The Crucial but Unspoken Governance Issues Exposed by the Tata-Mistry Saga
As expected, the Tatas have moved the Supreme Court challenging the 18 December 2019 judgment of the National Company Law Appellate Tribunal (NCLAT) which ruled that Cyrus Mistry’s removal in October 2016 by Tata Sons Ltd was illegal. 
 
Ever since its announcement, many legal luminaries have found multiple flaws in the NCLAT judgement. In their opinion, it does not have the legal legs to withstand scrutiny by the Supreme Court. 
 
Others have questioned whether it infringes on the majority rule by the shareholders, powers and functioning of company boards, and role of nominee directors. 
 
Since the matter is sub-judice, it will be best to avoid commenting on the legalities.  
However, it is worth recalling that the two main contentions of the Mistry camp before the NCLAT were of oppression of the minority group, i.e. the Shapoorji Pallonji (SP) group and the alleged illegal removal of Mr Mistry himself, not only from Tata Sons but consequently from the boards of various Tata group companies. Intrinsically interwoven is the larger issue of conversion of Tata Sons into a private limited company. 
 
The entire saga basically revolves around corporate governance. It has significance not only for Tata Sons but more importantly for the entire corporate sector. 
 
“Out of the Box” Thinking
 
As per para 12 of the NCLAT judgment, Tata Sons has controlling interests in a wide range of companies of the Tata group, which operate in 160 countries across six continents and employs over 660,000 people. The Tata group comprises over a 100 operating companies of which 29 are listed companies with millions of shareholders. 
 
Is it time to revisit, purely from a governance angle, if a company of the size, scale and impact of Tata Sons, should enjoy the privileges of a private limited company? Should any company of this size be allowed to fly under the radar of corporate governance? Is this what the lawmakers intended? Not to forget, some of the other governance issues exposed would make an interesting case study.
 
This “out of the box” thinking is bound to raise many eyebrows. Before creating more flutter with what some may call an outlandish idea, I must share one of my experiences when I had the privilege of working as the chief financial officer (CFO) of a TATA group company more than two decades ago. 
 
Good Corporate Practices
 
The shareholders of this particular company had passed an “enabling” resolution authorising the Board to raise share capital, and debt up to a specified limit.  Years later, the company wanted to enhance its paid up share capital by way of investment by a foreign partner. The proposed enhanced capital was well within the limits approved by the “enabling” resolution.  
 
Strictly speaking, there was no need to go back to the shareholders.  However, the company was advised by a senior legal advisor to the TATAs that as a ‘GOOD CORPORATE PRACTICE”, the company must seek re-approval of the shareholders. This was done and was much appreciated by the shareholders. 
 
The above was a glittering example of good governance at the house of TATAs: doing much more than what was mandated by the law.  
 
“Unbridled” Private Limited Companies Were Never Intended
 
The origins of the Indian Companies Act can be traced as far back as 1866.
Subsequently the Act of 1956 was promulgated which received the assent of the President of India on 18 January 1956. That is less than a decade after India achieved Independence. Undisputedly, the business environment then was starkly different from the present scene.
 
Businesses then were generally started by sole proprietors who, in search of more resources, both financial and otherwise, initially graduated to partnerships. To fuel further growth and safeguard against unlimited liabilities, they then converted to “private limited companies” as defined in Section 3(iii) of the Companies Act, 1956.  
 
The main source of finance for them was in the form of contribution to capital by the shareholders.  Resources were limited since they could not access funds from the public.  
 
It must have been perceived that businesses up to a certain level only will be conducted through private limited companies. Consequently, their impact on the economy and society would also be limited.  That must have been the primary reason why the compliance requirements for private limited companies were much fewer than those prescribed for public companies. 
 
The lawmakers had the foresight, even several decades earlier, to ensure that the private limited companies were treated as public limited companies once they exceeded certain specified thresholds. 
 
The Companies Act, 1956 had a deeming provision.  As per Section 43A of the said Act, private companies were considered to be public companies under three scenarios: (i) when more than 25% of the share capital of a private limited company was held by one or more bodies corporate, (ii) when the average turnover during the relevant period exceeded the specified amount and (iii) when not less than 25% of the share capital of a public company was held by a private limited company.
 
The deeming provision allowed operational flexibility associated with a private limited company without compromising on governance expected of public limited companies.
 
Good Laws Evolve with Time
 
Some examples that immediately come to mind include amendments or scrapping of Sections 376 and 377 of the Indian Penal Code (IPC), introduction of Insolvency and Bankruptcy Code (IBC), Reserve Bank of India (RBI) guidelines for early recognition of non-performing assets (NPAs), and strict norms for corporate governance imposed by the Securities & Exchange Board of India (SEBI).
 
The Companies Act 2013, however, took a major step backwards.  The deeming provision of Section 43A of the Act of 1956 was abolished altogether leading to the conundrum exposed by the Tata-Mistry saga. The lawmakers need to move quickly lest it sets a precedent. 
 
Other Governance Issues 
 
Several other issues and processes merit serious introspection.  Firstly, should any key managerial personnel (KMP) be dismissed summarily especially when his or her performance has been lauded in the recent past? Don’t the regulators have a duty to step it or should they be allowed to dismiss this merely as a case of personal contract?
 
Secondly, it is well settled that the chief executive or managing director (CEO/MD) works subject to the superintendence and control of the board. Should he or she be singled out for lack of performance? Do the other directors have no responsibility?  A similar issue was highlighted earlier in the sacking of the MD of the rating agency ICRA.
 
Thirdly, is it a good corporate practice to elect a non-executive chairman without prior notice, that too of a large conglomerate?  
 
Fourthly, should directors be expected to merely vote without demonstrating any application of mind, that too on significant matters?  How will their accountability or complicity be then determined?
 
Fifthly, should a clear distinction not be made between shareholders’ rights and the voting power at a board meeting? It is true that representation on board very often represents the amount of share-holding.  The former drives the division of profits and other shareholders’ rights.  But shouldn’t all board members be treated as equal with the chairman being the first amongst equals, despite a casting vote. 
 
Sixthly, majority shareholding per se is not bad. But if everything is to be decided only by the majority voting power, then should directors representing the minority shareholding even attend board meetings?
 
Last but not the least, should adequate safeguards be built to protect minority interest rights? Are percentages enough or are some monetary thresholds and other safeguards equally necessary? What is the role of the much touted Independent directors? Are they not supposed to protect the interests of all the stakeholders? 
 
Of the total investment of Rs6 lakh crore in Tata Sons, SP group’s share was Rs1 lakh crore!!  If the SP group can lay claim to oppression and mismanagement, justified or unjustified, what about those minority interests, who are less fortunate and unlikely to have the same financial muscle power as that of the SP group?
 
Clearly, lawmakers and regulators like SEBI need to put on their thinking caps. Merely laying down compliance requirements is abysmally insufficient. 
 
Opportunity for TATAs to be the Lodestar for Governance
 
The venerable house of TATAs has always been the epitome of values, ethics and morality in the private sector.  The hitherto unblemished shine has however been spoilt, at least to some extent, by the muck created by this unsavoury saga. Every threat brings with it some opportunities. Legalities apart, the house of TATAs has an excellent opportunity to re-affirm its position as the lodestar for corporate governance. 
 
Disclaimer: It is not the intention of the author to comment legally/ personally on the merits of the case and/or persons involved.  Facts have been used only to make the larger point on governance issues. 
 
(Sarvesh Mathur is a senior financial professional, who has earlier worked as CFO of Tata Telecom Ltd and PricewaterhouseCoopers.)
Comments
col bogey pongal
2 years ago
i hope there is meteor showers or some asteriod hit RBI offices
and destroy this vermins.

as i dont want credit for taking down vampires.
i want credit for positive actions.
col bogey pongal
2 years ago
CBI, RBI IMf are the real terrorist. they will soon get their dues. in kind.

payback for duck dynasty and payforward my kindness.
and hell break loose. when the first s k um is hit.
col bogey pongal
2 years ago
all thanks to tata india audit firms have been shut -lovelock, af ferguson, billimoria.

so corrupt are these buffons. just cant believe that they would cover it up by taking short cuts. fixing it miss world titles, and using goldmans sachs 'bRICs' to get FDI. it is just bad.
it is al paid and bot. BRICS.
very bad. i hope then end of these sc ums of the earth from doc manmohan , pranab ,ukherkee. i wish them the very worst. traitos. may u rot in RBI office inside.

indian ca's, lawyers are not only greedy but barbbarians. and one day all these judges of supreme cout etc will be paid in kid( hells kitchen)

col bogey pongal
2 years ago
TATA SONS MUST BE BOOTED. and if mistry/nusli plan is good(no one can do anything worse than ratan tata )
they must thrash and dump the entire tata group. bad acquiston, no world class manufacturing. industry 2.0.
world is onto industry4.0 and everything is space age. here it is still about regulations, onion prices and yoga.
TaTa has no plan. he doing everything -coffee, tea, gandhiji brand salt. what jokers are these. i also noted they got a crooks advisors/auditor. one y h malegam. team i m m oral r a s cals. low skills. just trying to be like sherlock homes of india with british accent. very poor
Mani Sriram
2 years ago
Great article and well articulated case for a relook at the company act provisions. Having said that, as long as those 1 million rupee an hour lawyers exist, all sorts of creative ways will be found to circumvent any law to make majority shareholder to prevail. This is the harsh reality
Peruvemba Subramanian Ramachandran
2 years ago
Tata group lost its name 20 years back itself when the auditors af ferguson was forced to change its audit report of one of its companies by Ratan Tata and the Tata group and the signing partner of af ferguson; who refused to reissue his report was sacked by Af ferguson.
Rajneesh Agarwal
2 years ago
Conversion to private ltd and also removal of a major shareholder group from directorship reflect a proprietary, clandestine and dishonest approach. Even much more so in case of Tata Group which always claims to be holier than thou. RT saying it was not a partnership, raising a bogey of destabilising the listed cos etc are all dishonest excuses.
m.prabhu.shankar
2 years ago
What is mentioned towards the end of the article is the expectation of the public of India as well. Tatas should set a higher benchmark for good governance through this problem that they are undergoing as we are seeing predominantly most of the companies are crony capitalists finding ways to usurp public money and bypass regulations by hook or crook.
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