The Tata Corporate Governance Episode: The
‘India-Specific’ Issues and Concerns
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.
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. 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. 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.
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. 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. 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, the ease with which independent directors can be removed
from company’s board came into limelight. 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. 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. Retail investors mostly demonstrate interest
in obtaining material financial gains on their shareholdings. 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. 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. 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.
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. 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, 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.
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. 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, 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, 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, (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. 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.
