High-profile court cases bring India’s corporate governance regimes into question

Cyrus Mistry's ongoing battle with Tata and Uday Kotak's dispute with Reserve Bank of India continue to rumble through the courts

FILE PHOTO: A private security guard stands at the exit gate of the headquarters of Tata Consultancy Services (TCS) in Mumbai, India October 13, 2016. REUTERS/Shailesh Andrade/File Photo
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India's biggest corporate feud is rumbling on after the country's top court on Friday said that a former chairman of conglomerate Tata Group cannot return to his old position.

The dispute dates back more than three years to October 2016, when Cyrus Mistry, then chairman of Tata, was unceremoniously ousted from his post without explanation, a surprise move that sent shock waves through the business world in India.

But Mr Mistry refused to back down without a fight, accusing the $111 billion conglomerate — which previously had a largely unsullied reputation over its 150-year history — of instances of fraud or questionable behaviour. The battle is set to continue, though, hitting the reputation of corporate India and the group, analysts say.

“In our opinion no prolonged legal feud in a corporate set-up is good news,” says Rahul Agarwal, the director at Wealth Discovery, a financial services company based in New Delhi. “Corporate governance is the biggest casualty in all such issues”, he says. Such cases lead to “significant value erosion for investors”, he adds.

Mumbai-headquartered Tata is one of the most powerful, oldest and diverse business houses in India. The 150 year-old old conglomerate owns names such as Jaguar Land Rover, Tetley tea and Tata Steel, with interests spanning from IT services to property, aviation and consumer products.

The group, which is made up of about 100 companies, had revenue of about $110.7 billion (Dh406.5bn) in the financial year from April 2017 to March 2018, and its companies collectively employ 700,000 people.

Philanthropy is at the core of the group’s values, with two-thirds of the conglomerate owned by charitable trusts. And the ongoing feud is seen as being at odds with the group's benevolent image.

On Friday, India's Supreme Court decided to put on hold the decision of a lower court last month, which issued a verdict that Mr Mistry should be reinstated as chairman at Tata. The Supreme Court judges said the lower court's verdict was an “error”. In December, the National Company Law Appellate Tribunal said that Tata had illegally removed Mr Mistry as chairman, at the demand of 82-year-old chairman-emeritus Ratan Tata. The lower court described the move as “oppressive” to minority shareholders. But Tata argued that the lower court's verdict would “paralyse” the management of the group, so the decision by the Supreme Court to put this verdict on hold comes as a relief to the group. The Supreme Court has indicated that it will hear the case in more detail at a later date.

In a statement issued on January 5, Mr Mistry said that despite the judgment of the lower court in his favour, he had no intention of “pursuing the executive chairmanship”.

“I will, however, vigorously pursue all options to protect our rights as a minority shareholder, including that of resuming the 30-year history of a seat at the board of Tata Sons and the incorporation of the highest standards of corporate governance and transparency at Tata Sons,” he said.

The Supreme Court, however, rejected a proposal that Mr Mistry returns to the board.

Mr Mistry's family, which runs the Shapoorji Pallonji Group, has an 18.37 per cent stake in Tata Sons.

When Ratan Tata retired at the end of 2012, Mr Mistry, an Irish citizen, succeeded him, becoming only the second person from outside of the immediate Tata family to take up the position of chairman.

After he was ousted, it was speculated that some of Mr Mistry's decisions irked Mr Tata and were reversals of moves that he had made. For example, Mr Mistry is understood to be behind the decision to try to sell Tata Steel’s loss-making UK business.

Ratan Tata, the figure from the Tata dynasty who was at the helm of the group, is considered an iconic figure in India, who had developed a respected reputation for his anti-corruption stance and broader ethical values.

But analysts say that the Tata feud has brought to the fore questions about how business houses in India, many of which are still family-controlled, should be run.

“The current feud is a classic case of one-upmanship between Ratan Tata and his much younger counterpart Cyrus Mistry,” says Mr Agarwal. He says that both businessmen are guilty of “obstinate behaviour”.

“The case also pivots on the complex question of majority versus minority shareholder rights,” he adds. “Regardless of what is the actual legal outcome, the case does not present a pretty picture. Not only does it create a lot of uncertainty around the Tata Group functioning; it also distracts the group from focusing on the core issues that the Tata Group needs to focus on right now.”

Some of its firms, including Tata Steel and Jaguar Land Rover, have been hampered by tough global economic conditions. Tata Steel is cutting thousands of jobs in Europe, while Jaguar Land Rover's sales slumped last year.

Some experts argue that not only is the feud negative for Tata, but it could also have an impact on the economy.

Abha Singh, a Bombay High Court advocate, says that the fact that the corporate feud is going through court “sets a dangerous precedent”.

“Courts must not interfere in administrative matters of companies which are the domain of the board,” she says. “The board is in a better position to manage the affairs of the company as opposed to the courts because it has a better understanding of its affairs … and is in a better position to guard the interests of the company, which is crucial to our economic growth."

"Regardless of what is the actual legal outcome, the case does not present a pretty picture."

Ms Singh adds that “by interfering in administrative affairs of the company, its efficient functioning will be hampered [and] this will adversely impact corporate governance in our country and can have serious implications for the economy, which is already in a fix.”

Further highlighting challenges at the core of corporate India, Asia's richest banker Uday Kotak was set on Thursday to continue his legal battle in the Bombay High Court against the country's central bank, the Reserve Bank of India (RBI). The hearing was postponed until March, so in a few weeks, the court will hear Kotak Mahindra Bank contesting an RBI rule which requires billionaire Mr Kotak to reduce his shareholding to below 20 per cent. The RBI's rationale behind this requirement is that it is aimed at limiting the influence of founding shareholders within Indian banks.

“It's a peculiar case,” says Rajesh Narain Gupta, the managing partner at SNG & Partners, an Indian law firm. “The question is what is reasonable and whether regulatory interference in such situation is justified. It's an interesting situation where [a] regulator feels that for proper governance the ownership and control of a listed entity owning a bank the ownership of a family or promoter needs to be reduced and restricted.”

He describes this as another “exciting case” which has brought up questions about corporate governance and regulatory control in India.

Analysts and business leaders say that as these issues continue to unfold, the outcome of both the Kotak case and the Tata feud will be closely watched by the business world.
"The judiciary is currently dealing with two high profile corporate cases that could change the way India Inc does business," says Agnelorajesh Athaide, an entrepreneur and founder chairman of St. Angelo's VNCT Ventures.

“While both of the above are distinctly different cases, they represent a few key trends in corporate governance that has kept India Inc on its toes for the past few years,” he says. “While this can be seen as unsettling times, over the long run, these steps will help build a robust and well-structured business environment in India.”