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The Tata-Mistry case verdict is not surprising

It is difficult to prove oppression and mismanagement, even for powerful minority shareholders

analysis Updated: Jul 10, 2018 20:14 IST
A file picture of Cyrus Mistry, ousted chairman of Tata Sons(PTI)

The Tata-Mistry affair was by far the most high-profile case before the National Company Law Tribunal (NCLT) related to oppression and mismanagement as defined under the Sections 397 and 398 of the erstwhile Companies Act, 1956, and Sections 241-245 of the current Act.

The way the law is structured, experience suggests it is fundamentally difficult to prove or act under these sections even for a powerful minority shareholder such as Cyrus Mistry for three reasons: one, jurisdiction without involvement of “malice or malfeasance” is difficult to sustain. Two, “unwise, inefficient or careless conduct” of a director is not an act of oppression as held by courts earlier. And three, the cardinal principles of invoking these provisions centre around the principle of non-interference in the company’s routine functioning unless affairs are “prejudicial to public interest”.

Being difficult propositions to prove in law, the above sections have hardly the teeth to evict entrenched managements easily in India. Hence, the NCLT verdict is hardly surprising.

However, it is important not to lose sight of the two larger issues Mistry has been fighting for. First, the board’s accountability to minority shareholders for both governance and management performance; and second, protecting the reputation of the Tata institution.

I am not sure if the NCLT is indeed the right forum to decide on this. It has been nobody’s case that destruction of shareholder value in many Tata companies that Mistry highlighted was a consequence of dubious intentions.

But repeated misjudgment in strategy coupled with a management style laced in a corporate culture in which some decisions seem to be beyond the realms of critical questioning can’t be ignored.

Mistry represents a minority shareholder grouping in Tata Sons and I would like to believe that for once management of a major business conglomerate was in the hands of a genuine minority shareholder who took decisions keeping minority shareholder interests in mind. The markets certainly thought so; and there was appreciation for the tough steps he was taking to clean up the mess he had inherited. N Chandrasekaran, the current chairman, is very much on the same path too.

As it rightly should, the NCLT has remained strictly within the purview of law in passing the verdict on most of the points in the petition. Reiterating the board’s right to dismiss the chairman is stating the obvious: similarly, existence of “super directors” and interference can hardly be expected to be proven in law as these “arrangements” are manifested through verbal directions, “off the book” persuasion and a repertoire of distinguished, but compliant, board members.

The NCLT christened this phenomenon as providing the “guiding light” — a new term in the corporate lexicon. Similarly, since proportional representation on the board is not envisaged in the Companies Act, and was not permitted in the Articles of Association of Tata Sons, the conclusion should have been obvious. Allegations involving C Sivasankaran and Air Asia are subject to continuing investigations by law enforcement agencies and hence the NCLT could hardly be expected to have passed a judgment on this at this moment. Therefore, Mistry’s counsels should perhaps introspect if these questions were indeed appropriate for the larger issues which Mistry was trying to raise.

But as I mentioned earlier, for those larger issues, the NCLT is perhaps not the right redressal forum in any case as is the application of the sections on oppression and mismanagement.

There are no other sections which deal with these aspects in the act. Hence, despite ignoring realities of how boards are effectively run, legally a conclusive determination in favour of the Tatas at the NCLT is hardly surprising. In these circumstances it is difficult to envisage the outcome of the appeals, potentially right up to the Supreme Court .

What this does demonstrate, though, is the state of redressal with regard to issues related to governance and accountability towards minority shareholders in our country despite the legislative intent in various statutes to protect “minority rights”.

At the end of the day, the person who controls the board — by charisma, voting power or sheer influence — always ends up on top.

Prabal Basu Roy is a Sloan Fellow from the London Business School, a corporate advisor, an author, and former director and Group CFO in various companies

The views expressed are personal

First Published: Jul 10, 2018 19:49 IST