The tussle between Ratan Tata and Cyrus Mistry, which started on October 24 and has snowballed into a full-blown corporate war, has brought to the fore the issue of independence of independent directors.
Slowly and steadily, the noise is getting louder for the need to review the process of appointment and removal of independent directors. The debate is over the actual control that promoters have over the appointment, and removal, of independent directors.
Last week, a group of investors filed a petition in the Bombay High Court seeking a change in the manner independent directors are removed by the shareholders of the company.
The petition has made Ministry of Corporate Affairs, Ministry of Law, Securities and Exchange Board of India (SEBI) along with Tata Chemicals, Tata Steel and Tata Motors parties to the case. The petition pleaded that promoters should not be allowed to vote on resolutions seeking the removal of independent directors.
The court has declined to grant any interim relief and has allowed the Tata Group companies to hold their respective extraordinary general meetings (EGMs) for the removal of Mr. Mistry as the chairman and Nusli Wadia as the independent director in the case of Tata Motors, Tata Chemicals and Tata Steel.
On December 16, the court had, however, directed the companies to keep a director’s position vacant till the time the case was heard and a verdict passed. It means that while all shareholders can vote on the resolution seeking the removal of Mr. Wadia as an independent director, no new director can be appointed in his place.
Meanwhile, popular opinion has it that mandatory voting by institutional investors could help maintain the independence of independent directors.
Institutional investors
Incidentally, while SEBI had made it mandatory for mutual funds to disclose their voting decisions and the reasons thereof, there is no such obligation on the part of insurance firms, which include the country's largest domestic institutional investor — LIC.
“Independent director is a myth,” said Prithvi Haldea, Founder-Chairman of Prime Database, that maintains comprehensive data on independent directors. “It is a very fine line as promoters will not like to have total strangers on board while known persons might not act independently.” he says.
A recent analysis by Prime Database showed that between January 2015 and December 2016, 1,300 independent directors resigned and most of them just cited “personal” as the reason for leaving even though norms require them to state the reason, for their resignation, in detail.
“Institutional investors need to be more active. If you have a large stake in the company then you should be required to cast your view. Also, proxy advisory reports should be made available to all shareholders, institutional and retail, so that they can be better informed and vote.
“It will lead to promoters becoming more responsible in introducing resolutions,” said Mr. Haldea.
SEBI disinclined
Interestingly, the capital market regulator is not inclined to review the norms for independent directors at this juncture for the lack of any “compelling reason”.
“Whether there is a need to review (norms for independent directors), there is always a need to review but at this stage I do not foresee a compelling reason to review that,” SEBI chairman U.K. Sinha had said at a capital market seminar recently.
“If independent directors are not performing the duty enshrined on them, then action can be taken. Independent directors have to take care of all stakeholders. If there are any violations, law will take its course,” Mr. Sinha had said.
Sandeep Parekh, Founder, Finsec Law Advisors said that opposing an independent director for taking an independent view would be against the very institution of independent directors.
“In Satyam, independent directors got hit because they didn’t stand up for what was right for the company, here (in the case of Tatas) they are being hit because they are standing up for what they believe is right for the company.
It probably will call for a review by the regulator and old calls for an independent appointment and removal of independent directors would be renewed,” said Mr. Parekh, who has earlier served as an executive director in the legal department of SEBI, the market regulator.
But, there is a section that believes that policy formulation should not be done in a knee-jerk manner and a better approach would be wait before acting.
‘Knee-jerk reaction’
Sumit Agrawal, founder of Suvan Law Advisors and a former legal officer of SEBI, was of the view that a policy review by the regulator at this stage may just be a knee-jerk reaction and a better approach would be to wait for some time to understand the wider implications going forward.
“The Tata-Mistry episode has once again brought (the) focus on regulatory roles and responsibilities of independent directors. They need to take a stand unambiguously whether, in their opinion, exuberance and aspirations of promoters or majority shareholders expose the company to unwarranted risks as a going-concern. Regulatory role requires them to be clinical while businesses expect them to be sympathetic or practical, that’s the tight rope they walk on,” said Mr. Agrawal.
