in such matters.

At meetings, shareholders have the right to do the following:

·         ask questions during a meeting;

·         appoint a proxy, i.e. an agent to attend and vote meetings on their behalf;

·         call for an EGM or seek addition of agenda items (available to shareholders who own more than 10% of the share capital);

·         seek appointment as a director of shareholders or elect a small shareholder director by nominating a representative;

·         inspect company documents such as the register of shareholders/directors, annual returns, constitutional documents, etc.; and

·         meet the stakeholders’ relationship committee for resolution of grievances.

2.4        Can shareholders be liable for acts or omissions of the corporate entity/entities?

Indian law considers a company to be a distinct legal entity from its shareholders and separates liability for the acts or omissions of a company from that of its shareholders.  Shareholder liability is capped to the face value of the shares held by them in the company. There may be extraordinary instances where the ‘corporate veil’ is lifted by courts to impose liability on shareholders.  However, such cases would typically arise in the context of fraudulent conduct by a shareholder.

2.5        Can shareholders be disenfranchised?

The disenfranchisement of shareholders is possible in certain restricted cases.  For instance, in the event that a transaction for transferring shares of a company has been approved by more than 90% of its shareholders by value, the acquiring company has the option to acquire the shares of the dissenting shareholders (as per the terms offered to the approving shareholders).

2.6        Can shareholders seek enforcement action against members of the management body?

The Companies Act provides for a class action mechanism, permitting a representative group of shareholders, constituting a minimum of 100 shareholders or those holding 10% shares in the company, to bring an action on behalf of all affected parties, including claims for compensation from directors for any fraudulent, unlawful or wrongful act or omission or conduct on their part.  While this provision has not been notified as yet, such actions may be brought before the proposed NCLT.

As discussed above, specified shareholders also have the ability to move the NCLT for their oppression or mismanagement of the company by the management body.

2.7        Are there any limitations on, and disclosures required, in relation to interests in securities held by shareholders in the corporate entity/entities?

Shareholders of listed companies are required to make events based and continuous disclosures to the stock exchanges for the purposes of discharging obligations under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.

Any shareholder acquiring or holding more than 5% shares or voting rights in a company, together with any person acting in concert, is required to make a disclosure of such acquisition or change in shareholding beyond 2%.  Every shareholder holding 25% or more of the shares or voting rights in a company is required to disclose shareholding on an annual basis.

As part of the SEBI (Prohibition of Insider Trading) Regulations 2015, promoters, directors and ‘key managerial personnel’ (KMP) of a company are required to disclose their holding of securities in the company within seven days of acquiring such a status.  Such persons are also required to disclose any transactions in securities within two trading days, if the value of the securities traded in a calendar quarter is greater than INR 1 million cumulatively.  This requirement is also applicable to any person who takes trading decisions for the promoters, directors or KMPs.

Additionally, a company’s promoters are required to disclose any creation, invocation or release of an encumbrance of their shares to the concerned stock exchange and the company within seven working days of such activity.

Management

3.1        Who manages the corporate entity/entities and how?

Except for those matters which require the consent and approval of the shareholders, the board of a company is entitled to exercise all the powers of the company, and to do all such acts and things which the company is authorised to do, in accordance with the Companies Act and the constitutional documents of the company.

Companies follow a unitary board structure and do not have the concept of a supervisory board.  The board is authorised to delegate certain specified powers to (i) a committee of directors, (ii) the managing director, and (iii) the manager or any other principal officer of the company.

Companies are required to appoint the following as KMP by way of a board resolution detailing their terms of their appointment:

(i) the Chief Executive Officer, the managing director or the manager;

(ii) the company secretary; and

(iii) the Chief Financial Officer.

The KMPs, along with executive directors of a company, are generally deemed to be responsible for any defaults under the Companies Act by virtue of being classified as ‘officer who is in default’.

3.2        How are members of the management body appointed and removed?

Directors are typically appointed by a company at its AGM through shareholders’ approval.  A company must intimate the candidature of a person applying for the office of a director to the shareholders.  A director is required to assent to act as a director of a company.  The board may be permitted to appoint a person as an additional director, alternate directornd nominee director.

The appointment of an independent director is required to be approved by the company in an AGM.  The appointment should take place via a letter of appointment, indicating the terms and conditions of the appointment.

A company can remove a director (except a director that has not been appointed by the NCLT) before the expiry of the period of office upon providing such a director a reasonable opportunity to be heard, followed by passing an ordinary resolution removing the director from office.

Companies are required to have at least one Indian resident director, one female director and one-third of independent directors on their board.

3.3        What are the main legislative, regulatory and other sources impacting on contracts and remuneration of members of the management body?

Companies are required to constitute a nomination and remuneration committee, for the purposes of recommending a policy to the board concerning the remuneration of directors, KMPs and other employees.

The total managerial remuneration payable by a company to its directors, including the managing director, whole-time directors and managers, in respect of any financial year must not exceed 11% of the net profits of the company for that financial year.  Stock options granted to directors are calculated as perquisites for the purposes of income tax laws and must be included in the remuneration.

The remuneration is approved by the board at a meeting, which is subject to approval by a resolution at the next company general meeting.  Approval of the central government and the shareholders is required for payment of remuneration exceeding prescribed thresholds.

In an exceptional instance of shareholder activism, Tata Motors Limited was unable to obtain shareholders’ approval for remuneration in excess of Companies Act thresholds to three of its senior executives.  However, the resolution was approved by the shareholders upon re-circulation.

3.4        What are the limitations on, and what disclosure is required in relation to, interests in securities held by members of the management body in the corporate entity/entities?

Directors of public listed companies must disclose their shareholding details and voting rights above a prescribed threshold, in accordance with the insider trading and takeover code-related provisions issued by the SEBI.

Directors are also required to disclose their concern or interest, including shareholding, in any company or companies or other forms of legal entities at the time of joining the board and after the next board meeting upon the occurrence of any change in such disclosure.

In the event that a company provides any share-based employee benefits, the directors are required to disclose the details of such schemes in the board report, including the beneficiaries of the schemes.

Companies are also required to make continuous and event-based disclosures to the stock exchange where the shares of the company are listed, as also to the SEBI.

3.5        What is the process for meetings of members of the management body?

Companies are required to conduct a minimum of four board meetings in a year, with a gap of no more than 120 days between any of them.  Notice of conducting a board meeting must be provided in writing to every director of the company, and it is good practice to attach the meeting agenda along with such a notice.  The quorum for a board meeting is one-third of the total number of directors or two directors (whichever is higher).

3.6        What are the principal general legal duties and liabilities of members of the management body?

The Companies Act has codified the duties of directors which require them to:

·         act with care, skill and diligence and to exercise independent judgment;

·         act in good faith in accordance with the constitutional documents of the company;

·         not to obtain any undue gain or advantage and/or to assign their office; and

·         not to be involved any situation which conflicts with the interests of the company.

Directors also have a fiduciary duty to the company and the shareholders of the company as a whole.  Directors are required to make full and adequate disclosures in the event of any conflict of interest, including perceived conflicts, and to abstain from participation in discussions or voting on such matters.

A director in breach of these duties is liable for both civil and criminal sanction, which is determined on the basis of type of breach and the concerned statutory provision.

3.7        What are the main specific corporate governance responsibilities/functions of members of the management body and what are perceived to be the key, current challenges for the management body?

It is mandatory for the board of directors of every company to present a financial statement to the shareholders along with its report, known as the Board’s Report, at every annual general meeting.  Apart from giving a complete review of the performance of the company for the year under report and material changes until the date of the report, the report highlights the significance of various national and international developments which can have an impact on the business and indicates the future strategy of the company.

The board’s report is a wide-ranging document covering both financial and non-financial information, with a view to inform the stakeholders about the performance and prospects of the company, capital structure, management changes, significant policies and recommendations for the distribution of profits, etc.

The top 500 listed companies (based on market capitalisation at BSE/NSE) are also required to circulate a business responsibility report, which is a standardised format for companies to report the actions undertaken by them towards adoption of responsible business practices.  This reporting is intended to provide basic information about the company and information related to its performance and processes.

Some of the key challenges concerning the management body pertain to disciplining the majority shareholder and safeguarding the interests of the minority shareholders.  Further, while the corporate governance regime has been prepared with reference to global benchmarks, there remains a need to develop solutions for India-specific issues.  The weak enforcement of corporate governance regulations in the Indian corporate setting is also an area of concern.  For instance, Satyam Computer Services and its former auditor PricewaterhouseCoopers have settled securities class action suits in New York in 2011, but the SEBI order imposing penalties against the company management, passed in 2014, is currently under appeal.

3.8        What public disclosures concerning management body practices are required?

The board’s report, as discussed above, is required to be circulated to all shareholders at least 21 days prior to an AGM and includes details of:

·         the number of board meetings held in the year;

·         compliance of the financial statements with applicable laws;

·         systems to ensure the company’s compliance with the provisions of all applicable laws;

·         particulars of loans, guarantees and investments made by the company;

·         qualifications and adverse remarks in the auditor’s report and the secretarial audit report; and

·         contracts with related parties, details of the risk management policy of the company, and dividends recommended to be paid to the shareholders.

3.9        Are indemnities, or insurance, permitted in relation to members of the management body and others?

Directors are permitted to obtain indemnities from the company in the event that they meet any liabilities if no fault can be attached to their conduct.  Companies also typically obtain directors’ and officers’ insurance for their director and key management personnel.

Transparency & Reporting

4.1        Who is responsible for disclosure and transparency?

The SEBI prescribes that the board of directors and senior management of a company should conduct themselves so as to meet the expectations of operational transparency to stakeholders and imposes a general obligation of compliance on KMPs, directors, promoters or any person dealing with the company.

The board of directors of a company is also required to authorise one or more KMPs for the purpose of determining materiality of an event or information and for the purpose of making disclosures to stock exchange(s).  The contact details of such personnel are required to be also disclosed to the stock exchange(s) and provided on the company’s website.

Additionally, every company is required to appoint a qualified company secretary as the compliance officer who is responsible for:

·         ensuring conformity with the regulatory provisions applicable to the company;

·         co-ordination with and reporting to the Board, recognised stock exchange(s) and depositories with respect to compliance requirements; and

·         ensuring the correctness, authenticity and comprehensiveness of the information, statements and reports filed by the company.

4.2        What corporate governance related disclosures are required?

The financial statement of a company must be approved by the board for submission to the auditor for his report.

The managing director, the whole-time director in charge of finance, the Chief Financial Officer (or any other person of a company empowered by the board) are required to prepare the books of account and other relevant books and papers and the financial statement for every financial year which provide a true and fair view of the state of the affairs of the company (including that of its branch office, if any).

At every AGM, the board of the company must present the financial statements for the financial year.  The board must issue a board report, which must be annexed to the financial statements and presented before the company in the general meeting.

The board report must also have a directors’ statement of responsibility which requires directors to endorse that they have devised proper systems to ensure the company’s compliance with all applicable laws, that these systems are adequate and are operating effectively, and that the applicable accounting standards have been followed in the preparation of the company’s financial statements.  The board report is also required to respond to qualifications made in the audit report of the company.

4.3        What is the role of audit and auditors in such disclosures?

The auditor of a company is required to make a report to the shareholders on examination of accounts.  The auditor report also states whether it gives a true and fair view of the company’s accounts in accordance with the Companies Act, in the opinion and to the best knowledge of the auditor.

The primary objects of an audit are to disclose:

·         the company’s compliance with statutory requirements;

·         adequacy of information required to be provided in the financial statements;

·         truth and fairness of the financial position as reflected in the balance sheet;

·         truth and fairness of the company’s operations as reflected in the profit and loss account; and

·         accuracy and reliability of accounts books and underlying documents from which the financial statements have been prepared.

Companies should appoint an auditor on the date of every AGM after obtaining the auditor’s written consent for such an appointment.  Companies are permitted to appoint an individual as an auditor for a maximum period of five consecutive years or an audit firm as an auditor for a maximum of two terms of five consecutive years.

4.4        What corporate governance information should be published on websites?

Every company is required to maintain a functional and accurate website containing its basic information.  Any change in the content of a company’s information is required to be updated on its website within two working days from the date of such change.  The website is required to contain:

·         details of the company’s business;

·         the company’s shareholding pattern;

·         criteria of making payments to non-executive directors;

·         the composition of various committees of the board of directors;

·         the terms and conditions of appointment of independent directors;

·         details of establishment of vigil mechanism or whistle-blower policy;

·         the code of conduct of the board of directors and senior management personnel;

·         policies on dealing with related party transactions and determining ‘material’ subsidiaries;

·         details of agreements entered into with the media companies or their associates;

·         details of familiarization programs imparted to independent directors;

·         contact information for resolution of investor grievances;

·         financial information including financial results, and copies of the annual report including balance sheet, profit and loss account, directors’ report, and corporate governance report;

·         schedule of analyst or institutional investor meet and presentations made by the company to analysts or institutional investor; and

·         the new name and the old name of the listed entity for a continuous period of one year, from the date of the last change of name.

Other Issues

5.1        What, if any, is the law, regulation and practice concerning corporate social responsibility?

India is the only country in the world with codified corporate social responsibility (CSR) obligations.  The Companies Act requires specified companies to spend at least 2% of the average net profits made during the three immediately preceding financial years on prescribed CSR activities.  This provision operates on a ‘comply or explain’ basis, and the board of directors must provide an explanation in the directors’ report if the company does not spend the requisite amount on CSR.  This requirement is applicable to companies which have:

·         a net worth of at least INR 5 billion during any financial year;

·         a turnover of at least INR 10 billion during any financial year; or

·         a net profit of at least INR 50 million during any financial year.

Every company which fulfils the above threshold requirements must constitute a corporate social responsibility committee, formulate a CSR policy and make recommendations on CSR to the board.

There is a mandatory requirement to report the details of the CSR policy and the implementation of the CSR initiatives taken by a company during a financial year.

A company can engage in a broad category of CSR activities, including eradication of poverty, promotion of education, promotion of gender equality and environmental sustainability.  The CSR activities must be performed within India and are not permitted to be for the exclusive benefit of the company’s employees or their family members.

5.2        What, if any, is the role of employees in corporate governance?

Employees of a company who are not directors or KMPs do not typically have any formal corporate governance duties.  Employees are, however, required to comply with the company’s corporate governance and risk management policies, including any whistle-blower policy.

Robust Rule Book . But Reality is Different

From the above analysis, it appears that India has excellent corporate governance. If you see the Rule Book, no doubt it is better than even some of the developed nations. But the latest Global Financial Stability Report published earlier this month by the International Monetary Fund (IMF) suggests otherwise. It says that while corporate governance norms have improved across emerging markets, corporate governance standards fell in India between 2006 and 2014. The report examined country-level performance on variables such as strength of investor protection, protection of minority shareholder interests, and disclosure and reporting norms. In most of the key indicators, India’s score seems to have dropped. As the chart below shows, India’s score in protection of minority shareholder rights has declined, the report suggests.

The apparent decline in corporate governance norms is puzzling as the past few years have witnessed three important changes that have strengthened minority shareholder rights and corporate governance regulations: first, a new Companies Act which has tightened norms to be followed by firms; second, tightening of regulations relating to minority protection by market regulator Securities and Exchange Board of India or SEBI, and third, a surge in investor activism in the country which has helped minority shareholders take on promoter groups.

Corporate governance experts in the country agree that the country scores used in the report are counter-intuitive.

But it is also a fact that the disclosures have increased in India as stated in the report and as is evident from the companies Act, 2013 and provision of e-voting facility to the shareholders, the indices for ‘Protection of Minority Shareholders’ Interests’ and ‘Strength of Auditing and Reporting Standards’ will increase.

Shriram Subramanian, founder and managing director of corporate governance advisory firm InGovern, also agrees that scores on audit and reporting standards should have seen an improvement after rules were tightened “especially after the Satyam scam”.

A closer look at the data shows that most corporate governance-related indicators were drawn from the Global Competitiveness Indicators published by the World Economic Forum (WEF). The corporate governance indicators are all based on responses to questions asked in a survey of executives (the Executive Opinion survey). For instance, the survey asks respondents to rate on a scale of 1-7 the extent to which minority shareholders are protected by law in their home country. Similar questions cover other indicators as well. The sample size of the India survey was 211 in 2014, and 68 in 2006. Such surveys largely reflect perception and sentiment on corporate environment, and may not always reflect changes in laws and regulations.

It is possible that the corruption scandals and corporate scams which emerged after 2008 impacted sentiment negatively. In fact, companies which were politically connected saw their stock prices fall sharply during this period, according to an index of connected companies constructed by brokerage house Ambit Capital. Heightened sensitivity to such issues may have affected the survey responses. But the responses show a similar trend even after 2014, the WEF website shows, suggesting a disconnect between regulatory changes and executive sentiments.

An alternative database of the World Bank, however, suggests an improvement in corporate governance norms in India in recent years. The World Bank reports on doing business show that India improved its rank in protection of investor and minority rights significantly over the past decade, as the chart below shows. These rankings seem to be in sync with the views of corporate governance experts cited earlier.

The World Bank reports are also based on surveys but these surveys are more detailed and attempt to elicit information on changes in securities regulations, company laws, civil procedure codes and court rules of evidence rather than rely on sentiment. The reports for a particular year are released before that year begins. For example, the Doing Business 2017 report was released on 25 October 2016. The World Bank reports show that India’s rank in investor protection had fallen between 2007 and 2013 before rising sharply in 2015. India ranked seventh among all economies surveyed in 2015, ahead of several advanced economies.

The 2016 and 2017 Doing Business Reports showed that India’s rank on investor protection (of minority shareholders) slipped to 8 and 13, respectively. However, its distance to frontier or DTF score was 73.33 in the latest survey, slightly better than the 72.5 recorded in 2015. The score measures how close a country is to the best possible performance on a given indicator, with higher scores indicating better performance. This suggests that the latest drop in India’s rank has more to do with other countries catching up, rather than India regressing on governance practices. The DTF score suggests that investor protection standards have in fact improved slightly since 2015.

The World Bank reports seem to indicate that corporate governance standards in the country may not be as dismal as one may infer from the WEF and IMF reports.

Now we will take up Tata case and will try to understand whether  executive sentiment on corporate governance really caught up with the changes in the regulatory environment , or there is a disconnect between the two remains as stark.

Tata Board Room Crisis Story So Far

The board of Tata Sons Ltd replaced Cyrus P. Mistry as chairman, less than four years after he took the helm, and named his predecessor Ratan Tata interim chairman for four months without citing any reasons. Since then, Tata Sons and its former chairman have traded charges of corporate governance violations and incompetence in an increasingly bitter spat.

Independent directors of some Tata group companies have backed Mistry as chairman, Tata Sons, in turn, has called EGM to eject him as a director. As the spat continues, the lens shifts to the role of independent directors and institutional shareholders at Tata group. Here is a timeline of recent events at Tata group:

21 December 2016

The shareholders of Tata Steel voted on the proposal to oust Nusli Wadia, an independent director on its board, following a request from Tata Sons, the company’s principal shareholder. Tata Sons owns 31.35% stake in the company, while the rest is owned by institutional and minority shareholders. As Cyrus Mistry had already quit the board of Tata Steel, the resolution to remove him had become pointless. Hence, the resolution was not to put to vote, O P Bhatt, an independent director and interim chairman of the company, informed shareholders.

20 December, 2016 

Ousted Tata Group Chairman Cyrus P Mistry  quit from the boards of six listed companies including Tata Motors and Indian Hotels and vowed to shift his fight to a "larger platform".  In a statement issued by Mistry, he said, "Having deeply reflected on where we are in this movement for cleaning up governance and regaining lost ethical ground, I think it is time to shift gears, up the momentum, and be more incisive in securing the best interests of the Tata Group. Towards this end, the objective of effective reform and the best interests of employees, public shareholders and other stake holders of the Tata Group (the very people I sought to protect as Chairman) would be better served by moving away from the forum of the extraordinary general meetings."

29 November 2016: Tata Power Co. Ltd fixes 26 December for an extraordinary general meeting (EGM) to seek removal of Cyrus P. Mistry as a director.

28 November 2016: Tata Chemicals Ltd fixes 23 December for an extraordinary general meeting (EGM) to seek removal of Cyrus P. Mistry as a director and Nusli Wadia as an independent director from its board.

25 November 2016: Tata Global Beverages passes circular resolution to remove Cyrus Mistry, days after voting him out; move is seen as a bid to avoid legal complications.

25 November 2016: Tata Steel passes a circular resolution to remove Mistry and replaces him with O.P. Bhatt as interim chairman.

23 November 2016: Tata Group Wednesday pulls out the big guns from its old guard to rebut Mistry allegations. FC Kohli says group had no intentions to sell TCS. B. Muthuram says “ surprised and very sad” about Corus allegations; Tata Steel’s long-term strategy was to grow inorganically.

22 November 2016: Ratan Tata once tried to sell TCS to IBM, claims Cyrus Mistry. Corus buy, the result of “one man’s ego,” says ousted chairman.

21 November 2016: Nusli Wadia writes a letter to Tata Sons directors saying that the move to seek his expulsion is “false, defamatory, baseless and libellous”, pointing out that the allegations have been made with an intent to harm his reputation; gives Tata two days notice to withdraw resolution.

21 November 2016: TCS issues EGM notice; says company board agrees with Tata Sons’ explanation seeking Mistry’s removal. Mistry’s conduct, upon his removal as executive chairman of Tata Sons, has caused enormous harm to Tata group, co. and stakeholders, including employees and shareholders, says the filing to Bombay Stock Exchange.

17 November 2016: TCS board meets and fixes 13 December as the date for the extraordinary general meeting to remove Mistry as director. Tata Sons board meets and discusses “routine affairs”. Mistry doesn’t attend.

15 November 2016: Tata Global Beverages says seven out of 10 directors at the company’s board meeting voted for removal of Cyrus Mistry as chairman. Cyrus Mistry questions Tata Son’s investments in certain companies, high public relations (PR) costs, the compensation of Ratan Tata and the practice of directors drawing commissions from operating companies.

14 November 2016: Ratan Tata meets finance minister Arun Jaitley. News about Venu Srinivasan, board member in Tata Sons, joining Sir Dorabji Tata Trust as one of its trustees on 31 October becomes public. Independent directors at Tata Motors refuse to take sides, saying the auto maker’s board was collectively responsible for all decisions relating to strategy and operations.

13 November 2016: Tata Sons says it will do whatever is necessary to deal with the fallout of Mistry ouster; asks independent directors to ensure future of Tata companies and interest of all stakeholders is protected. Mistry’s office rebuts charges that he was trying to gain control of Tata Firms; says a new structure was created with an eye on improving transparency and reflects “generational change”.

11 November 2016: Bhaskar Bhat, a non-independent director on the board of Tata Chemicals, resigns, saying the contents in the statement by independent directors ‘dilutes’ his views expressed in the board meeting Tata Sons moves resolutions to eject Mistry and Wadia as directors of Tata Steel, Tata Chemicals and Tata Motors.

10 November 2016: Independent directors of Tata Chemicals, including Nusli Wadia, back Mistry as chairman, citing their evaluation of his performance for the past couple of years. Tata Sons releases a nine-page statement detailing reasons why Mistry was ousted. It accuses Mistry of betraying the trust reposed in him and seeking to control the main operating companies of the Tata group “to the exclusion of Tata Sons and other Tata representatives”.

10 November: Tata Sons replaces Mistry as chairman of Tata Consultancy Services Ltd with Ishaat Hussain as interim chairman. Separately, it calls for a shareholders’ meeting of Indian Hotels to pass a resolution for the removal of Mistry as director.

 05 November 2016: Tata Motors Ltd defends and clarifies credit and accounting practices related to the Nano car and Tata Motors Finance, its vehicle finance arm.  Independent directors of Indian Hotels unanimously back Mistry as chairman of the company.

04 November 2016: Tata Sons outlines new reponsibilities for Mukund Rajan and Harish Bhat. Says group human resources responsibilities will be overseen by S. Padmanabhan.

01 November 2016: Indian Hotels Co. Ltd says N.S. Rajan has resigned from its board. Tata Chemicals Ltd informs bourses that Nirmalya Kumar has stepped down from its board. Ratan Tata writes a letter to the staff of Tata group companies saying that the removal of Mistry was “absolutely necessary for the future success of the Tata Group.”  Mistry’s office releases a statement rebutting allegations that he kept the Tata trustees in the dark on transactions such as Tata Power Co Ltd’s purchase of Welspun Renewable Energy Pvt. Ltd and his handling of a spat with NTT DOCOMO Inc.

27 October 2016: Tata group companies write back to exchanges assuring them that their accounts are in order. Tata Steel’s management assures investors at a meeting that contrary to reports it was still firm on the sale or joint venture plan for its European business and the sale of its UK specialty steel business was on track.

26 October 2016: Stock exchanges ask Tata group companies such as Indian Hotels Co. Ltd, Tata Steel Ltd and Tata Motors Ltd for a clarification after Mistry, in his leaked email, calls them “legacy hotspots”.

25 October  2016: The Tata group files caveats in the courts seeking advance notice from Mistry were he to initiate legal action. Ratan Tata calls for a meeting of Tata Group’s chief executive officers. Also meets investors such as Life Insurance Corporation of India to assure them that it is “business as usual.”

25 October: Mistry writes an email to the board of Tata Sons, which gets leaked. In his e-mail, Mistry warns of a potential $18 billion write down faced by the group and alleges corporate governance violations.

24 October: The group executive council (GEC), which advised the Tata Sons chairman, is disbanded. Nirmalya Kumar, Madhu Kannan and N.S. Rajan are asked to leave, while Mukund Rajan and Harish Bhat are retained. Cyrus Mistry is ousted as chairman of Tata Sons and replaced by Ratan Tata as interim chairman. A search committee is constituted to find Mistry’s replacement.

15 September 2016: Meeting of the board of Tata Sons. Mistry presents an updated version of a strategy document which outlines plans till 2020.

26 August 2016: Amit Chandra is nominated as a director in Tata Sons by Tata Trusts, which has the powers to recommend one-third of the board of directors in the holding company.

25 August 2016: At the annual general meeting of Tata Sons, Srinivasan and Piramal are confirmed as directors by shareholders.

8 August 2016: Ratan Tata, chairman of Tata Trusts, nominates Venu Srinivasan and Ajay Piramal as additonal directors on the Tata Sons board.

25 June 2016: The nomination and remuneration committee of the Tata Sons board recommends a raise for chairman Cyrus Mistry. It also discussed formalizing the governance structure between various entities in the group such as Tata Trusts, the trustees and boards and directors of group operating companies.

Broad Nature of Company Law Issues

From a technical perspective, the legal issues surrounding Mr. Mistry’s replacement may not be all too complicated. First, Tata Sons Limited is an unlisted company, and hence governed by the provisions of the Companies Act, 2013. It is not subject to the slew of corporate governance norms and securities regulation dispensed and implemented by the Securities and Exchange Board of India (SEBI). Tata Sons is a closely held company with about 65% of the shares held by two Tata Trusts controlled by Mr. Ratan Tata, with about 18.5% being held by the Shaporji Pallonji Mistry group, to which Mr. Mistry belongs.

Second, the Tata Sons’ board has only replaced Mr. Mistry as the “chairman”, while he continues to be a non-executive director of the company. Although the Companies Act envisages roles and functions for a chairperson of a company, it does not stipulate the precise mechanism for appointment and removal of such a chairperson. That is indeed left to each company to frame in its articles of association. Hence, the likely bone of contention has veered towards whether the board of Tata Sons complied with its articles of association while replacing Mr. Mistry as its chairman. Based on news reports , it appears that following Mr. Mistry’s assumption of chairmanship, the articles of association of Tata Sons were amended to restrict the powers of the chairman and to enhance the oversight and control exercised by the Tata Trusts. In that sense, the board (including the directors nominated by Tata Trusts) may very well have possessed the appropriate powers to replace Mr. Mistry as the chairman. 

This being the case, it is as yet unclear whether the dispute will end up in litigation. In a letter issued by Mr. Mistry to the board of Tata Sons, he has alleged that the directors have failed to “discharge the fiduciary duty owed to stakeholders of Tata Sons and of the group companies”. While available in theory, any action surrounding breach of directors’ duties through a shareholder derivative action ought to be brought in a civil court, and may not only be difficult to establish, but may be inefficient given the costs and time involved in successfully bringing such an action. A more appropriate action in such a case would be one for oppression and mismanagement under section 241 of the Companies Act, 2013. Any shareholder holding 10% of the shares of a company (in this case the Shaporji Pallonji Mistry group satisfies the requirement) can bring an action before the National Company Law Tribunal (NCLT) on the ground that the affairs of the company are being conducted in a manner “prejudicial or oppressive” to a shareholder, or that a material change has taken place in the management or control of a company, which is likely to cause prejudice to shareholders. The NCLT possesses wide-ranging powers to pass various kinds of orders in an action involving oppression and mismanagement. Even here, the bar to bring an oppression action is quite high, and ultimately it will boil down to the specific facts and circumstances whether such an action can be successfully availed of. 

These and other issues will certainly be the subject matter of debate in the legal circles in the days to come.

Tata Case : Impact on Corporate Governance

Definitely the impact of this  episode will be  on corporate governance in Indian companies . It would be too simplistic to treat the Tata Sons boardroom crisis as one involving an unlisted company that is bereft of public shareholders. Tata Sons is the promoter (or controlling shareholder) of several listed companies within its fold, and which in the aggregate represent about  7.5% of the market capitalization on BSE. In such a scenario, the corporate governance issues surrounding Tata Sons is no longer a matter within the house, but one that involves the interests of minority shareholders and other stakeholders of all listed companies within the Tata stable. In that sense, the conduct of affairs on the Tata Sons board has a considerable impact on the governance of all of those listed companies. 

Taking this into consideration, the sequence of events that transpired over the last few weeks leaves much to be desired. Even if the board of Tata Sons did legally possess the right to replace the chairman, the manner in which that was accomplished does not comport with basic principles of corporate governance. For instance,  press reports indicate that sufficient advance notice may not have been given to Mr. Mistry and that the item regarding his replacement was included in the agenda as part of “other items”, thereby springing a surprise on him (although reports suggest that he was informed by one of the directors the day before the meeting). While this may be legal due to the nature of Tata Sons as an unlisted company, the impact of Mr. Mistry’s exit has been felt across all the listed companies in the group, which have witnessed declines in the market value of their shares.

Key Lessons

What lessons from this episode may be relevant for the broader corporate governance framework in India? At the outset, this continues to raise significant issues for promoter-driven companies. Matters that affect promoters, including disputes among groups of promoters, will directly impact the listed companies and their minority shareholders and other stakeholders. Hence, the governance framework is important not only at the listed company-level, but also at the promoter-level. It is paradoxical that despite the establishment of a detailed governance framework (albeit through the articles of association) in Tata Sons, such a negative outcome was unavoidable. 

Second, one cannot escape from the fact that in promoter-driven companies, there could be multiple centers of power. For instance, promoters themselves may have a governance framework (as Tata Sons did), and decisions taken through such a framework would have implications for all listed companies under it. However, there is a perceptible governance gap here. Decisions taken by promoters (being either individuals or unlisted companies) are not subject to the same level of transparency and governance norms as listed companies are. For instance, even though Tata Sons had a professional board with immensely competent individuals, the balance of power stipulated in the articles of association swayed heavily in favor of the Tata Trusts, thereby arguably impinging upon the exercise of powers of the board as a whole, and the chairman in particular. Hence, decision-making at the promoter level was not accompanied by any accountability to stakeholders of listed companies, although they are considerably impacted by such decisions. Moreover, in the Tata Sons episode, there was no advance warning to the markets about the impending precipitous action that was taken by the board on 24 October 2016. What began as a terse announcement of the chairman’s replacement then led to speculation regarding the reasons behind such action. The lack of any legal requirements on the part of Tata Sons to provide advance notice or sufficient details following the action may have led to this situation.

Third, the absence of disclosure and transparency requirements pertaining to the promoter (being an unlisted company) has left the shareholders of the listed companies in the lurch and kept them guessing about the reasons for the chairman’s replacement. This has led to a lot of speculation both among investors and commentators. Added to this are the allegations now made by Mr. Mistry in his letter to the Tata Sons board, which is now available in the public domain. 

Fourth, and more importantly, what is the role of the boards of various listed companies within the group? At one level, the board’s attention may not be called for as the various events have occurred at the promoter level. The listed company boards have neither considered nor taken any decision. But, that would be too simplistic and naïve an approach. Given that the recent string of events have a direct impact on the shareholders and stakeholders of these listed companies, the boards must state their position and clarify the issues and assuage the concerns of investors. An additional complication is that Mr. Mistry continues to be the chairman and non-executive director of various listed companies within the Tata Group. Will this affect the functioning of the boards of the Tata Group when there is a battle for control and management of the promoter company? These are important questions that the boards will have to consider and answer. To that extent, the move by the stock exchanges in writing to the Tata Group companies to explain and clarify the events and their impact on each company is a welcome one.

The Way Forward

In all probability, the issues surrounding Tata Sons will be resolved one way or another, and the companies within the Tata Group will move on with their businesses. But, the lessons learned so far (there may be much more after a deeper analysis) cannot be ignored. From a governance perspective, this calls for a more focused approach towards promoter-driven companies, especially those run by business families. In such cases, governance oversight must extend beyond listed companies and into the domain of promoters. Issues affecting promoters cannot be isolated from their impact on listed companies. Hence, this raises a question whether some types of governance norms must be imposed on promoters themselves, in addition to the listed companies. Even if there is no need for a slew of corporate governance norms extending their reach towards promoters, decision-making by promoters ought to be made more transparent. More importantly, listed companies and their boards must be in a state of preparedness to deal with issues that occur at the promoter level, whether it be succession or any other disputes. 

Mr Mistry has a point when he says he inherited the problems from his expansion-minded predecessor. And some progress came on his watch. He sold part of the British steel business (to Tata old-timers’ deep chagrin, apparently, despite its steep losses). The telecoms operation was overhauled, ready for some form of industry consolidation, new bosses were brought in and so on. But he shied away from a radical redrawing of the boundaries of a sprawling group. Still, it is plausible that Mr Tata and his allies would in any case have stopped him. Mr Tata is now only an interim boss—he has promised to find a successor to take over the chairmanship of the holding company by the end of February—but he will continue to wield sway from atop the charities that control it.

Regardless of the true reasons for his ousting, Mr Mistry has befuddled his adversaries. They had expected him to depart in “the Tata way”: quietly and without fuss. He had not granted a single interview to the media during his time as chairman. Instead he wrote to the board alleging several instances of improper conduct around accounting and other matters. Three weeks on, none of the substantive charges Mr Mistry laid out has been conclusively addressed. The securities regulator is reportedly taking an interest. Even though not formally announced, it is a humiliation for the company and for the business grandees on its various boards.

Broad failures of corporate governance emerge from Mr Mistry’s claims. Mr Tata, who has no children and was the first Tata to have a non-family member succeed him, appears to have found a way to get more and more important decisions sent to the board. Here, his allies apparently agreed to do his bidding, including Mr Mistry’s sacking. A cheap-car project that Mr Tata had launched, for example, would have been ended had it not been for his intervention, and it continued making losses. Most seriously, Mr Mistry has suggested that the company has avoided taking write-downs required by accounting rules, of a whopping $18bn, notably in the steel business. The firms involved say that their numbers are correct.

Mr Mistry was trying to stay on as chairman of the operating companies even after his removal from the group. The boards of some of the large subsidiaries, such as Tata Motors (owner of JLR) and the hotels division, have defied Tata and given their support to Mr Mistry. The parent firm did manage to evict him from TCS’s board, because it owns a majority of it, unlike most of its other big group companies.

The accidental activist

Some people would have welcome his continued presence. “He’s like an activist shareholder in a group that badly needs it, good luck to him,” says a senior Mumbai banker. But he has not been able to hang on for much longer than a few weeks. Even if the various companies’ directors would have let him stay on as chairman, Tata has used its stakes in the firms, with the help of its allies, to boot him off boards entirely.

And Tata has plenty of levers to get its way. It could strip the subsidiaries of the right to use its valuable brand—it has done this at least once in the past. Although the group is loth to admit it, the central holding company implicitly guarantees the debts of the operating entities that are listed. The troubled ones, such as the telecoms or power-generation units, would pay far more to borrow without its support. In one of its letters, Tata alludes none too subtly to the extra creditworthiness it gives. But kicking out subsidiaries in a sort of break up would please no one but the Tata’s rivals.

A compromise is also possible. Some business people in Mumbai reckon that the government will not stand by idly for much longer, and that it could force a truce. Mr Mistry won’t get his job back, but the group might agree to ease out Mr Tata not only from the chairmanship of the holding company but also from his position on top of the charities through which he appears to control Tata Group.

No less may be necessary to attract a successor to the top job. Few in Mumbai expect that Tata will bring in an outsider to grapple with its problems. Many reckon that Natarajan Chandrasekaran, who is thought to have done well running TCS since 2009, is a likely candidate. Then Mr Tata will have to decide how to treat his successor. The experience of Mr Mistry’s last weeks, during which the mild-mannered Indian executive turned into something like an American-style corporate raider, might just be enough to persuade him to let the new chairman lead.

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