With an increasing possibility that Tata Sons could look to take its earlier decision to remove Cyrus Mistry, to its logical conclusion, including generating shareholder vote, shareholder advisory IiAS has said independent directors on boards of the Tata group should guide shareholders in this regard as there are risks of operating companies in the group becoming dysfunctional.
Such risks are likely to be triggered if independent directors and Tata Sons nominees hold divergent views on their support to Cyrus Mistry, or even if independent directors differ within themselves on this debate.
Explaining the nature of such risks, IiAS says “Tata group companies’ ease of access to finance and the cost of finance tend to be favourable – driven by the implicit understanding that these belong to the Tata group, and that credit support from group companies will always be available.
“But, there is now, a real possibility that boards of listed companies may choose to ignore Tata Sons. This is likely to make lenders nervous, and they may show restraint in extending any further credit, until there is clarity,” says IiAS.
This can have operational implications for listed companies. As on March 31, 2016, the Tata group of companies had outstanding debt aggregating around Rs 2.5 trillion (Rs 2.5 lakh crore), of which about 24% is due within twelve months. This also has implications for India’s banking system which is trying to reduce bad debts.
HOW SUCH AN EGM CAN BE CALLED
For Tata Sons to remove Mistry as director – a board of directors elects a chairman whereas shareholders vote to appoint a director – the Tata group has to call an extraordinary general meeting and present a resolution to remove Cyrus Mistry as a director. Such a resolution has to be passed with a 51% majority.
“When and if, a proposal is put to shareholders to vote, independent directors of the listed companies need to provide shareholders with guidance on how they should vote on a resolution to remove Cyrus Mistry as chairperson,” says IiAS.
To that extent, the recent decision of Indian Hotels Company, where its independent directors took a public stand on Cyrus Mistry’s position in IHCL can serve as an example, says IiAS. “Independent directors, in forming an opinion, will likely consider Cyrus Mistry’s performance during his tenure, and whether his strategy for the company is the best possible strategy given where the company is. They will also likely consider the issues raised by Tata Sons directors, and then make a balanced decision,” IiAS added.
Under section 100 of the Companies Act, 2013 (Section 169 of the erstwhile Companies Act, 1956), Rule 17 of the Companies (Management and Administration) Rules, 2014, the board shall call an EGM on the requisition made by shareholders
The members should provide the requisition to call an EGM in writing or through electronic mode, at least 21 days prior to the proposed date of the EGM.
The notice should specify the place, date, day and hour of the meeting and contain the business to be transacted at the meeting. It is not mandatory to provide an explanatory statement for the proposed resolutions.
Further, the requisitionists may disclose the reasons for proposing the resolutions. The meeting should be convened at the registered office or in the same city or town where registered office is situated on working day.
The notice shall be signed by all the requisitionists. If the board does not, within 21 days from the date of receipt of such requisition, proceed to call an EGM on a day not later than 45 days from the date of receipt of such requisition, the EGM can be called and held by the requisitionists themselves within a period of 3 months from the date of the requisition.
The EGM shall be called and held in the same manner as any other meeting held by the Board.