Outgoing Tata Chairman Cyrus Mistry has raised several uncomfortable questions regarding corporate governance standards in India’s most haloed conglomerates in an email to the Tata Sons’ board. Among the allegations is a lack of clearly-defined reporting structures between Tata Sons, the various Tata Trusts and its companies; the interference of independent director Ratan Tata in the affairs of group companies without consultation of the group chairman; insider trading by two directors; and that the group faces $18 billion in write-downs.
Any proof of the allegations levelled by Mr. Mistry would suggest a decline in protections available to minority investors, which could hurt corporate India in the long term, particularly given the Tata Group’s reputation. The question currently on Indian investors’ minds is: given the tightening of corporate governance requirements in recent years, how is it that Mr. Mistry’s email seems to suggest that little has changed since India’s older governance failures?
Corporate Governance Standards in India
Corporate Governance is a set of standards, controls and policies, either dictated by a regulator or set by the company itself, to protect interests of shareholders, particularly minority shareholders, and ensure transparency in every aspect of management. India has had several high-profile governance failures over the past three decades, most famously those involving UTI, Ketan Parekh and, most recently, Satyam.
The response to these failures came in the form of several progressive processes in the Indian Companies Act, 2013. Reporting norms are now much tighter than before and Securities & Exchanges Board of India (SEBI) has taken several steps to ensure that minority shareholders have their rights protected.
For example, mutual funds must now, on a quarterly basis, report the resolutions on which they have voted and their reasons for doing so, all listed companies with over 1,000 shareholders must provide e-voting facilities, thereby permitting all members to weigh in on resolutions. The Act has also tightened norms related to related party transactions, requiring a three-quarter majority in a special resolution that bars the participation of promoters and directors, and significantly increased the responsibilities of the Audit Committee.
There has also been an increase in investor activism on account of steps taken by SEBI. Companies as large as Siemens and the Tata group itself have had their resolutions successfully challenged by minority investors. You may even recall proxy advisory firm IiAS’s recommendation last year that minority shareholders vote against Maruti Suzuki’s resolution to purchase vehicles from Suzuki Motor Company’s Gujarat plant at production price.
These changes have led the World Bank to improve India’s ranking on investor protection and minority investor rights. From a low of 49 in the world in 2013, India’s rank improved to 7, ahead of even many first-world economies, in 2015. In the report for 2017, released on October 27, 2016, India has been ranked 13 in the world. This is in sync with the changes put in place by the Companies Act, 2013 and by SEBI.
Just Lip Service?
All over the world, however, there exists a sentiment that corporate governance is just lip service. The Tata Sons case would certainly suggest that this is so, if the allegations prove to be correct. After all, if transparency can be found to be lacking to such a large degree in one of India’s most scrutinised firms, how much is slipping through the cracks elsewhere?
This is certainly the sentiment shared by corporate executives. A comparison of surveys of Indian executives published by the World Economic Forum in 2006 and 2014 suggests that investor protections are, in fact, on the decline. India’s score on Minority Shareholder Protection had fallen from 5.4 in 2006 to 4.1 in 2014. While sentiment surveys are merely a reflection of perception, the dip suggests that the change in laws may not be sufficient protection for investors.