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Tata-Mistry

Shareholders vs Board - Battle for supremacy

Corporate Governance Research Proxy Advisory Services

Corporate Governance Scores Stakeholders’ Education

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Stakeholders Empowerment Services 2012 –

2013 | All Rights Reserved

Tata-Mistry-Shareholders vs Board-Battle for supremacy 2016

© 2012 - 2013 STAKEHOLDERS EMPOWERMENT SERVICES | All Rights Reserved Pag

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EXECUTIVE SUMMARY

Decision to remove Mr. Cyrus Mistry from position of chairman of Tata Sons has created some sort of a crisis and

has threatened the perceived ethically numero uno position enjoyed by house of Tata in India Inc. Hitherto Tatas

have been viewed as ethical and no nonsense business house. Their position is at risk.

SES does not find any legal issue with the decision of removal per se, however optically the decision does not sound

convincing. (Read More- Annexure-A)

Action of removal (with immediate effect) is disproportionate to the reasons cited, raising doubts and millions of

questions. The issue of non-performance, if true, admittedly has been persisting for long therefore, immediate

removal does not make sense. (Read More- Annexure-C)

Letter war between two sides is not helping the cause of stakeholders. While on one hand E Mail of Mr. Mistry

raises some crucial issue, which needs to be effectively addressed or clarified. On the other hand, it questions board

decisions to which he and / or IDs were themselves a party. He raises some issues about future write-off which SES

finds bordering scare mongering. (Read More)

Mr. Mistry has raised several questions in his letter, raising many issues on governance, decision making, past

decisions, interference etc. It would serve interest of all stakeholders if all these are addressed effectively. Tata’s

must address all issues to turn the pointed finger back. (Read More). Transaction with Mr. Sivasankaran must be

explained and truth must be brought to the notice of investors. (Read More)

A certificate from the person being accused serves no purpose. In this case accused are Tata Sons, its directors,

trusts and its directors. Therefore, it will be in the interest of stakeholders and in the interest of Tata Brand that a

third party must be asked to examine and give its report on the issues raised by Mr. Mistry in his letter. If Tata’s are

effective in countering the allegations, it will not only restore lost credibility but also comfort investors and

regulators. (Read More)

Reports have appeared about threat given by Tata’s to withdraw its brand name and guarantees. SES is of the view

that such statement is bit premature. Further did IDs consider this aspect and evaluated loss of value before backing

Mr. Mistry? What makes them back Mr. Mistry ignoring all these concerns which ordinary shareholder has? Why

they were silent till now? (Read More)

The Board battle has put role of Independent directors at forefront. It is in real sense a testing time for them.

Without questioning their decision and their right, SES raises fundamental questions on the issue. On what basis IDs

of IHCL and Tata Chemicals have decided to back Mr. Mistry? Do they know the truth? If yes, please tell the same to

all investors? If not, can they adjudicate based on letters of two sides and decide? Does their job involves

adjudication? Are they competent for adjudication? In one way, they are guilty of same hurried decision, which is

being complained of by Mr. Mistry. Adjudication is a process and one cannot decide without serious application of

mind taking into account all factors. Have IDs done that?

Is opposing dominant shareholder a sign of independence? Is it the right thing? (Read More)

IDs on IHCL Board have unanimously reposed faith in Mr. Mistry. No questions on this, subject to their ability to

adjudicate. However, a serious question arises here. Amongst many issues raised by Mr. Mistry, issues at IHCL are

very prominent and serious. Boards have collective responsibility so these IDs along with Mr. Mistry are equally

responsible for mis-governance as well. However, SES is of the view that a least three IDs have placed them in

inexplicable position. Mr. Cyrus Mistry attributes all the problems as legacy problems and hotspots. These three IDs

were part of legacy and hotspots. Mr. Dadiseth and Mr. Parekh have been independent director since year 2000 and

Mr Nadir Godrej has been director since year 2008. What is more Mr Cyrus Mistry’s brother, Mr Shapoor has been

director since 2001. Surely stakeholders are confused and asking questions why these directors had kept mum for

all these years and allowed the problems to persist. Why they are supporting Mr. Mistry when all of them are

collectively responsible for affairs of IHCL from year 2000 onwards, in cases points raised by Mr. Mistry on IHCL are

correct?



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SES raises fundamental question, what for good governance is propagated? What is the objective? SES is of the view

that underlying objective is to take care of stakeholders’ interest and compliance with laws and ensure that no

illegality is attached in any of the actions/ business.

Does the decision of IDs to support Mr. Mistry fulfils the objective of good governance? Is their action protecting

shareholder value? Can a divided board enhance shareholder value or it destroys the same? Do they have duty to

stakeholders or to an individual? Was there any illegality in seeking to remove Mr. Mistry? Was Mistry selected by

them? SES finds that somewhere, in the anxiety to project and prove the independent mind, IDs have forgotten

about stakeholder’s interest. Once again we have a situation where form has won over substance. (Read More)

Are employees the key stakeholders? Are they free to support any one they want or go by what IDs have decided? It

seems IDs feel that if unions support Tata then it is upon instigation. If that be the case employees can question their

(IDs) stand in the same manner. (Read More)

SES also raises issue in this Report on governance structure and role of dominant shareholder. SES is of the view that

in Indian context where majority companies are promoter oriented, rather than continuing with opaque

involvement of promoters in day to day management, an institutionalised mechanism needs to be evolved within

the framework of Insider Trading, PFUTP and LODR regulations, without in any manner compromising minority

rights. (Read More)

SES is of the view that in this case, there are no issues which can be amicably settled as the issues raised are not only

affecting two individuals but millions of stakeholders. Therefore, SES does not recommend amicable settlement

sitting across the table as recommended by many. Their logic is - Do not wash dirty linen in public and cause value

loss. SES is of the view that whatever may be the dirty linen, let it come out so that there is no risk of value erosion

in future. Value systems cannot be strengthened when the foundation is based on doubts. (Read More)

SES finds faults with process adopted by Tata Sons in various instance. For example, removal of Mr. Mistry as

Chairman from TCS. This decision even if within legal right is not optically correct. (Read More)

Going forward, all the seven companies where Mr. Mistry is a director on the board, might see an EGM being called

for removal of Mr. Cyrus Mistry. This will give an opportunity for shareholders to vote on resolution for removal of

Mr. Mistry. At this point, SES is not making any recommendation on the issue as the same will be decided based on

contents of notice and explanatory statement, opinion of directors and explanation, if any, by Mr. Mistry. However,

SES has done detailed analysis of past voting pattern, current equity structure. Our analysis indicates that to win the

battle, either side will require support of institutional investors. Key to future event lies with the Institutions. The

largest shareholders are insurance companies lead by Life Insurance Corporation. Future will tell whom LIC has

insured. (Read More)

SES would have never questioned IDs, had they spoken earlier. Their pre-emptive action would have established

their independent mind without any doubt. They could have put a check to alleged violation of governance issues

and earned laurels. These IDs have been part of the Board(s) of Tata companies for long, all allegations of Mr. Cyrus

Mistry relate to past, and in most of the cases these directors were part of decisions, Board processes. Therefore,

how come suddenly virtues of independence and governance which were missing till now have been kindled? For

any mis-governance of past they are equal partner.

THE DECISION

In the Board meeting of TATA Sons Limited held on 24th October, 2016, Mr. Cyrus Mistry, the Chairman of TATA Sons was

replaced with immediate effect and Mr. Ratan Tata was appointed as the interim Chairman of TATA Sons. Further, the Board

constituted a Selection Committee comprising Mr. Ratan N. Tata, Mr. Venu Srinivasan, Mr. Amit Chandra, Mr. Ronen Sen and

Lord Kumar Bhattacharyya, as per the provisions in the Articles of Association of Tata Sons, to choose a new Chairman within

four months. Link It was also stated that the three members of Group Executive Council of Tata Sons viz. Madhu Kannan, NS

Rajan, Nirmalya Kumar resigned. Link. The suddenness and enormity of decision stirred India Inc. The action has no parallel

in Indian corporate history and evoked strong reactions with surprise. Return to Top

http://www.tata.com/company/releasesinside/tata-sons-chairman-selection-committee

http://www.tata.com/media/releasesinside/tata-sons-organisational-changes



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TATA SO NS- AL TERA TI ON O F ART ICL E S OF AS SO CIA TI ON

As indicated in Mr. Mistry’s Letter, AoA were amended after his appointment as a Chairman. There were three major

changes in the AoA. Article 104 B, 118 and 121 were amended. While Mistry camp has been critical of change is Article 121,

SES is of the view the most important and critical change was made in Article 104B.

Article 104B relates to nomination of directors by Tata Trusts. Prior to change, the Article gave power to these trusts to

nominate upto 1/3rd directors. The appointment was within the domain of the board, indicating that board had the right to

accept or reject the nomination. In EGM held in April 2014, a clause was added to indicate that “The directors so nominated

by the trust shall be appointed”

This indicated that right of rejection with the board was no more there. Effectively even if a person so appointed was

conflicted or may be unwanted would still have to be appointed and board could not do anything. SES views such rights with

shareholder as poor governance practice.

Surprisingly, Mistry side did not criticise this but criticised Article 121 which SES found was amended favourably for all

shareholders as it diluted power of nominee directors. Prior to amendment, the Articles required affirmation of all directors

to any proposal, however, post amendment affirmation of majority of nominee directors was required. Therefore, SES finds

no reason to criticise this amendment. Return to Top

MR . M I STR Y & ARTI CL E 118 OF AOA

The appointment of Mr. Cyrus Mistry, is regulated by Clause 118 of AoA of the Tata sons Ltd and any other contract/

appointment letter that would have been issued by the Company (TATA Sons Ltd, or by virtue of an agreement between its

shareholders and Mr. Mistry)

Removal of incumbent chairman is also covered under Article 118 of AoA. The construction of the relevant clause in AoA is

not very clear and is rather confusing, as it states that “the same process shall be followed for removal of incumbent

chairman”. Does this mean that a search committee will be formed as per AoA to remove existing chairperson (seems highly

illogical) or does it refer to affirmative votes of all directors appointed by two trusts under Article 104B and 121.

Note: Tata Sons has omitted to amend Article 118 and align it with the provisions of amended Article 121, which provides for

affirmative vote of Majority of directors appointed under section 104B. The Article 118 still retains old provision requiring

affirmative vote of all directors appointed under 104B.

As the appointment contract is not available in public domain, based on logic it can be concluded that Board of Tata Sons was

within its legal rights to remove Mr. Cyrus Mistry from position of Chairman and their decision cannot be questioned unless

there was any case of:

Breach of Contract terms

Not following provisions of AoA-relating to procedure as well as authority related to convening and conducting of

Board Meeting and removal.

Compliance of procedure

In both the cases, on face of it, it might appear at first hand to be a case of bad governance. However, such a conclusion will

be flawed with risk as one is not fully aware of circumstances leading to such a decision.

Therefore, first it would have to be established that there was a breach or violation of AoA and then establish that decision

was not in the best interest of the stakeholders at large. While on the face, it might appear to be a governance failure, in fact

the circumstance may be such that it might be a case where decision is in best interest of stakeholders.

In the worst case, at the most it would amount to a case where AoA provisions were not followed, legal remedy will be to

follow the procedure. No law can force that a chairperson should continue despite shareholders and the Board not wanting

him to continue. Annexure-B Return to Top



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WH Y TH E DEC I SI ON RA IS E S QU ES TI ON S?

SES believes that Board and Management of any company are expected to be expert and knowledgeable about the business

rather than analysts who view and analyse things with limited objective or with coloured glasses. What is going to be long

term value creator, Management knows the best and SES would not question but rely on the management decision unless

governance and fairness issues are observed. However, in this case also, SES believes that the management knows the best.

(purely for making its point clear SES is arguing the case in next paragraph suggesting a different course of action)

If it was a case of Mr. Mistry’s non-performance, the management/ Board could have given him a notice, notified it to the

other shareholders and started the process to find another suitable candidate. What made the management to remove Mr.

Mistry in a jiffy, an abrupt move from the Board of TATA Sons and later stating reason of ‘non-performance’ of the person,

doesn’t seem convincing.

It is important to note that the terse message from the Tata Sons Board uses the word “Removed with immediate effect” and

says “in the long term— “. One does not understand what was the earth-shaking event which caused such a sudden, drastic

decision. A long-term decision is not taken in haste.

Further, the act of removing certain documents from website does not leave a good taste. Deleting reference to executive

council is again not a matured decision. If one burns book of history, will Akbar, Maharana Pratap etc. cease to exist? This

certainly leads one to question transparency and intent.

“It is unfortunate that Mistry had overwhelmingly lost the confidence of the Members of the board of directors for a

combination of several factors,” Tata Sons said.

What were the ‘several factors’ were not made public. Even if Tata Sons is not a listed entity, it is a promoter of many listed

TATA entities. There is a public interest involved and therefore there is need for adequate disclosures. Return to Top

OPTICS OF DECISION

SES has been of the view that action of removal of Mr. Mistry on immediate basis was disproportionate to cause attributed

for the decision. Assuming it was based on non-performance, it is difficult to believe that non-performance could be an

overnight development which assumed such an enormity that immediate action was required.

It appears from the media reports and comments by various eminent personalities (Annexure-C), that the sudden expulsion

of Mr. Mistry was shocking and hard to believe. It caused a lot of disturbance in the market and in the minds of people who

have reposed their trust in TATA group.

As could be understood from the media reports, such move was unwelcomed and it was not the “TATA” way. This was

something which could not be expected from a 148-year-old TATA Group, which is a pioneer of Corporate governance and at

least from the group which was hitherto treated as torch bearer of good governance and ethical conduct. Certain acts of the

Company like removing reference to Group Executive Council (GEC), its members and address of Mr. Mistry to employees,

from Tata website are intriguing to say the least.

While it is safe to assume that none of the person making statements as listed above was aware of full facts and reactions

were out of emotion and respect that Tata Group commanded. Some statements appear to echo the “victim” status claimed

by Mr. Mistry in his E-Mail and some are based on half-baked information.

However, one thing is amply clear that Tata group had invited unwanted attention in the matter.

Adding to confusion

Ronnen Sen Comments

"I have not and will not comment on the veracity or otherwise of confidential and internal documents being leaked in

a selective and motivated manner by "sources close to the former chairman", contrary to norms governing privileged

information. I leave it to you to arrive at your own conclusions on whether these orchestrated leaks, unless

denounced by him, will enhance or further diminish the confidence of his fellow directors on the board of Tata Sons,"



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"I will also not stoop to the level of the unidentified "person" "close to the former chairman" who has implicitly

questioned my integrity and explicitly alleged that I, and another respected colleague on the board, of "clearly having

failed to apply their mind independently and discharge their fiduciary duty" by dignifying the charge with a response.

The implied assumption that there were no developments between the meeting of the Nomination &

Remuneration Committee and the board meeting on the 24th October is also naive to put it mildly,"

Farida Khambata and Ronen Sen complimented Mistry on his performance as chairman. Sen added that based on the

site visits he had undertaken, Mistry had earned the respect not only of CEOs and senior management but also of

operational personnel. Link

VR Mehta, Trustee of Sir Dorabji Tata Trust, Interview

Such comments from the TATA representatives indicates that something happened more than what meets the eye which

triggered the whole event. However, there is no proper clarity as to what exactly happened. Such statements allow media/

stakeholders to speculate which in turn creates more confusion. Return to Top

AFT ERM ATH & L ETT ER WAR

An ugly battle seems ahead for all the parties in the midst of claims, counterclaims, allegations and counter allegations. What

is surprising is that on behalf of Tata, it is not only their PR Department and Mr. Tata himself, but many legal luminaries,

Independent directors and self-appointed counsels are also taking positions and rationalising the decision.

The fact that such explanations are forthcoming, points to a delayed realisation that optically the decision has not gone down

well with all stakeholders taking into account ethos, value system and reputation of Tata group for which it is known. A

question mark has emerged as to whether respect it commanded was for real or was it based on illusion.

After the terse firing message from Tata on 24th October 2016, first torpedo was fired by Mr. Mistry vide his e mail dated 25th

October, 2016 which was responded in brief without pointed reply (on 27th October 2016) as Tata did not believe detailed

response to be as per dignity of Tata Group.

It will be beneath the dignity of Tata Sons to engage in a public spat with regard to the several unfounded allegations

appearing in his leaked confidential statement. These allegations are not based on facts or the true state of affairs. It

is convenient to put selective information in the public domain to defend one's point of view. There is a multitude of

records to show that the allegations made by Mr. Cyrus Mistry are unwarranted and these records will be duly

disclosed before appropriate forums, if and when necessary, sufficiently justifying the decision made by responsible

Boards of Directors, of Tata Sons and its Group companies.

As the speculation, did not end and statements continued and Independent Directors on the Board of IHCL decided to

unanimously support Mr. Mistry and allowed him to continue as chairman. An unexpected move as far as Tata’s were

concerned. Fear of further possible support to Mr. Mistry from other listed companies probably forced a detailed response

from Tata’s and Tata Sons released a detailed response to E Mail of Mr. Mistry on 10th November 2016.

Cyrus Mistry wrote a Letter to the Board and Trustees of TATA Sons, where he brought forward various issues and raised

governance concerns with TATA structure which, according to him, have negatively impacted various TATA entities resulting

into impact on the shareholders’ returns and interests.

The issues raised by Mr. Mistry are bucketed into 4 broad area and the same are tabulated below along with response from

Tata and observation of SES.

Tata sons Board Meeting Response of Tata Sons

Invalidity and illegality

the board of directors has not covered itself with glory.

---

SES View: SES does not find illegality, however optics of decision faulted. Even if illegality is established, the remedy lies in correcting

illegality and following correct procedure, status quo cannot be restored.

https://www.thequint.com/business/2016/11/02/after-heaping-praises-why-did-the-tata-sons-board-sack-mistry-ratan-cyrus

http://www.moneycontrol.com/news/business/tatas-have-moral-legal-duty-to-protect-shareholder-interests_7943201.html



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Management Issues Response Of Tata Sons

free hand.

Interference from previous Chairman to step back

Change in AoA

Pushed into the position of a "lame duck" Chairman,

The accusation of interference by the Trusts is not only wrong in reality but has been twisted to mislead people.

Yet, after four years of full-time involvement and executive authority, we continue to be told how these ‘legacy’ problem areas are a major drag on Mr. Mistry’s otherwise good performance.

We now have an unacceptable new structure where the Chairman alone is the only common Director across several companies and this situation could not be allowed to go on.

He voluntarily took this position, knowing the composition of the Tata group and its many strong companies as well as the weaker and problem companies – which he presumably took on as a challenge for ‘turning around’ those difficult situations.

SES View: SES cannot comment upon issues at Management level. It is in the best interest of the Company that these are resolved at the

Board level ASAP. If Board is unable to put proper structure and resolve the issues, let them consult a third party. Regarding change in

AoA, shareholders have every right to make changes and it cannot be questioned. A corporation functions based on the rules shareholders

decide, what powers they delegate. The complaint of Mr. Mistry that his non-performance was on account of lack of authority etc. may be

genuine. But are we accepting that it was non-performance? Interference from past chairman indicates interference from shareholders.

This is an issue of governance and must be addressed.

Past Decisions Response of Tata Sons

Mr. Mistry has talked about mainly following

Foreign Acquisitions

Corus takeover, legacy issues

Hot spots

IHCL acquisitions

Do-Como

Tata Power UMPP

Even with no turn-around in these major problem areas, the only action taken was to write-off huge amounts against these companies – which is no solution because the problem companies continue to exist with their continuing losses and high debt and only the shareholders suffer from these write-offs.

There has been a perilous drop in market share in both passenger cars and commercial vehicle areas over the past three years. In passenger cars, in the year ended March 2013, the market share was 13% which now stands at 5%! The third launch of Tiago has been well received in the market but its sustained steady state volumes are yet to be determined.

Mr. Mistry repeatedly talks of ‘bad’ acquisitions, but he forgets that his own firm had acquired South India Viscose Limited and Special Steels Limited many years ago from which they walked away, while Tatas always stand by their companies in difficulties.

SES Views: SES believes review of past decision in hindsight serves only as a lesson for future as history cannot be used to criticise or put

blame. Board owns collective responsibility, cannot pinpoint decisions to an individual. Only if there was a malafide, then past decisions

are to be evaluated. Was anything not in public domain? Was anything hidden?

Mr. Mistry was on Board of Tata Sons for long before he became Chairman, so he was aware and equally responsible. Neither side can

claim credit for hen giving good eggs but disown hen giving bad eggs. This shows clear divide between two camps. Did it develop post

24th October 2016 or before cannot be said, but persisting divide is undoubtedly not good for stakeholders.



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Governance Issues Response Of Tata Sons

loan to Siva

Interference by Executive Trustee Venkatraman

Tata Motors Finance NPAs

foray into the aviation sector

in the case of Air Asia, ethical concerns have been raised with respect to certain transactions as well as the overall prevailing culture within the organization.

amendments in the Articles of Association,

Another challenge in shutting down Nano is that it would stop the supply of the Nano gliders to an entity that makes electric cars and in which Mr. Tata has a stake.

alternative power centres without any accountability or formal responsibility, invalidating the very governance role of nominated directors, who I would assume would use their own independent judgment and discharge their fiduciary duties, were reduced to mere postmen.

trust directors (Nitin Nohria and Vijay Singh) taking in order from Mr. Tata, in middle of Board meeting

He has cleverly ensured over these years that he would be the only Tata Sons representative on the Board of IHCL in order to frustrate Tata Sons’ ability to exercise influence and control on IHCL.

Insiders in Bombay House who have been with the group for many years silently and helplessly watched the conscious departure from old, proven and successful structures within the group and the induction of very senior executives from outside the group with little or no experience of running large companies and being paid amounts reportedly running to several crores for purely functional positions at the very top.

SES View: These are serious governance issues and cannot be brushed aside by either side in press statements. The issues hinge on

decision making, alternative power centres, board procedure and transactions. Tata Sons has to come out clean on each issue. It may be

argued that Tata Sons is unlisted, but governance at holding company level flows to operating company level and creates benchmark.

Futuristic Issues Response of Tata Sons

between 2011 and 2015 in legacy hotspots (IHCL, Tata Motors PV, Tata Steel Europe, Tata Power Mundra, and Teleservices), capital employed has risen from Rs. 132,000 crores to Rs. 196,000 crores (due to operation losses, interest and capex). This figure is close to the networth of the group which is at Rs. 174,000 crores. A realistic assessment of the fair value these businesses could potentially result in a write down over time of about Rs. 118,000 crores.

Has Mr. Mistry, the Chairman, informed the Boards of these companies at any time in the past specifically of potential write-downs?

SES View: This in opinion of SES most serious charge, which impacts stakeholders and has important bearing on governance.

Write offs are made based on current assessment of fair value of assets and it is the duty of Auditors to ensure that assets are reflected at

the fair value. If what is written by Mr. Mistry is to be believed and is based on fact, then it would indicate that probably the Financial

Statements do not reflect correct position. This is damaging for all concerned including Mr. Mistry and Auditors. As they are guilty of not

reporting true and fair picture. Or it is just a peep into future using a crystal ball. If that be the case, it is nothing but scare mongering,

without realising impact this statement may have on the value of companies and potential losses to stakeholders.

This is one issue which regulator must seek clarification from all concerned including Mr. Mistry. As Mr. Mistry is still part of Board of

these companies, regulator must ensure that the response received from the companies has his concurrence. In the alternative separate

response, must be sought.

Return to Top

RATAN TATA’S MEETING WITH GROUP CEOS

As per Media Reports dated 25 October, 2016-

Ratan Tata on Tuesday arrived at Bombay House to meet the Group CEOs after Cyrus Mistry was removed as the

Chairman of the company yesterday.

Also, Mr. Ratan Tata told Group CEOs –



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"The companies must focus on their market position vis- a-vis competition, and not compare themselves to their own

past. The drive must be on leadership rather than to follow,".

SES is of the view in accordance with corporate democracy, Mr. Ratan Tata being just a shareholder of the TATA Sons and an

interim chairman has no locus standi to call upon a meeting of Group CEOs. Group CEOs report to the Board of respective

Companies and not to any particular shareholder. This appears to be a poor governance practice and not within the

boundaries of law, where one shareholder, being a Promoter has the privilege to meet the Group CEOs against the other

shareholders. This creates asymmetrical information and may result in violation of Insider Trading Laws. Return to Top

INS TI TUTI ONA L FRA ME WORK FOR DOM INA NT SHAR EH OLD ER S ’ RO LE

In this case, allegations of interference by Tata Trusts, its directors, Tata Sons and its directors in affairs of listed companies

has been made by Mr. Mistry. How far these allegations are true, SES has no knowledge. However, SES has raised issue of

interference and hitting the basic concept of corporate structure is the fact that Mr. Tata called a meeting of CEOs of all Tata

companies. This very clearly indicates interference by a dominant shareholder is affairs of a company.

It is not at all an isolated case and it is a well-known secret that in Indian companies, including listed companies, dominant

shareholders do play an important role and exercise their influence on day to day basis wither in transparent manner or in

non-transparent manner.

The important question is to decide whether it is good or bad, and if bad, how it can be stopped. If it is not that bad after all,

how it can be institutionalised and made transparent, so that risk associated with such interference can be mitigated.

SES is a strong votary of good governance. SES also realises that laws in a country cannot be adopted by copy and paste rules

and must be tailored to local conditions, with the underlying theme of transparency, mitigation of risk, reduction or

abolishing chances of abuse etc. Indian corporate materially differs from rest of developed countries specially USA and UK in

their ownership structure. In India, almost all companies have a dominant shareholder, called promoter. In USA and UK

holding/ ownership is generally dispersed and no one is a promoter. By equating dominant shareholders at par with minority

shareholders, the law has created mismatch of risks and rights. This leads to non-transparent control mechanisms.

In opinion of SES, such non-transparent mechanisms/ systems are worse than a transparent mechanism which recognise the

fact that dominant shareholder does carry greater risk and has much more incentives to increase value for stakeholders.

SES is of the view that there must be some institutional framework which must recognise this and spell out do’s and dont’s,

with enough safeguards that dominant shareholders do not benefit in any manner at the cost of minority, nor rights of

minority are impacted in any manner. Such a framework in fact may create more transparency and increase value. In this

connection two articles are worth reading at Annexure-E. Selected excerpts are reproduced below, which are worth paying

attention to.

Quote

“What’s missing, though, is a clear answer to the question of what to do in the absence of such a principle. When shareholders are

widely dispersed, how can they keep managers in check?”

“Conflict between shareholders and managers is asymmetric warfare, with shareholders in no position to prevail.”

“The argument here isn’t that managers and boards always know best. It’s simply that widely dispersed short-term shareholders

are unlikely to know better—and a governance system that relies on them to keep corporations on the straight and narrow is

doomed to fail.”

“But we do think that giving a favoured role to long-term shareholders, and in the process fostering closer, more constructive

relationships between shareholders, managers, and boards, should be a priority.”

A large shareholder holds both considerable voting power and considerable cash flow rights. The well-known advantage of

concentrated ownership is that a large or controlling shareholder with extensive cash flow rights has a strong incentive to monitor



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managerial misconduct. However, as a negative side-effect, large and controlling shareholders have the opportunity to obtain

private benefits of control.

Thus, leaving stakeholder issues aside, the most important policy goal of corporate law in such systems is to keep large

shareholders’ opportunities to abuse their position in check.

Unquote

SES VIEW:

SES is of strong view that in a dynamic state where shareholders keep on changing continuously, there is a need for someone

to provide directions to the Board/ management and keep a check on both Board and management. In all cases where

largest shareholder representatives are on board/ management position, this is achieved partly transparently or non-

transparently. And in cases where promoters’ representative is not there, it is achieved mostly in non-transparent manner.

SES is of the view that Market regulator SEBI must initiate public discussion on the same and devise a framework so that

none of SEBI Regulations (LODR, Insider Trading and PFUTP) are violated, yet the framework is made functional. It is no way

suggested that minority rights to be impacted in any manner. Return to Top

LOAN TO SI V A

Mr. Mistry has raised several issues relating to transaction of the Tata Group with Mr. Sivasankaran.

One such transaction mentioned is transaction with Tata Capital for loan against security of TTSL shares. As indicated in Mr.

Mistry Letter about a loan to Siva:

The loan to Siva was under the strong advice of Executive Trustee Venkatraman, which has turned into a non-

performing asset. All of this resulted in Tata Capital having to recognise abnormal size of NPAs.

The allegation has been denied by the company Tata Capital as reported in media. This leaves all analysts and investors

confused as to what is the truth and who is telling the truth.

Additionally, in respect to DoCoMO transaction, as per Media Reports-

Mistry had asked for Tata Sons' approval for legal action at its board meeting held on September 15.

The September 15, date of Tata Sons' board decision as well as Siva Group's legal notice prompted Mistry to write a

mail to the company's senior management, asking "how this came just after our decision at the Tata Sons board to

go legal? We need to check this out". Tata Sons received the legal notice on September 19.

In this case media reports indicate the decision to take legal action has been initiated, albeit with delay. Was there no

intention to go legal and it is only after issue was raised, did Tata initiated legal action or such delays are normal?

Although all the companies mentioned are unlisted (TTSL and Tata Capital) still good governance require that the matter be

investigated by any independent authority and truth be told. Return to Top

TATA BRAND

There is no doubt that at present TATA brand has a lot of value, at the same time there is a risk to loss of value of brand if

allegations are proved to be correct. Therefore, there is a need to protect the brand value by effectively countering the

allegation by facts and third party certification.

Connected with the issue is alleged threat by TATA to withdraw brand name and withdraw guarantee. SES finds this threat

amounting to inflicting wound not only on others but to oneself as under. Such a step will cause loss of value and majorly hit

Tata Sons more than anyone else. Further why give threat, if need be, act when time comes. While it is a fact that if in any

of the company resolution of removal of Mr. Mistry is defeated, it will be a setback for house of Tata’s and signal a break up

of House of Tata’s. Such a step would cause huge value erosion due to multiple factors.

Are IDs aware of this? Did they take the same into account before backing Mr. Mistry? If they have a conviction that Mr.

Mistry is correct, the question must haunt them why they were silent till now? Assuming the decision of Tata Sons was

wrong, to correct this wrong should they (IDs) cause value erosion for shareholders by their action? SES is of the view that IDs

cannot take upon their head role of activist at the cost of shareholders. Return to Top



e11

ROL E OF IND EP END EN T D IREC TOR S

Statement by Independent Directors

Independent Directors of Indian Hotels Company Limited held a Board Meeting on 4th November, 2016-

“Taking into account Board assessments and performance evaluations carried out over the years, the Independent

Directors unanimously expressed their full confidence in the Chairman, Mr. Cyrus Mistry and praised the steps taken

by him in providing strategic direction and leadership to the Company.”

Similarly, Tata Chemicals board at its meeting held on 10th November 2016 also supported Mr. Mistry.

Tata Chemicals- Independent Directors

They recalled and reaffirmed their earlier assessment and evaluation carried out in the year 2015 & 2016 of the

Chairman, the Board, and its functioning. The Independent Directors referred to the minutes of the above meetings

outcome of which was with the entire Board at that time. Link

Following the outcome of the meeting of IDs, Mr. Bhaskar Bhat resigned from Tata Chemicals board on 10th November 2016.

Further he also indicated- The contents as well as the spirit of the statement completely dilutes the views I expressed at the

Board meeting today especially regarding the threat the company faces on account of loss of confidence of the promoter

Tata Sons in the Chairman of Tata Chemicals Limited” Return to Top

Why Independent Directors are supporting Mr. Mistry?

Independent Directors of IHCL and Tata Chemicals, have unanimously praised Mr. Mistry for his contribution and it appears

that first round goes to Mr. Mistry, however this does not mark a final victory for Mr. Mistry’s in any way. In view of SES, the

support of Independent Directors of Indian Hotels to Mr. Mistry was just an outcome of situation where probably all the

Independent Directors were pushed to the wall and their independence was put to question. This appears to be an obvious

or expected reaction. These directors had two choices

A: to oppose Mr. Mistry; if they had done that, even if that decision was based on solid reasons, in view of questions being

raised, they would have faced the same questions as are being faced by Tata Sons IDs. In addition, probably their

independence would have been questioned and they would be blamed for acting in cahoots with Tata Sons, promoter

shareholder. So, to avoid any controversy this was not the preferred choice.

B: To support Mr. Mistry; this was an easy option. Optically, it protects their image and they appear to be independent. SES

believes that independence is more of an issue of character rather than compliance. Further, they were clearly aware that it

is only an interim step, as eventually when resolution is moved by Tata Sons as shareholder to remove Mr. Mistry, Mr. Mistry

does not stand a chance to survive. This way both Tata and IDs would be winner. Tatas would be able to remove Mr. Mistry

and claim moral high ground by continuing the same IDs despite their support for Mistry and these IDs would retain position

having proved their independence. This was an easy choice, although it may not be the best choice. Return to Top

Resignation of Mr. Bhaskar Bhat

Resignation of Mr. Bhat, a non-independent director of Tata Chemicals, brought to fore the divide in the board- room on the

issue of support to Mr. Mistry. If what is stated by and attributed to Mr. Bhat is true, it points to an attempt to capture the

board process by IDs, an unheard thing in the past. While IDs are free to act in any manner that they choose, however,

ignoring to record dissent of other directors is certainly not within the proper conduct of the IDs.

IDs are expected to be independent of influence of any one, be it promoter or chairperson or anyone else. They owe fiduciary

duty to stakeholders at large and not to an individual. What is in best interest of company must be their guiding principle

within the framework of law.

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/CAD179E8_ED7B_4513_9430_5A8D8B9A5078_175959.pdf

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/76D2265F_1B36_4350_AE55_DCBDEA808A2F_100437.pdf



e12

Happenings at Tata Steel Board

It seems that bolstered by resignation of Mr. Bhaskar Bhat from Tata Chemicals board, facing the same situation at Tata Steel

Board, a few IDs took a different view and the Board became a divided house and could not pass unanimous resolution

reposing faith in Mr. Mistry. The three directors who threw their lot against Mr. Mistry are Mr. O P Bhatt, Mrs Mallika

Srinivasan and Mr. Andrew M Robb supported Tata Sons. It was widely believed that Mrs Srinivasan, being wife of Mr. Venu

Srinivasan, Director at Tata Sons was very much expected to support Tata Sons. SES does not share this view as such a view

or perception will be demeaning to her. In opinion of SES, she is a director on Board of the Company on her own merits with

her independent mind and not because she is married to Mr. Srinivasan. SES raises a question; should women, to

demonstrate their capabilities and independent mind & character necessarily put themselves in different camp regardless of

merit of the issue at hand? A woman doesn’t need to be at loggerheads with her husband to be independent. Such yardstick

for evaluating character is flawed with risk and would indicate opposition as the only proof of independence. Return to Top

Conflicting Stand of Some IDs

For instance, Mr. Keki Dadi Seth, ID at Indian Hotels, who applauded the performance of Mr. Mistry, is also a Trustee of Sir

Ratan Tata Trust (SRTT). SRTT is one of the two principal Tata Trusts which control 66% in Tata Sons; it is also a shareholder in

IHCL. It seems like Mr. Keki Dadi Seth has taken two different stands, one where he supports Mr. Mistry, other where he was

also involved in decision making process for replacing Mr. Mistry as a Trustee of SRTT.

Same is true for Mr. Narsee Munjee. Unless they come out and state the reason for their diverse views, doubts would

remain. Return to Top

What should guide Independent Directors?

Best interest of stakeholders must guide the conduct of all directors not only of IDs. The second yardstick is that truth should

be guiding principle. Then the question is, do the IDs know the truth? Today all we have are allegations and counter

allegations from both sides. Can anyone including IDs claim to know and put together all the pieces of jigsaw puzzle to see

entire picture? SES is of the view that at least investors have not seen the full picture. Directors (including IDs) do not have

the mandate or right to adjudicate and pronounce right or wrong.

This leads to another question, whether a divided board is in the interest of stakeholders? Will it secure future prosperity of

stakeholders? Board has collective responsibility. Can the foundation of collective responsibility survive in a divided board?

SES believes it cannot. A divided board is like a vehicle with driver at both end, each trying to move in his own direction.

Division at board level unlike dissent, which reflects a healthy board, is counterproductive and destroys shareholder value.

Removal of Mr. Nusli Wadia

Tata Sons, as a dominant shareholder of listed companies where Mr. Nusli Wadia is an independent director, has given notice

for his removal as an ID. At the outset SES is of the view that Mr. Wadia was not at all an ID on those boards, as he had been

a director for more than 10 years.

Legally speaking, Tata Sons has every right to seek removal of any director on board be it ID, ED or otherwise. The issue is

whether such an act is ethically right and would pass the benchmark of good governance? A connected question would be-

can the board (and directors) discharge its duty, while being at loggerheads with dominant shareholder? A board cannot be

reduced to a battlefield with casualty each day. The next question that comes is what for the boards are constituted?

Obviously to carry out decisions in best interest of stakeholders in smooth manner. Can a divided board work smoothly? The

answer is no. Therefore, division at board level must be avoided at any cost. Therefore, if Board is divided the only solution is

to bring board unity back.

It is very clear from happenings at Tata Steel Board that there is a clear-cut division. The cause of division is a support for an

individual who does not enjoy support of dominant shareholder any further. Return to Top



e13

Employees as stakeholders

One important issue that needs debate is whether employees of companies are stakeholders or not. SES is of the view that

there can be no doubt in minds of any one on this issue. As employees are the only active assets of the company in

comparison to all other assets which are passive, therefore they are key stakeholders. No organization can be successful if it

does not have backing of its employees. In this backdrop, news report stating that IDs at Tata Chemical Board raised concerns

at Board Meeting on Employees Union being instigated to support ouster of Mr. Mistry is noteworthy. How can IDs object to

one side garnering support, when they themselves are taking side, rightly or wrongly? If they have the right to choose, in the

same manner employees also have the right. IDs questioning such support in opinion of SES is going a bit too far. It also

indicates that they have the feeling that they are right and every one should come around and follow them (IDs).

Tata have been for long known for excellent relationship with their employees’ union, and support of unions coming at this

juncture should not evoke any surprises or malafides. It cannot be a case or view of IDs that anybody not supporting their

stand is wrong. Employees union can also raise such questions. Return to Top

Does opposition or support to dominant shareholder means independence?

The next question is what constitutes independence? Being at loggerhead with dominant shareholder and opposition to its

proposal constitute independence? Independence, in opinion of SES means application of one’s mind independent of one’s

association with a person or organization, on the merit of an issue at hand. In the present context, the question that comes

to mind is whether Mr. Mistry was appointed on Board of the Company by IDs on its own identification as the best person to

lead or on recommendation of dominant shareholder. While Mr. Mistry was not on the board of these companies in ex-

officio position, however his appointment without any doubt was because his position as chairperson of Tata Sons board. Did

any ID at that time oppose the move? Now is it a case that the IDs have developed affiliation with Mr. Mistry hence

supporting him (if that be the case it will not amount to being independent) or have come to the conclusion that he is best or

have a feeling that he has been wronged. SES is of the view that most likely IDs feel that he (Mr. Mistry) has been wronged.

As discussed elsewhere, IDs cannot adjudicate about right or wrong based on what is alleged/ counter alleged. If they know

for sure he has been wronged it must be told to shareholders. Return to Top

Form Over Substance

The key issue that must decide their conduct is stakeholders interest. All the rules that have been made over a period relating

to governance have one underlying theme that in order to serve the stakeholders in best manner and increase value, the

company must have strong board. A divided board is not at all strong and hits the basic philosophy of governance and

objectives. Divided board is certainly a threat to shareholder’s interest. Are the board members there to ensure justice for an

individual or protect interest of stakeholders? Let the job of adjudication be best left to judiciary or a competent authority.

Directors are not competent to adjudicate as they do not have the powers to call for documents, call witness, record

statements and penalize or restore what is lost. That job is best left for the courts.

The question that needs to be asked, will IDs lose their independence if they vote for removal of Mr. Mistry? The answer is

an emphatic no. If they have taken any decision in best interest of the company and supported or opposed any resolution,

they need not fear any question. Fear of uncomfortable question and avoidance may lead to a wrong judgement.

Similarly, if the IDs are supporting Mr. Mistry no question can be raised on their conduct. In this connection statement of Mr.

Mohan Parasaran legal advisor is noteworthyas well as disturbing. It does not reflect tolerance of accepting dissent.

“It’s part of a well-crafted strategy for a long term battle. Tatas may have to take some precipitative action. Normally, independent directors don’t rush to the regulator (referring to media reports SEBI has been informed). This raises eyebrows,”

Mohan Parasaran, ex-solicitor general and adviser to Tata Group

SES is of the view that in order to establish high moral ground that these IDs have taken to establish their independent

behavior, probably they have omitted that their key responsibility is to protect stakeholder value. By supporting an

individual, howsoever right it may be, they have created a divided board which is surely going to lead to erosion of value.

Once again Form has won over substance. Return to Top



e14

FPI Insurance MF + FI + Banks Retail

TCS 73.33 17.02 4.10 1.03 4.52

Tata Steel 31.35 12.80 19.39 9.90 26.56

Tata Motors 33.00 26.11 10.36 4.04 26.49

IHCL 38.65 0.00 12.23 26.66 22.46

Tata Power 33.02 26.01 20.94 3.63 16.40

Tata Chemical 30.80 19.33 13.35 14.85 21.67

Tata Global 35.72 15.51 12.03 7.00 29.74

Shareholding in %Name of

Company PromotersPublic

Removal of Mr. Mistry from position of Chairman of TCS

TCS vide its communication to stock exchanges on 10th November 2016 informed the decision to appoint Mr. Ishat Hussain as

Chairman on the Board of TCS in place of Mr. Mistry. In this matter interview of VR Mehta, Trustee of Sir Dorabji Tata Trust

must be read Interview.

SES agrees that there is no provision in law regarding appointment of chairman and articles (AoA) of TCS are relevant.

However, SES does not agree that powers of Board or decisions of Board can be changed by shareholders in this manner. In

the present case Mr. Mistry was first appointed as Deputy chairman in April 2012 and then he was to become chairman post

retirement of Mr. Ratan Tata. This implies that he was in fact appointed by the board, notwithstanding the fact that the

nomination was made by Tata Sons. The question once again is why such a hurry? Why can’t one wait for board meeting?

GO IN G F ORWAR D-BA LL IN SHAR EH OL DER S ’ COU RT

In corporate democracy shareholders are supreme and they will now decide fate of Mr. Mistry.

Mr. Cyrus Mistry holds directorship in 7 listed entities all belonging to TATA Conglomerate. In order to remove him as a

director from these entities, an Ordinary Resolution must be placed before shareholders pursuant to the special notice given

by shareholder(s) as per provisions of Companies Act 2013 (Section 169 read together with section 115 and 100). In present

case such a requisition has been made/ shall be made (if desired) by a shareholder and respective entities will seek

shareholders’ approval by way of ordinary resolution. Return to Top

REM OV A L O F DIR EC TOR S L AW AN D RI GHT S OF D IRE CTOR

The Act prescribes a procedure for removal of director, the law does not distinguish between independent, non-independent, executive and non-executive directors in so far as Removal of Directors is concerned. (Law- Annexure-D)

For the objective of fairness law prescribes the copy of notice to be sent to the director being removed. The law also entitles

the director proposed to be removed to make a representation and the representation must be made available to all

shareholders. The director also has a right to be heard at the meeting.

SHAR EH OLD IN G P ATT E RN

SES has analysed the shareholding pattern, past voting pattern and what would be required to pass or defeat resolution, if

any, moved by shareholders.

Law requires passing of Ordinary Resolution requiring simple majority for removal of a director. Some analysts have raised

issue of applicability of section 188 of Companies Act 2013 on resolution moved by a dominant shareholder and opined that

Tata Sons would not be allowed to vote. SES is of the view that Section 188 of the Act is not at all applicable in the instant

case and such resolution would not come under related party transaction even remotely.

As on date Mr. Mistry is director in seven

listed companies of Tata Group. Tata

Sons shareholding is lowest in Tata

Chemicals and highest in TCS. All the

companies have fairly large shareholding

of retail investors between 20-30% with

the exception of TCS where promoters

themselves own 73% and Tata Power

where holding of retail investors is

16.40%.

Return to Top

http://www.moneycontrol.com/news/business/tatas-have-moral-legal-duty-to-protect-shareholder-interests_7943201.html



e15

Past participation in meetings by shareholders

The key to passing or defeating resolution rest in unity index of non-promoter shareholders. Unless all non-promoter

shareholders unite and vote against the resolution it is unlikely to be defeated. Reason for this lies in voting pattern observed

relating to retail investors, whose participation in voting is insignificant. It appears that Tata Motors retail participation is

high, it is not the case as it reflects mainly outstanding ADRs.

Assuming participation of retail as well as institutional shareholders in recent past is repeated in proposed EGMs, the table

below capture various scenarios of passing or defeating resolution.

Case-A where non-promoter investor participation remains same and all non-promoter vote against the resolution. In that

scenario resolution, resolution can face defeat in Tata Steel, Tata Motors, Tata Power and Tata Chemicals, unless retail

investor vote en-masse in favour of resolution. (Legend-Yellow Defeat case, Blue-Marginal case)

Case-B reflects position where LIC and other insurance companies vote in favour of resolution. In such a scenario, only in Tata

Motors, there could be a potential for defeat if other investors participation is increased against resolution.

As the resolution for removal will be an important resolution, participation is likely to be more than the historic participation

therefore the Table below captures picture emerging assuming all shareholders vote

Case-C: Assuming LIC abstains in that case if all shareholders oppose resolution, it may be defeated in all companies other

than TCS.

Case-D: If LIC votes in favour of resolution still Tata Motors, Tata Chemicals and Tata Global can face defeat and Tata Steel

and IHCL can be marginal case

Case-E: in case LIC votes against in all companies, in such an eventuality resolution could face defeat all across with exception

of TCS.

The key for victory of either side lies in participation of investors and on whose side institutions vote including LIC.

Return to Top

Ownership % Participation %Majority

Mark

Shortfall

from 50%+

With LIC+

Insurance

Shortfall for

promoters

TCS 4.52 0.11 TCS 73.34 17.25 0.11 90.69 45.35 -27.99 77.43 -32.08 4.90

Tata Steel 26.56 0.42 Tata Steel 31.23 32.09 0.42 63.75 31.87 0.64 50.74 -18.87 10.00

Tata Motors 26.49 19.48 Tata Motors 32.43 30.98 19.48 82.89 41.45 9.01 43.36 -1.91 9.53

IHCL 22.46 0.42 IHCL 38.65 35.42 0.42 74.49 37.25 -1.41 50.88 -13.63 3.47

Tata Power 16.4 0.70 Tata Power 33.02 40.96 0.70 74.69 37.34 4.32 53.96 -16.62 9.62

Tata Chem 21.67 0.20 Tata Chem 30.98 30.31 0.20 61.49 30.74 -0.24 44.15 -13.41 17.22

Tata Global 29.74 0.96 Tata Global 34.40 22.50 0.96 57.86 28.93 -5.48 47.75 -18.82 12.04

Institutional Retail Total

Case-A Case-B

Shareholding in %

Company Promoter

Retail

Company

Institutional

Non voted

Case-E

Majority

Mark

Shortfall

from 50%+Majority Mark

Shortfall from

50%+

Shortfall from

50%+TCS 73.34 4.10 22.56 100.00 47.95 -25.39 50.00 -27.44 (23.34)

Tata Steel 31.23 19.39 49.38 100.00 40.31 9.07 50.00 -0.62 18.77

Tata Motors 32.43 10.36 57.21 100.00 44.82 12.39 50.00 7.21 17.57

IHCL 38.65 12.23 49.12 100.00 43.89 5.23 50.00 -0.88 11.35

Tata Power 33.02 20.94 46.04 100.00 39.53 6.51 50.00 -3.96 16.98

Tata Chem 30.98 13.35 55.67 100.00 43.33 12.34 50.00 5.67 19.02

Tata Global 34.40 12.03 53.57 100.00 43.99 9.58 50.00 3.57 15.60

Case-C Case-D

Company Promoter

Insurance

Companiesothers Total

Shareholding in %



e16

AMI CAB L E SE TT LE M EN T

Many experts and well known people are arguing in favor of amicable settlement. SES is of the view settlement of what?

What is the dispute to be settled? It is a case of removal of a chairperson, which is very much within legal rights of Tata Sons.

The dispute, if any, is on the process, which is only an academic interest and at best a case of bad optics.

The real issue is of allegations and counter allegations, Questions on governance, independence and so on. SES would never

advocate amicable settlement and burying issues under carpet and create a potential time bomb. All issues must be clarified

by TATA’s, as the investors, stakeholders and regulators need know the truth. This cannot just be wounded up as if two kids

were fighting over an ice cream.

Not only this, the reputation of ‘TATA brand’ is at stake now. And they are duty bound to their stakeholders to bring the facts

out so as to minimize damage or if Mr. Mistry is right in his allegations then all those responsible must pay the price.

LEG AL AC TI ON

Connected to talks of amicable settlement are talks of legal actions from either side. SES believes at this juncture there is no

cause of action except may be with Mr. Mistry to challenge his removal from Tata Sons position of chairman. Even there the

case will be for breach of contract and may be procedural lapse. In SES view, even if Mr. Mistry is successful, he would at best

be entitled to damages/ compensation for wrongful removal.

As far as Mr. Mistry’s removal from Board is concerned, the matter will be decided by shareholders in EGM. Cause of action,

if any, would arise if law is not adhered to in the EGMs so convened. Return to Top

CROS S-C ONN ECT IO N ON THE B OA RD O F TATA SON S

On 1st July, 2010, Mr. Nitin Nohria became the 10th Dean of Harvard Business School. He is also an Independent director on

TATA Sons Board since September, 2013. Nitin Nohria is brother-in-law of Mr. Amit Chandra as indicated in one of the news

articles.

He is a director on Piramal Realty Board. Link

Ajay Piramal (Promoter of Piramal Group) serves on the Harvard Business School’s Board of Dean’s Advisors and his

wife Mrs. Swati Piramal is a member of the Harvard Board of Overseers and Dean’s Advisor to Harvard Business

School & Public Health.

Ajay Piramal is also an Independent Director on Board of TATA Sons w.e.f. 25th August, 2016.

Name TATA Sons Harvard Business School Piramal Group

Nitin Nohria Independent Director since

September, 2013 1st July, 2010: 10th dean of

Harvard Business School Director of Piramal Realty

Amit Chandra Non-executive Director since 26th August, 2016

- Ceased to be an Independent Director

of Piramal Enterprises w.e.f 21st December, 2015

Ajay Piramal Independent Director since

25th August, 2016 Harvard Business School’s Board of Dean’s Advisors

Promoter of Piramal Group

14 October, 2010, Harvard Business School received $50 Million Gift from the Tata Trusts and Companies. Link

Harvard Business School Dean Nitin Nohria expressed deep appreciation for the Tata Group's extraordinary

generosity. "This is an historic gift from a renowned organization revered for its significant economic, civic, and

philanthropic impact. The Tata Group is widely respected for integrity and innovation, not just in India—where it

produced both the first indigenous car and the $2,000 Tata Nano automobile—but in a variety of business lines

across several continents, from cars to hotels and from tea to information technology," said Nohria.

It would be interesting to note what UK corporate governance code states about Independence of directors. The directors

cannot be independent if

http://www.outlookbusiness.com/perspective/all-the-kings-men-3134

http://www.outlookbusiness.com/perspective/all-the-kings-men-3134

http://www.piramal.com/piramal-group/board-team-member/realty/nitin-nohria/9

http://economictimes.indiatimes.com/news/company/corporate-trends/cyrus-mistry-first-tata-chairman-who-didnt-head-the-trusts/articleshow/55128314.cms

http://www.hbs.edu/news/releases/Pages/tatagift.aspx



e17

They hold cross-directorships or have significant links with other directors through involvement in other companies

or bodies (this works against the ‘old boys’ club’ method of appointing non-executives: George is finance director at

company A and sits as a non-executive on the board of company B; Harry is chief executive at company B and sits as

a non-executive at company A);

They have close family ties with any of the company’s advisers, directors or senior employees; Return to Top



e18

ANNEXURES

ANNEXURE-A

THE DECISION

In the Board meeting of TATA Sons Limited held on 24th October, 2016, Mr. Cyrus Mistry, the Chairman of TATA Sons was

replaced with immediate effect and Mr. Ratan Tata was appointed as the interim Chairman of TATA Sons. Further, the Board

constituted a Selection Committee comprising Mr. Ratan N. Tata, Mr. Venu Srinivasan, Mr. Amit Chandra, Mr. Ronen Sen and

Lord Kumar Bhattacharyya, as per the provisions in the Articles of Association of Tata Sons, to choose a new Chairman within

four months. Link

It was also stated that the three members of Group Executive Council of Tata Sons viz. Madhu Kannan, NS Rajan, Nirmalya

Kumar resigned. Link.

The suddenness and enormity of decision stirred India Inc. The action has no parallel in Indian corporate history and evoked

strong reactions with surprise.

LEG ALITY OF DECIS IO N

There is no provision in Companies Act 2013 (Act) relating to position of chairman of Board. The Act does not provide for

such a position on the Board. The Rules made under the Act although refer to Chairperson, his authority etc., but they are

silent on the issue as to who and how a director becomes chairperson of the Board. The Act provides for procedure for

electing a chairperson for shareholders meeting.

THE LAW

Section 104 of the Act provides as under:

104. (1) Unless the articles of the company otherwise provide, the members personally present at the meeting shall elect one of themselves to be the Chairman thereof on a show of hands.

(2) If a poll is demanded on the election of the Chairman, it shall be taken forthwith in accordance with the provisions of this Act and the Chairman elected on a show of hands under sub-section (1) shall continue to be the Chairman of the meeting until some other person is elected as Chairman because of the poll, and such other person shall be the Chairman for the rest of the meeting.

The above is applicable to General Meetings of shareholders. This clearly indicates that position of chairman of General

Meetings of Shareholders, if any, is created on the strength of AoA of the company.

A similar provision exists in Table F of Schedule I to the Companies Act, 2013 (Model for AoA) regarding position of chairman

of Board -

Clause 70 (i) states that:

"The Board may elect a Chairperson of its meetings and determine the period for which he is to hold office."

Clause 5 of the Secretarial Standard - I (Board Meetings) issued by ICSI state that:

"5.1.1 The Chairman of the company shall be the Chairman of the Board. If the company does not have a Chairman, the Directors may elect one of themselves to be the Chairman of the Board."

Power lies within AOA

It can be concluded that

AoA can provide for position of chairman of the board and the same would be proper unless the AoA contradicts

provision of Act in any manner.

In absence of any specific provision in AoA, the Board members may elect chairman and decide what will be

duration of the period for which an individual could hold the office. Impliedly, they can also remove him.

http://www.tata.com/company/releasesinside/tata-sons-chairman-selection-committee

http://www.tata.com/media/releasesinside/tata-sons-organisational-changes



e19

WA S TH E BOAR D M E ETI NG C AL LE D PRO PER L Y?

Under Section 173 of the Companies Act, a seven-day notice should be given to every director at his registered address,

however, this notice is waived if at least one independent director is present in the board meeting or if the decision is ratified

by majority of directors.

Procedure

The law provides as under-

MEETINGS OF BOARD AND ITS POWERS

173. (3) A meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director

at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic

means: Provided that a meeting of the Board may be called at shorter notice to transact urgent business subject to

the condition that at least one independent director, if any, shall be present at the meeting: Provided further that in

case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall

be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if

any

174. (1) The quorum for a meeting of the Board of Directors of a company shall be one third of its total strength or

two directors, whichever is higher, and the participation of the directors by video conferencing or by other audio

visual means shall also be counted for the purposes of quorum under this sub-section.

From the above it is clear that as per Act the board meeting can be called at a short notice. Therefore, as far as Act is

concerned, it appears that the Board meeting was called properly. However, one must see what are the provisions of AoA

regarding Notice for Board Meetings, Quorum, Chairperson as well as removal of Chairperson. Article 114 of AoA of Tata

Sons provide that Notice of Board meeting shall be given. It prescribes minimum 7-day notice to any director resident out of

India, it does not prescribe any minimum notice period for director resident in India. Therefore, if any of the director is

resident outside India, in that case it can be held that the meeting was not called properly.

Can Independent Directors evaluate Chairperson and recommend removal?

Section 178 of the Act provides as under

178. (2) The Nomination and Remuneration Committee shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall carry out evaluation of every director’s performance.

SEBI LODR prescribes as under:

Obligations with respect to independent directors.

25. (3) The independent directors of the listed entity shall hold at least one meeting in a year, without the presence of non-independent directors and members of the management and all the independent directors shall strive to be present at such meeting.

(4) The independent directors in the meeting referred in sub-regulation (3) shall, interalia-

(a) review the performance of non-independent directors and the board of directors as a whole;

(b) review the performance of the chairperson of the listed entity, taking into account the views of executive directors and non-executive directors;

(c) assess the quality, quantity and timeliness of flow of information between the management of the listed entity and the board of directors that is necessary for the board of directors to effectively and reasonably perform their duties.

It can be seen from above that IDs on the Board of a company can evaluate and recommend removal of chairperson as well.

One must see what procedure was adopted. Although TATA Sons is not a listed company and both Companies Act provisions

of Section 178 and LODR Regulation 25 do not apply, however, as a good governance practice they can still adopt the same.

Return to Executive Summary



e20

ANNEX URE-B

Excerpts of edited AoA Tata Sons

Appointment of Chairman - (Inserted vide Special Resolution passed at the EGM held on December 6, 2012)

For the purpose of selecting new Chairman of the Board of Directors and so long as the TATA Trust won and hold in

the aggregate at least 40% of the paid up Ordinary Share Capital of the Company for the time being, a Selection

Committee shall be constituted in accordance with provisions of this Article to recommend the appointment of a

person as the Chairman of the Board of Directors and the Board may appoint the person so recommended as the

Chairman of Board of Directors, subject to Article 121 which requires the affirmative vote of all Directors appointed

pursuant to Article 104B.

The same process shall be followed for the removal of the incumbent Chairman.

The Selection Committee shall comprise – (a) Three (3) person nominated jointly by the Sir Dorabji Tata Trust and Sir

Ratan Tata Trust who may or may not be Directors of the Company, (B) one (1) person nominated by and from

amongst the Board of Directors of the Company and (C) one (1) independent outside person selected by the Board for

this purpose, The Chairman of the Committee will be selected by the Sir Dorabji Tata Trust and the Sir Ratan Tata

Trust from amongst nominees nominated by the Trust.

The quorum for a meeting of the Selection Committee shall be the presence of a majority of members nominated

jointly by the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust.

Explanation: The words ‘nominated jointly’ used in this Article shall mean that all Trustees of the Sir Dorabji Tata

Trust and Sir Ratan Tata Trust acting together shall decide the nominees. In the case of any difference, the majority

decision of all the Trustees acting together of the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust shall prevail.




e21

ANNEX URE-C

REA SON FOR D EC I SI ON A ND REA CT ION S

There is utter disbelief amongst analysts, media, stakeholders and others about the reasons advanced for removal of Mr.

Mistry. The disbelief emanates due to aura and halo around Tata name. When one is at the top of the heap, it is under

scrutiny of all and has to pass the strictest test each time. Probably the Board of Tata Sons ignored this, while taking the

decision.

As indicated in Mr. Cyrus Mistry’s Letter, he was removed on account of non-performance and no proper explanation was

provided to him.

“I cannot believe that I was removed on grounds of non-performance.”

To "replace" your Chairman without so much as a word of explanation and without affording him an opportunity of defending

himself in a summary manner must be unique in the annals of corporate history. The suddenness of the action, and the lack of

explanation has led to all manner of speculation and has done my reputation and the reputation of the Tata Group immeasurable

harm.

Mr. Ratan Tata in his Letter to Employees stated as under-

“It is unfortunate that Mr. Mistry had overwhelmingly lost the confidence of the Members of the Board of Directors for a

combination of several factors. The Directors of the Tata Sons board had repeatedly raised queries and concerns on certain

business issues, and Trustees of the Tata Trusts were increasingly getting concerned with the growing trust deficit with Mr.

Mistry, but these were not being addressed. The Tata Sons board, in its collective wisdom, took the decision to replace its

Chairman in the manner undertaken,”

"The tenure of the former Chairman was marked by repeated departures from the culture and ethos of the group".

Although what exactly was it, which necessitated such a decision is not known and will not be known, as per TATAs it was the

issue of ‘trust deficit’ and as per Mr. Mistry, it was done with no proper explanation but mere non-performance.

Who is right? Who is wrong? cannot be determined by analysts and can only be adjudicated by an authority.

Reactions

Entire India Inc was unanimous in voicing its concern.

"Clearly, the great reputation of the group would be damaged,"

- Adi Godrej, Chairman of Godrej group

Tatas will have to answer a lot of questions the days to come. This also includes questions from important government institutions such as LIC which are significant shareholders. - Link

Sources now seem to suggest that Cyrus was forced to seek the board’s permission for any expenditure above a certain threshold. He was also legally mandated to seek the board’s permission for remunerative packages, including stock options, offered to senior staff. Obviously, when Ratan Tata was chairman of Tata Sons, he was all powerful and the board signed off on whatever he wanted.- Link

Before accepting the chairmanship, he (Mistry) could have taken a hint from what Bombay Dyeing’s Nusli Wadia said while declining JRD Tata’s offer of chairing the Tata Group in the late ’80s: “I am anything but a Tata and prefer to remain a Wadia.” -Link

"One would reckon there was no clarity on the roles between the two (the chairmen of Tata Sons and Tata Trusts). Even though these roles are separate both sides need to be well aligned. If Tata Sons wants a professional CEO, clarity on all aspects is a must. Even if there were any differences between the two, these should have been reconciled through interventions."

Harsh Mariwala, Promoter-chairman, Marico

"Consider Tata Trusts to be like the executive chairman of an organization, and Tata Sons as CEO. With the powers vested in Tata Trusts, Mistry did not have the powers a normal chairman of a board would have. We do not know if he ever objected to this diluted power situation impacting his ability to impact results of the listed entities where he is chairman.”

Vineet Nayar, CEO, HCL Technologies


http://www.business-standard.com/article/companies/were-cyrus-mistry-s-powers-curtailed-tatas-will-have-to-answer-many-questions-116102600377_1.html

http://www.business-standard.com/article/companies/were-cyrus-mistry-s-powers-curtailed-tatas-will-have-to-answer-many-questions-116102600377_1.html

http://mumbaimirror.indiatimes.com/mumbai/cover-story/Cyrus-Mistry-not-a-Tata-son-sacked-as-group-chief/articleshow/55043070.cms



e22

ANNEX URE-D

Section 169 (2) A special notice shall be required of any resolution, to remove a director under this section, or to appoint

somebody in place of a director so removed, at the meeting at which he is removed.

(3) On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a

copy thereof to the director concerned, and the director, whether or not he is a member of the company, shall be

entitled to be heard on the resolution at the meeting.

(4) Where notice has been given of a resolution to remove a director under this section and the director concerned

makes with respect thereto representation in writing to the company and requests its notification to members of the

company, the company shall, if the time permits it to do so,—

(a) in any notice of the resolution given to members of the company, state the fact of the representation

having been made; and

(b) send a copy of the representation to every member of the company to whom notice of the meeting is

sent (whether before or after receipt of the representation by the company), and if a copy of the

representation is not sent as aforesaid due to insufficient time or for the company’s default, the director

may without prejudice to his right to be heard orally require that the representation shall be read out at the

meeting:

Provided that copy of the representation need not be sent out and the representation need not be read out at the

meeting if, on the application either of the company or of any other person who claims to be aggrieved, the Tribunal

is satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory

matter; and the Tribunal may order the company’s costs on the application to be paid in whole or in part by the

director notwithstanding that he is not a party to it.

Resolutions requiring special notice

115. Where, by any provision contained in this Act or in the articles of a company, special notice is required of any

resolution, 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 or holding shares on which such aggregate sum not

exceeding five lakh rupees, as may be prescribed, has been paid-up and the company shall give its members notice of

the resolution in such manner as may be prescribed.




e23

ANNEX URE-E

CORPORATE COMMUNICATIONS

What Good Are Shareholders?

Justin Fox & Jay W. Lorsch

FROM THE JULY–AUGUST 2012 ISSUE

https://hbr.org/2012/07/what-good-are-shareholders

“It is difficult to overstate the power of this idea. It is elegant. It is intuitive. There’s even evidence to back it up:

Marianne Bertrand and Sendhil Mullainathan found that public companies with a large (more than 5% of shares

outstanding) shareholder who isn’t the CEO are better governed, pay their executives more rationally, and

outperform companies that have no such “principal” minding the store. What’s missing, though, is a clear answer

to the question of what to do in the absence of such a principal. When shareholders are widely dispersed, how

can they keep managers in check?”

THE WAY FORWARD

In the 1970s many big corporations in the United States had a complacency problem. Managers saw themselves as

the stewards of important institutions and were resistant to change despite big shifts in the competitive landscape.

In response, shareholders became impatient, and academics devised theories about how to keep self-interested

managers toeing the line. The result was a revolt that goaded managers into being less risk-averse and more willing

to embrace change. But shareholders have not proved successful at controlling the more aggressive breed of

managers that the revolt helped spawn. How could they? Except when a company is in trouble (generally the only

time that shareholders succeed in cobbling together antimanagement majorities), conflict between shareholders

and managers is asymmetric warfare, with shareholders in no position to prevail.

Paying too much attention to what shareholders say they want may actually make things worse for them. There’s a

growing body of evidence (for example, Rosabeth Moss Kanter’s “How Great Companies Think Differently,” HBR

November 2011) that the companies that are most successful at maximizing shareholder value over time are those

that aim toward goals other than maximizing shareholder value. Employees and customers often know more about

and have more of a long-term commitment to a company than shareholders do. Tradition, ethics, and professional

standards often do more to constrain behavior than incentives do. The argument here isn’t that managers and

boards always know best. It’s simply that widely dispersed short-term shareholders are unlikely to know better—

and a governance system that relies on them to keep corporations on the straight and narrow is doomed to fail.

Given how many unintended and unwelcome consequences have flowed from the governance and executive pay

reforms of the past few decades, we’re wary of recommending big new reforms. But we do think that giving a

favored role to long-term shareholders, and in the process fostering closer, more constructive relationships

between shareholders, managers, and boards, should be a priority. So, should finding roles for other actors in the

corporate drama—boards, customers, employees, lenders, regulators, nonprofit groups—that enable those actors

to take on some of the burden of providing money, information, and especially discipline. This is stakeholder

capitalism—not as some sort of do-good imperative but as recognition that today’s shareholders aren’t quite up to

making shareholder capitalism work.

The Dark Side of Shareholder Influence

http://www.harvardilj.org/wp-content/uploads/2010/09/HILJ_50-1_Gelter.pdf

Page 154

https://hbr.org/topic/corporate-communications

https://hbr.org/search?term=justin+fox

https://hbr.org/search?term=jay+w.+lorsch

https://hbr.org/2012/07/what-good-are-shareholders

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=223736

https://hbr.org/2011/11/how-great-companies-think-differently/ar/1

http://www.harvardilj.org/wp-content/uploads/2010/09/HILJ_50-1_Gelter.pdf



e24

Under prototypical concentrated ownership, a large shareholder holds both considerable voting power and

considerable cash flow rights. The well-known advantage of concentrated ownership is that a large or controlling

shareholder with extensive cash flow rights has a strong incentive to monitor managerial misconduct. Thus, the

classic Berle-Means managerial agency problem of the separation of ownership and control is eliminated. However,

as a negative side-effect, large and controlling shareholders have the opportunity to obtain private benefits of

control. Controlling shareholders are typically able to siphon money out of the firm by entering into non-arm’s-

length deals with the firm or by exploiting corporate opportunities. Thus, leaving stakeholder issues aside, the most

important policy goal of corporate law in such systems is to keep large shareholders’ opportunities to abuse their

position in check.

Page 156

2. Explicit Shareholder Influence in Continental Europe It is easy to see that controlling shareholders in Continental

Europe typically have a strong influence on management. French law, for example, allows shareholders to revoke

the appointment of members of the board of directors (conseil d’administration) at any time, without giving a

reason. Similarly, the conseil, which appoints the CEO of a company (directeur g´eneral´), can remove the CEO at any

time.---




e25

Report Date: 14th November, 2016

Analysts: J N Gupta | Ritika Gupta

DISCLAIMER

Mr. Nawshir Mirza, is pro bono advisor on independent advisory board of SES to provide unbiased and objective

guidance on Proxy advisory policy issues. He is not involved in day to day operations of SES.

Mr. J N Gupta holds 5000 shares in Indian Hotels Company Limited.

While SES has made every effort and has exercised due skill, care and diligence in compiling this report based on publicly

available information, it neither guarantees its accuracy, completeness or usefulness, nor assumes any liability whatsoever

for any consequence from its use. This report does not have any approval, express or implied, from any authority, nor is it

required to have such approval. The users are strongly advised to exercise due diligence while using this report.

This report in no manner constitutes an offer, solicitation or advice to buy or sell securities, nor solicits votes or proxies on

behalf of any party. SES, which is a not-for-profit Initiative or its staff, has no financial interest in the companies covered in

this report except what is disclosed on its website.

The report is released in India and SES has ensured that it is in accordance with Indian laws. Person resident outside India

shall ensure that laws in their country are not violated while using this report; SES shall not be responsible for any such

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