In a significant move, an overwhelming majority of shareholders of Tata Sons, the holding company of the $105-billion cars-to-software group, last week voted in favour of changing the legal status of the firm to a private limited company from a deemed public company.
The move by Tata Sons, no doubt, has to be cleared by the National Company Law Tribunal (NCLT). Nonetheless, the significance of Tata Sons’ move is not lost on the avid watchers of India’s corporate scene. It has introduced an additional dimension, especially since it comes almost a year after Ratan Tata, the patriarch of India’s biggest conglomerate, ousted Cyrus Mistry as the chairman of the group in what was billed as one of the biggest surgical strikes in India’s corporate world.
Much earlier, in 2015, the 106-year old T.V. Sundram Iyengar and Sons (TVS and Sons) Ltd., the holding company of TVS Group, converted into a private limited company from a public company.
The action by these two venerable institutions can be a pointer to the way businesses will be run henceforth in India. In a way, it also signifies a certain sense of discomfort and trust deficit in the operating environment which forces enterprises to expend precious management time and resources on issues other than running the businesses.
Disclosure norms
The Companies Act of 2013 may have a lot do with the new-found business route. For, the new norms have made disclosure requirements much more stringent for public limited companies. “This move will help Tata Sons reduce the cumbersome disclosure on its day-to-day activities required under the Companies Act, 2013,” said Suresh Surana, founder, RSM Astute Consulting Group.
“It will also give more control in the hands of promoters as Tata Sons will also not need shareholders’ approval for selling any of its undertakings, borrowing money to invest in trust securities and appointing people to key positions,” Dr. Surana said.
The conversion is bound to have a significant fallout on the Indian corporate world. Read especially in the context of the current ongoing imbroglio at the Tata empire, a private structure is a sure-shot route to secure the organisation from the ill-directed adventures of its members. A private structure puts restrictions on share transfers and sale. In a public company, for instance, a shareholder can sell his/her stake to anyone, including its rivals, or, in other words, to people whom the current promoters might not be comfortable with. In the demat era, it has become even more easier to palm off one’s shares However, this is not possible in a private limited company. This may yet prove a push-factor for many companies to contemplate conversion into private entities.
Tata Sons, it is reckoned, will continue to have independent directors on its board like earlier even though a private limited company is not required to have such positions. The fact, however, is that on conversion into a private company, the board shall have more power in terms of decision-making.
Not surprisingly, Mr. Mistry, whose family still owns just over 18% in the holding company, has opposed the move.
The move will restrict his family’s freedom to sell its stake. And, it may have to drive a hard bargain with the Tatas who will have the first right of refusal under the ambit of the private limited company.
S. Santhanakrishnan, an expert on corporate law and governance and also a director on the board of Tata Global Beverages, defends strongly Tata Sons’ move to become a private company.
“Earlier you had the option of being a public company, deemed public company or a private limited company. Now, under the Companies Act of 2013, you can only be a private limited company or a public company. They have chosen the route of being a private company,” he said. There is absolutely nothing amiss in the move, according to him.
“You can use a toll road or a non-toll road to reach your destination. Both are right means to achieve your objective. The choice is yours. So, why make a noise about it? ” queried Mr. Santhanakrishnan.
The group always upheld a high level of corporate governance standards and integrity, he said. “Whether it is a private limited company or a public company, all the dividend pay-out goes to trust, and, therefore, to charity,’’ he pointed out.
Ease of doing business
The law is not moving in sync with the ease of doing business. It has made doing business more complex. Hence, going through the private company route makes sense.
While the Companies Act 2013 had many welcome changes, it made the compliance aspect excessive. “The choice of being public or private is based on your choice of ease of doing business,” said Mr. Santhanakrishnan. “There can’t be a living-in relationship in a corporate set-up. It needs the patronage and identity of the parent.” After all, he argued, a private company is also a regulated company under the Companies Act. There is a calibrated level of regulation. So, what is wrong in choosing one of the methods provided by the law?
Compliance norms
Many compliance norms just go away under the private company structure. The most important one pertains to related party transactions, according to Arvindh Pandian, a Chennai-based corporate lawyer. “Another advantage in such a set-up is you can have like-minded people on the board,” he added. The related party transaction is one of the important aspects yet in this context. It was indeed one of the major points of friction between Mr. Mistry and Mr. Tata. Whatever way one looks at the Tata Sons’ move, it is likely to embolden more firms to convert into private companies. It will be more so where management bandwidth and compliance are turning out to be critical.
A report by a standing committee on Finance, Ministry of Corporate Affairs, tabled in the Lok Sabha last year, also seems to acknowledge the new trend in corporate India. The committee observed that more and more private limited and limited liability partnerships (LLPs) are being registered as compared to public limited companies. As many as 52,144 LLPS were registered as on December 31,2015, of which only 51,315 LLPs were active. It, however, noted that such a trend was not very healthy for the growth of the corporate sector.
Pointing out that the trend could be due to the detailed and cumbersome procedures and rules under the Companies Act, 2013, it urged the Ministry to examine the issue with a view to simplifying and rationalising the related rules and procedures under the Act.
Tata Sons has gone by what is permissible under the rules in doing what it did. Yet, Mr. Mistry and his family will take their battle to the NCLT.
However, one thing is certain. The Mistry war at the Tata empire has indeed sent out a new lesson or two in partner management in business.
