The Securities and Exchange Board of India (Sebi) is examining whether Tata Sons Ltd violated insider trading regulations in its interactions with group operating companies, according to The Economic Times. This isn’t surprising. A letter by Cyrus Mistry, former chairman of Tata Sons, to the company’s board had mentioned possible violations of insider trading regulations. In addition, people close to Mistry have spread the word that the relationships between operating companies, Tata Sons and Tata Trusts are nebulous. According to them, price-sensitive information often goes back and forth between these entities before the board of the operating company comes to a decision.
The charges, in one sense, implicate Mistry himself, since he was a key link between the operating companies and Tata Sons. Sebi’s insider trading regulations prohibit communication of unpublished price-sensitive information.
But a pertinent question here is if communication of price-sensitive information with a large shareholder should be seen as a violation, per se. If so, perhaps every Indian company would have violated Sebi’s regulations at one time or another. For instance, when a board nominee of the government or a bank or a private equity fund receives price-sensitive information, it doesn’t remain a closely guarded secret. That information is typically taken back to the team overseeing the investment at these entities.
It then depends on how you read Sebi’s insider trading laws. They state, “No insider shall communicate, provide, or allow access to any unpublished price sensitive information... to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.” A bank’s or an investment firm’s nominee on a company’s board will argue that sharing the information with his team is in furtherance of legitimate purposes and performance of duties.
A Tata Sons nominee on the board of a Tata group company will make the same argument. Surely, it can’t be the regulator’s case that nominee directors keep all price-sensitive information close to their chests, and not take it back to the firm they represent. If it insists on doing so, it will throttle decision-making at the holding company level or at banks and investment firms, as the case may be. A former executive director at Sebi said that if such restrictions are imposed, taking normal business decisions will become impossible.
In fact, if Sebi starts examining all board nominees of large shareholders and how they handle price-sensitive information, it will clearly be a slippery slope. Where, then, does one draw the line?
Policymakers should accept the fact that large shareholders will rule the roost when it comes to decision-making at a company. A structure where the rights of large shareholders are curtailed will unduly empower the management of the company, which will result in negative outcomes.
JR Varma, professor of finance at Indian Institute of Management, Ahmedabad and a former Sebi board member says, “The central problem in Indian corporate governance is how to manage the conflicts between dominant shareholders and minority shareholders. We can’t improve corporate governance by limiting shareholder democracy, and therefore the ‘legitimate’ governance rights of the majority shareholder must be respected. In fact, the various obligations that regulators impose on dominant shareholders don’t make sense without the governance rights that underpin these obligations. That does not mean giving the majority shareholder a free hand to do whatever it likes. An important goal of corporate governance regulations is to ensure that dominant shareholders don’t abuse minority shareholders through unfair related party transactions or through insider trading.”
Sebi will surely have a case on its hands if it finds that any of the Tata Sons directors or any of trustees of Tata Trusts traded shares of operating companies, when the trading window was closed for insiders. The former Sebi official says that the operating word that should be kept in mind as far as insider trading violations go is ‘trading’. Besides, Sebi should devote its resources to areas where there is an abuse of power by dominant shareholders such as related party transactions that work against the interest of minority shareholders. The fact that Tata Sons and its principal shareholder procured price-sensitive information ahead of others is, in itself, not something to get worked up about. In fact, among other things, people close to Mistry complained how he had to hold multiple meetings with both trustees of Tata Trusts as well as directors of Tata Sons ahead of important decisions. These are matters that Tata Sons and Tata Trusts need to resolve.
Sebi has a model code of conduct as far as handling price-sensitive information by a listed company goes. The code doesn’t envisage sharing of information with a dominant shareholder. Even so, the Tata group can adapt best practices so that leakage of information is kept to the minimum.