The NCLAT verdict on Cyrus P Mistry has again brought into sharp focus corporate governance issues given the manner in which he was ousted from his position as Chairman of Tata Sons. Corporate governance experts are of the view that the issue of the dismissal of Mistry did not follow rules. "The entire process of the removal of Cyrus Mistry as chairman of the group and the Board was shocking. The reasons given for his removal was a surprise," said Shriram Subramanian, proxy advisor, InGovern.
The Tata Group is not known for boardroom battles that have ricocheted outside the iconic Bombay House, the headquarters of the salt-to-software conglomerate comprising of 100 companies spanning 6 continents. But the ouster of Mistry placed it centre stage of a boardroom coup where the Tata Sons Board summarily removed Mistry as chairman.
Prof Kavil Ramachandran, Executive Director of the Thomas Schmidheiny Centre for Family Enterprise at the Indian School of Business, said the central message of NCLAT is that corporate governance is not only about rules but also processes. In this case, Mistry was thrown out in a daylight coup and was denied fairness in terms of the board processes, he said.
Tata Sons is the holding company of the Tata Group. Though a minority shareholder -- the Mistry family owns a 18.5 percent stake in Tata Sons, making them the single largest individual shareholder, while Tata Trusts, the charities run by Ratan Tata owns 66 percent. Mistry was ousted over charges of shareholder oppression and mismanagement.
Earlier, arguing the case before the Mumbai bench of the NCLT, Tata Sons' counsel Abhishek Manu Singhvi, had said Mistry was removed only because the company's board had "lost confidence in him," and termed it a "commercial decision", according to the PTI report.
However, the NCLAT deferred with that argument made by Sanghvi and in a huge win for Mistry and a setback for Tata Sons, the National Company Law Appellate Tribunal (NCLAT) on Wednesday ordered the restoration of Mistry back as the executive chairman of Tata Sons. It went a step further and also expunged 'disparaging' remarks made against Mistry by the Mumbai bench of NCLT which had dismissed his plea challenging his removal as chief of the Tata Group.
Citing 11 paras of disparaging remarks against Mistry in its 172-page long order, the NCLAT said, "Remarks made against the Appellants, Cyrus Pallonji Mistry and others stand expunged."
In 2012, Mistry was handpicked as chairman of Tata group and his successor by Ratan Tata himself. Incidentally, he was the first chairman from outside the Tata family to hold the top position in the group. That is why the sacking of Mistry raises much discomfort, said Prof Amit K Nandkeolyar, Associate Professor of Organizational Behavior and teaches courses on Negotiation Analysis, Leadership and Teams, IIM-Ahmedabad.
"You have identified someone as successor and later you sack him. That does not seem right especially given the fact that the Tata Group has cherished values, ideals and is known for it. In that background, one gets worried. It is not enough to state these values and ideals but the Group must be seen to be adhering to it and following it," he said.
The manner of sacking of Cyrus Mistry has been much discussed and debated, especially given the fact that corporate governance and the Tata Group’s oft-stated principles of transparency, social and ethical principles have been so intricately meshed that the principles have become synonyms for the group.
However, Prof Sanjay Kallapur, Deputy Dean, Planning and Regulatory at the Indian School of Business in Hyderabad said, the Tata Group structure is vulnerable to being abused: "Excepting TCS where Tata Sons owns 71 percent of the shares, it owns less than half the shares of Tata operating companies (35.8 percent of Tata Motors, 33.2 percent of Tata Steel, and 25 percent of Titan, going by the information on the group's website.). Yet it controls the decisions of these operating companies, as was evident from the way Nusli Wadia was dislodged as a director following his support of Cyrus Mistry. "
Just one person, Ratan Tata, controls Tata Sons despite having only 0.8 percent direct ownership of it, versus 18.6 percent ownership of Cyrus Mistry’s Shapoorji Pallonji Group. He does this through his control of the Tata Trusts (that own 66 percent of Tata Sons), which are public charitable trusts, reiterated Kallapur. Such trusts are not even allowed to own shares in companies. Tata Trusts were grandfathered from the rule which was made subsequent to their formation. So, without going into the merits of who is right—Ratan Tata or Cyrus Mistry, and the legalities and details of the case, the NCLAT order is good for establishing the principle that power should not be concentrated in one person in this manner, he said.
The larger impact of the NCLAT decision will be the safeguarding of minority stakeholders, perhaps. Not all of them have deep pockets to fight a case like Mistry. However, viewed in the context of several other governance-related issues and responses of the regulatory agencies, Indian corporates will have to apply higher standards of governance processes, said Ramachandran of ISB.
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Updated Date: Dec 20, 2019 11:24:40 IST