Minority stakes count: Cyrus Mistry's NCLAT win in Tata Sons tussle is a significant precedent in refining shareholder democracy in India

The last has not been heard on the tussle between Ratan Tata and Cyrus Mistry over the chairmanship of Tata Sons Ltd, the flagship that controls the Tata group. But it is clear that the National Company Law Appellate Tribunal’s (NCLAT) ruling against the summary dismissal of Mistry from the top of the awe-inspiring business empire is a key precedent for shareholder democracy in India.

The simple essence of the ruling is that brute majority is not acceptable in corporate governance in widely-held companies and that minority shareholders have a special place in a judicious scheme of things. For some reason, we are forced to recall a term that is more in vogue in politics today, ‘majoritarianism,’ which has now been questioned at a high level of a quasi-judicial body supervising corporate governance.

However, it is vital to recall that before his appeal Mistry had last year got a snub from the NCLT when he questioned the competence of the board that dismissed him. What we are seeing is a see-saw legal battle full of technical details on corporate governance, ethics, and articles of association, but what matters for us beyond the power struggle in a larger social context is the status of minority shareholders. For India, the NCLT ruling—no doubt to be vetted by the Supreme Court—is significant because we have a robust share market and thousands of listed companies and yet function in a social context where a significant number of the listed companies, probably a sizeable majority of them, are more or less family-run, if not family-controlled. The word “promoter” is unique to Indian capitalism and rarely used in advanced economies, where companies have “founders”. In India, founding families sometimes accompanied by friends and associates and their own backyard investment companies are collectively referred to as “promoters”. In casual conversations, however, they are referred to as “owners” even if the companies in question have a big outside chunk of shareholders including financial institutions, mutual funds and retail investors. [caption id=“attachment_3134616” align=“alignleft” width=“380”]  Cyrus Mistry (left) and Ratan Tata[/caption] At the same time, Section 244 of the Companies Act, 2013 allows a shareholder of a company to bring an “oppression and mismanagement” case against a firm if it holds not less than one-tenth of the issued share capital. Mistry effectively controls 18 percent of Tata Sons stakes. The Tata-Mistry ruling should give a sobering message to promoter-driven companies that running a public company through a board involves procedures and practices that go beyond a simple majority-oriented approach. The boards do not represent the narrow interest of the clans that may have led to their appointment. There is a measure of propriety and transparency required in the way key management positions are filled and replaced. The NCLAT verdict may be a pyrrhic victory for Mistry, who has been reinstated as a director in Tata Sons if he does indeed come back to head the Tatas. From all indications, he may not be inclined to do so even if the Supreme Court upholds the NCLAT’s views. It is difficult to run a hostile system in which fellow directors are at loggerheads and chosen men and women of an ancient regime run the show. Nevertheless, he can take comfort in a moral victory that has already been won in the glare of the media. Also lurking in the woodworks is the future of companies that have the Tata tag on them and yet need the support of a wide community of shareholders. Mistry, as I have earlier argued, has become willy-nilly a pioneering activist shareholder in a culture where the term is rarely heard. Mistry maybe adding one more nail in the coffin of India’s “promoter capitalism” that has already taken a knock or two this year. The chairman of the Securities and Exchange Board of India (SEBI) earlier this year wanted the word ‘promoters’ replaced with ‘controlling shareholders’ in the light of promoter shares being pledged. It seems promoters have been having the cake while eating it, keeping minority shareholders in the dark, if not leaving them in the lurch. What we need is a clear charter of rights and responsibilities of leading shareholders, boards of directors and senior management in a context where there is a paradoxical culture of public companies being privately run. The can of worms opened at Bombay House, the imposing headquarters of the Tata empire, should hopefully help India’s transition from feudal corporate culture to one in which a larger mass of shareholders truly call the shots. In the Tata case, there is no doubt that the 65 percent stakes controlled by Ratan Tata and his associates are a clear majority. But the fact that they run numerous companies with less than majority stakes in each means they cannot be doing things—or seen to be doing things—in an arbitrary fashion. Personality cults need to be replaced with professional cultures. Cyrus Mistry, in his dour, plodding style, may be helping India in doing just that. (The writer is a senior journalist and commentator. He tweets as @madversity)