How corporate governance has become complicated

The Tata-Mistry spat has complicated issues related to corporate governance with Cyrus Mistry still chairing board meetings at listed subsidiaries, despite being ousted from the unlisted parent Tata Sons.

Though the law does not say so, there is further potential for complexities on the operational front once the new Tata Sons Chairman is appointed.

Sumit Agrawal, Partner, Suvan Law Advisors & ex-SEBI official, says, “There is no question of law involved in a query whether a chairman of a listed subsidiary would take instructions from a chairman of unlisted holding company, a post which someone held earlier. Law does not mandate a listed company chairman seeking approval from an outside individual.”

On the possibility of Tata Sons ousting Mistry as chairman from its listed companies, experts said that there was potential for legal troubles going forward after the independent directors of Indian Hotels voted in Mistry’s favour.

Tejesh Chitlangi, Partner IC Legal, said: “If the majority/key shareholder on the board are not in a position to form majority (due to lack of support from the independent directors) and unable to oust the chairman by following the procedure in the Articles of Association, then the substantial shareholder may resort to calling an EGM of its members to seek removal of the chairman as a director itself so as to achieve his discontinuance from the board.”

“The removal of chairman and a director are two separate issues. Sacking a chairman can be done at the board level itself based on all the directors deciding in the interest of the company. On the other hand, removal of a director requires shareholder approval by way of an ordinary resolution under section 169 of Companies Act, 2013,” Agrawal added.

Proxy advisory firm Institutional Investor Advisory Services (IiAS) said that independent directors of the listed Tata companies must guide minority shareholders if a proposal is put forward to remove Cyrus Mistry as Chairman at an extraordinary general meeting.

“As a dominant shareholder with over 30 per cent holding in each of the companies, the Tata group can call an extraordinary general meeting and present a resolution to remove Cyrus Mistry as a director. But, for the resolution to pass, it needs the support of at least 51 per cent of shareholder votes i.e those present and voting,” IiAS said.

In all, the continued silence by the Tata Sons board is troubling for shareholders, IiAS said. “Tata Sons’ silence has not only led to excessive speculation, but is possibly haemorrhaging the current chain of command within the group. With public perception veering towards Cyrus Mistry, the Tata Group needs to provide factual and cohesive information supporting its decision to balance the discourse. Else it must back down,” the report concluded.

On the issue of a possible conflict between the corporate governance norms made by the standard setter (Institute of Company Secretaries of India ICSI) with that of SEBI experts felt it was ICSI for unlisted companies as per the Companies Act and SEBI’s norms for listed companies.

Assuming that ICSI has endorsed corporate governance perspective in any board decision of an unlisted company, this will make SEBI’s role further limited in examining processes because adherence by a company to Secretarial Standard is mandatory, as per the provisions of the Companies Act, 2013. “But for listed companies, secretarial standards, guidance notes and FAQs issued by ICSI are only guiding additional factors and explicit norms of SEBI takes a precedence. Hence, legally there may not be any conflict as such," Agrawal summed up.