The board proceedings at Tata-owned Indian Hotels Company last week signalled the possibility of a long and hard fight between the Tatas and Cyrus Mistry. The independent directors on the board of IHCL reposed their faith in their chairman Mr. Mistry, and even praised him for his strategic vision. If holding company Tata Sons, which removed Mr. Mistry as its chairman a fortnight ago, wants him out of the boards of group companies, it has to brace itself for due procedure and pray that there are no more surprises as the one that IHCL’s independent directors threw up last week.
If it cannot get the backing of all the directors on the board of individual companies, Tata Sons, as a shareholder, can still attempt sacking Mr. Mistry as a director. But, it would be an unpopular option, especially if the independent directors on the board reaffirm their confidence in Mr. Mistry as the chairman, as was done in IHCL. Legal consultants said that there were two elements to the issue: one, Mr. Mistry being removed from the chairman's post of a group company, which can be done by the board; and two, his removal as a director, which needs shareholders’ approval.
“If a company wants to sack the chairman, then it can be done at the board level,” Sandeep Parekh, Fonder, Finsec Law Advisors said. “However, all the directors, not just independent ones, have to take a conscience call on how to vote in the best interests of the company.”
Three listed entities of the Tata Group — Tata Steel, Tata Motors and Tata Global Beverages — have a similar board structure. Each of these companies has a total of 11 directors, with six of those being independent, as per information available on their respective websites. TCS has six independent directors out of a total of 10 directors on its board.
Further, Tata Chemicals has nine directors on its board with five independent, as per its annual report for the year 2015-16. Similarly, Tata Power had five independent directors on a board of 10 directors as on May 23, 2016, according to its latest annual report.
Meanwhile, Tata Sons has a stake in the range of 20-30 per cent in these entities barring TCS in which it holds close to 74 per cent. Trusts controlled by the Tatas own a significant 66 per cent in Tata Sons, which is the holding company of the group.
Cross-holding
While Tata Sons is the primary holding company of the diversified conglomerate with a market capitalisation of more than $125 billion, of significance is the cross holding within the group. Cross holding refers to a practice wherein group entities hold equity stakes in other companies within the group.
It effectively gives the group more control — direct and indirect — in the companies within its fold. Cross holding exists in the group company and that could give Tata Sons, an additional, though slim edge when it comes to shareholder clout in pushing resolutions.
“If a person has to be removed as a director then shareholders’ approval is required. With Tata Sons holding between 20 per cent and 30 per cent in the larger listed entities of the group (Tata Motors, Tata Steel, Tata Power, Tata Global Beverages), it can attempt to remove Mr. Mistry as a director. The process is clearly laid down in Section 169 of The Companies Act. It is by way of an ordinary resolution.
The law states that the director is entitled to be heard at the shareholders' meeting,” said Mr. Parekh, a former executive director at the Securities and Exchange Board of India (SEBI).
Obviously, if a person is removed as a director by getting shareholders’ approval, he ceases to be the chairman as well.
In other words, what Tata Sons could find difficult to achieve at the individual company board levels, Tata Sons as a shareholder, with its sizeable stake, could attempt at the shareholders’ level.
Tata, the shareholder
“Tata Sons as a shareholder can move a special notice asking the board to call an extraordinary general meeting (EGM). The board is under an obligation to convene a meeting to seek shareholders’ voting on the resolution,” said J.N. Gupta, managing director of SES Governance, an advisory firm.
Section 115 of The Companies Act 2013 lays down the law for resolutions requiring special notice. “... notice of the intention to move such resolution shall be given to the company by such number of members holding not less than one per cent of total voting power...”
In the battle for control, the holdings of institutional investors gain significance. Life Insurance Corporation of India (LIC) owns 3.2 per in TCS, while holding 13.6 per cent stake in Tata Steel which is beleaguered by uncertainty in its British operations. Meanwhile, New India Assurance, another public sector insurance firm, owns 1.17 per cent in Tata Steel. LIC also holds 13.1 per cent stake in Tata Power, 7.13 per cent in Tata Motors, 8.8 per cent in Indian Hotels and 9.8 per cent in Tata Global Beverages.
Anecdotal evidence has it that typically, retail shareholders form less than one per cent of all those who vote on resolutions. Take, for example, the case of Tata Motors. Tata Sons has a 33 per cent stake in it, while the individual or retail shareholders have about 6.2 per cent stake. If a good chunk of retail shareholders abstains from a vote, then the value of Tata Sons’ shareholding goes up even further when it comes to passing resolutions.
While Tata Sons holds stake in as many as 15 listed entities, Tata Steel also has a sizeable equity stake in 13 listed entities, according to data from Bloomberg. The metal major holds stake in Tata Power, Tata Sponge Iron, Titan, TCS and Tata Motors to name a few.
Corporate governance advocates viewed cross holding in a mildly negative manner. They said such structures give companies undue benefit in terms of control that is disproportionate to the stake that they hold. “It is certainly not a good practice as it gives the holder of shares voting rights that are disproportionate to their economic benefits,” said Mr. Gupta, who is also a former executive director with the SEBI, adding that nearly 90 per cent of business houses have cross holdings in India.
(This article first appeared in The Hindu dated November 6, 2016)