The shareholding of businesses in India, however, is mostly concentrated in a few hands.
In
India, a large number of companies are family-owned and almost run like personal fiefdom.
India's businesses are promoter-driven and the intervention of promoter-shareholders in company
management also raises serious concerns regarding corporate governance. In companies with
concentrated shareholding, the agency problems between controlling shareholders and minority
shareholders tend to be rampant, and hence corporate governance measures need to be targeted
to address that agency problem. Corporate governance refers to mechanism ,process and relation
by which corporation is controlled and directed .It deals with rights & responsibility of each
stakeholder and involves decision making & rules in the corporate affairs.
A huge amount of shareholding/controlling interest by shareholders in a company often gives
them the power to influence the board's functioning. The promoters feel emotionally attached to
the firm, and this attachment sometimes contributes to their stubbornness about the company's
operations. The promoters decide to make the company function for their personal interest which
is frequently prejudicial to the interest of the company. This leads to a failure in corporate
governance.
Tata sons is one of biggest name in Indian corporate sector has faced this kind of failure in
corporate governance.
Tata group has created a unique model of engaged ownership, where the Tata Trusts own 66 per
cent stake in Tata Sons Ltd (an unlisted entity) which, in turn, holds significant shareholding
(broadly over 20 per cent, in each case) in downstream listed operating companies, such as Tata
Steel and Tata Motors. Traditionally, the chairman of the Tata Trusts, Tata Sons and the
operating companies was one and the same.
Issues of the stubbornness of the promoter were brought to light during the Tata- Mistry tussle.
Since 2006, Cyrus Mistry has been the director of Tata Sons Ltd and it was for the first time that
the chairman of the Tata Trusts (Rata Tata) was different from the chairman of the Tata Sons and
the operating companies. Tata group has created a unique model of engaged ownership, where
the Tata Trusts own 66 per cent stake in Tata Sons Ltd (an unlisted entity) which, in turn, holds
significant shareholding (broadly over 20 per cent, in each case) in downstream listed operating
companies, such as Tata Steel and Tata Motors. Traditionally, the chairman of the Tata Trusts,
Tata Sons and the operating companies was one and the same. Trusts of the Tata family held the
majority of the shareholding. This was to ensure that even though Cyrus Mistry joined, power
remained with the family. The Board often disagreed with Cyrus Mistry's decisions and, after
one such board meeting, they fired him. He alleged that the nominee directors of the nominee
directors had dominant control. These nominee directors were Ratan Tata and the trust’s trustee.
According to Cyrus Mistry, the promoters never gave him a free hand to run the business and
work for his interests. The company's control was still exercised by the family. He also alleged
that the independent directors' job had little independence. Mistry’s removal in 2016 was
occasioned by the majority shareholder, i.e. Tata Trusts.
There was also some elaboration on the independence of the independent directors in the
company during this event. Mr. Nusli Wadia, who was an independent director, was also fired
for standing up to Cyrus Mistry to retain his group company chairmanship. This demonstrates
the obvious exploitation by the promoters of influence.
The Tata Company episode brings standards of corporate governance in India and the role of
directors in companies. The episode gives rise to Issues of directors' autonomy and
independence, the position of directors and the control of the executive chairman, conflicts of
interest and vested interests, and the involvement of non-accountable persons who have a say in
the company's governance, directly or indirectly. In addition, it shows that decisions in Indian
companies are still focused more on feelings and less on profitability and rationality. The episode
of the Tata group highlights the following flaws –
1. Undemocractic decision making – The say and rights of minority stakeholders seems to
be dominated by big stakeholders
2. Conflict of Interest in due to directors having stakes in few investing ventures.
3. Problems and issues among member of family business seems dominates the corporate
interest & profits
4. No clear separation of accountability and responsibility between stakeholders like board
of directors, management etc
5. Change in Values of the individuals in governance due to personal interests.
https://indiacorplaw.in/2016/11/corporate-governance-in-india-and.html
