Living with the frenemy
Experts are divided in their advice to shareholders when voting to remove some independent directors in the Tata group
 "Living with the frenemy")
In the ongoing boardroom battle in the Tata group, legal experts and proxy advisory firms appear divided over the issue of removal of independent directors from a board following a conflict with the primary shareholders. While legally, shareholders are within their right to appoint and remove any director on the board of a company, some experts feel that should be the case only when an independent director fails the test of independence as envisaged in company law and Sebi’s corporate governance code.
According to Section 166 of the Companies Act that spells out the duties of independent directors, they have to apply their judgement as part of a fiduciary duty. “They have to act independently irrespective of the views of the principal shareholders, unless they are convinced by those arguments,” noted corporate lawyer H P Ranina. As part of their duty, independent directors are also required to review the performance of non-independent directors, including the chairman of the board, at least once a year. So, they are well within their right to comment on the performance of the chairman.
Proxy advisory firms are divided in their advice to institutional investors and minority shareholders when it comes to voting on a proposal to remove any of the independent directors currently involved in the Tata group imbroglio.
“Minority shareholders and institutional investors should vote against any move by primary shareholders to remove independent directors,” says Shriram Subramanian, managing director, InGovern Research Services, a firm advising institutional investors on business governance. Subramanian argues that Tata Sons, the primary shareholder in the group, has not given adequate information and reasons to all shareholders in the current situation.
J N Gupta, managing director of Stakeholders Empowerment Services, a proxy advisory firm, does not agree with this line of reasoning. “A company board cannot become a courtroom. This will lead to division in the board and result in destruction of wealth for all shareholders of the company,” he said. His advice to independent directors in a conflict situation between shareholders is not to take sides. His vote is for removal of a director who appears to create a division in the board.
Shailesh Haribhakti, founder and chief mentor, Baker Tilly DHC, feels that the purpose of the law is put to test in such situations. “One needs to interpret the law and the regulations in the true spirit,” he says.
Agrees Arun Duggal, an experienced independent director and board chairman, who points out that an independent director is appointed on the board to exercise independent judgement and act in the best interests of all shareholders. “They should not act under the influence of or for the benefit of the primary shareholders,” he says.
Duggal feels that the removal of an independent director is a very serious matter that should only take place only in extraordinary circumstances as specified in the law. “If such a director is removed for not agreeing with the views held by the primary shareholders that is contrary to the letter and spirit of the law and Sebi regulations,” he adds.
Some experts like Duggal are in favour of the Ministry of Corporate Affairs and the Sebi taking cognisance of the situation so that it does not undermine the basic principle of directors’ independence and weakens corporate governance in India.
In accordance with Section 169 of the Companies Act, 2013, a company can through an ordinary resolution remove a director before the expiry of his term. Shareholders are not needed to give a reason for moving a proposal for removal of a director. However, a director has the right to defend his position, in writing or orally. “The company can obtain an approval from the National Company Law Tribunal (NCLT) for neither circulating the representation received from the director nor allowing the reading of the same at the meeting,” points out Pavan Kumar Vijay, founder-managing director of financial and legal consultancy Corporate Professionals.
Even when an independent director opts for a ‘gracious’ exit by resigning, he has the right under company law to state the reasons for it. Irrespective of the way the boardroom battle in the Tata group unravels in the coming days and months, it will be a testing time for the spirit of India’s corporate governance regulations.
READ OUR FULL COVERAGE OF THE TATA-MISTRY BOARDROOM BATTLE
According to Section 166 of the Companies Act that spells out the duties of independent directors, they have to apply their judgement as part of a fiduciary duty. “They have to act independently irrespective of the views of the principal shareholders, unless they are convinced by those arguments,” noted corporate lawyer H P Ranina. As part of their duty, independent directors are also required to review the performance of non-independent directors, including the chairman of the board, at least once a year. So, they are well within their right to comment on the performance of the chairman.
Proxy advisory firms are divided in their advice to institutional investors and minority shareholders when it comes to voting on a proposal to remove any of the independent directors currently involved in the Tata group imbroglio.
“Minority shareholders and institutional investors should vote against any move by primary shareholders to remove independent directors,” says Shriram Subramanian, managing director, InGovern Research Services, a firm advising institutional investors on business governance. Subramanian argues that Tata Sons, the primary shareholder in the group, has not given adequate information and reasons to all shareholders in the current situation.
J N Gupta, managing director of Stakeholders Empowerment Services, a proxy advisory firm, does not agree with this line of reasoning. “A company board cannot become a courtroom. This will lead to division in the board and result in destruction of wealth for all shareholders of the company,” he said. His advice to independent directors in a conflict situation between shareholders is not to take sides. His vote is for removal of a director who appears to create a division in the board.
Shailesh Haribhakti, founder and chief mentor, Baker Tilly DHC, feels that the purpose of the law is put to test in such situations. “One needs to interpret the law and the regulations in the true spirit,” he says.
Agrees Arun Duggal, an experienced independent director and board chairman, who points out that an independent director is appointed on the board to exercise independent judgement and act in the best interests of all shareholders. “They should not act under the influence of or for the benefit of the primary shareholders,” he says.
Duggal feels that the removal of an independent director is a very serious matter that should only take place only in extraordinary circumstances as specified in the law. “If such a director is removed for not agreeing with the views held by the primary shareholders that is contrary to the letter and spirit of the law and Sebi regulations,” he adds.
Some experts like Duggal are in favour of the Ministry of Corporate Affairs and the Sebi taking cognisance of the situation so that it does not undermine the basic principle of directors’ independence and weakens corporate governance in India.
In accordance with Section 169 of the Companies Act, 2013, a company can through an ordinary resolution remove a director before the expiry of his term. Shareholders are not needed to give a reason for moving a proposal for removal of a director. However, a director has the right to defend his position, in writing or orally. “The company can obtain an approval from the National Company Law Tribunal (NCLT) for neither circulating the representation received from the director nor allowing the reading of the same at the meeting,” points out Pavan Kumar Vijay, founder-managing director of financial and legal consultancy Corporate Professionals.
Even when an independent director opts for a ‘gracious’ exit by resigning, he has the right under company law to state the reasons for it. Irrespective of the way the boardroom battle in the Tata group unravels in the coming days and months, it will be a testing time for the spirit of India’s corporate governance regulations.
READ OUR FULL COVERAGE OF THE TATA-MISTRY BOARDROOM BATTLE