The Tata-Mistry row unveils the sad state of corporate governance in the country. The current scheme of things should give sleepless nights to a regulator such as the Securities and Exchange Board of India (Sebi) which, along with the stock exchanges, seemingly had no clue of the wrongs (if the concerns highlighted in Cyrus Mistry’s letter are even partially true) being perpetuated for the past many years. Under Sebi’s nose, investors have lost thousands of crores of rupees and the losses are only mounting with each passing day, while Sebi plays watchdog.
Who is to blame? The Tatas, the doyens of corporate governance, or Mistry, who kept silent all this while before deciding to be a whistle-blower, or the independent directors who never raised their voice and are suddenly now taking sides, or the regulator and stock exchanges who seemingly didn’t know about what was wrong? One thing is certain—the investors have burnt their fingers and are paying the price for misgovernance.
From a legal and governance perspective, the conduct of each party is under a cloud.
First, the Tatas in certain instances don’t seem to have followed the procedure for removal of chairman. Under the new company law provisions, the secretarial standards prescribed by the Institute of Company Secretaries of India have been made mandatorily applicable to all companies. These standards require any additional item in the board meeting agenda (if not circulated prior to the meeting) to be discussed only with the prior permission of the chairman. During the board proceedings of Tata Sons and Tata Global Beverages, this does not seem to have been the case. Compelling the independent directors to take sides and putting investor interest at stake on account of an otherwise avoidable shareholder and board battle have raised several issues on the governance front.
Second, Mistry has turned whistle-blower only late in the day. As chairman and director, he may also be considered to have perpetuated the regulatory issues he has flagged against the Tata group. There seem to be no past records suggesting any strong discontent on his part in the previous board and committee meetings, and this may legally put him on a sticky wicket.
Third, the role of Sebi and the stock exchanges has come under scrutiny. Why were they caught unaware of what was allegedly happening in several Tata group companies? More importantly, what steps are currently being taken to avoid such a failure in the future? A strong framework of listing regulations, disclosure requirements and securities laws alone cannot safeguard investor interest if implementation is missing. Sebi and the stock exchanges, as first-line regulators, should have been pro-active and stepped in to control the damage. Even in the aftermath of the Tata-Mistry spat, no strong message has been conveyed by the regulator to restore investor confidence. The regulator must chip in before the situation worsens.
Fourth, the independence of independent directors in the ongoing board battle is questionable. It seems like the independent directors didn’t approve of the removal of the chairman based on a qualitative assessment of the latter’s performance but instead acted rather under the influence of the parent shareholder. The independent directors under the Companies Act and the Sebi listing regulations have a critical role to play in ensuring good board governance. Independent directors in a few Tata companies seem to have ignored some of their key obligations.
For instance, in companies where they have voted against the chairman, there seems to be nothing on record to suggest that the independent directors had previously raised any objections or concerns pertaining to the functioning or performance of the chairperson. This may be in violation of the legal-regulatory provisions which require independent directors to separately meet every year to review the performance of the chairperson among other issues, and communicate their observations, if any, to the board. Concerns have to be raised on a timely basis and unresolved issues have to be recorded in the board minutes. Independent directors are legally obligated to balance the conflicting interests of various stakeholders while acting objectively in a bona fide manner. The laws require that an independent director not be influenced by any extraneous considerations while exercising his objective judgement.
This has happened in the Indian corporate world in the past, and it is happening yet again (with a rather unexpected candidate): Due to a whistle-blower act or in-fighting, investors lose money as share prices fall. Securities investments are subject to market risks, but losses arising on account of misgovernance should be treated differently. The mud-slinging and counter-attacks which have been witnessed over a past few weeks between the Tata and Mistry camps will certainly do no good to the reputation of the blue-chip Tata companies. They may also shake overall investor confidence and particularly disturb the sentiments of foreign portfolio investors who put a great emphasis on sound corporate-governance practices.
In India, despite strong and lengthy rule books, the investor protection and efficient enforcement mechanisms that exist in the US and other sophisticated markets are missing. However, there is a wave of change in the country and Indian regulators must go with the flow and set a good example.
Tejesh Chitlangi and Puneet Shah are, respectively, partner and principal associate at IC Legal.