Recent developments at Tata group, India's largest multinational conglomerate established in 1868, will leave many with a distinct sense of unease. At the centre, headlining a deeper divide, are two dates, an uncomfortable turn and an obvious question: What transpired this year between August 12 and September 17 for the chairman of Tata Sons, N Chandrasekaran, to take a dramatic U-turn on continuing as chairman for another term of five years?  

The first date records Chandrasekaran as saying he would not offer himself for reappointment as chairman after his current term because his continuation did not enjoy unanimous support. The second date marks an ugly, public acceptance of a new term in the face of continued, and indeed vociferous, opposition from the principal shareholder. 

The opposition to him comes in the voice of Noel N Tata, Chairman of the Tata Trusts, which own about 66% of Tata Sons. In simple words, this is a professional chairman holding on in the face of the majority owner asking him to go. That owner is not a family but a set of charitable trusts, whose widely celebrated model funds hospitals, research and relief from the dividends they receive.

Chandrasekaran’s turn carries at least the whiff of a power grab, riding on what is feared to be partisan political meddling from the highest quarters. Such events would be a sign of disaster for any institution. But when this transpires at Tata Sons, the principal investment holding company and promoter of the Tata companies, the stakes are larger.

Majority Shareholder Split

There is a second Tata Trusts nominee on the board of Tata Sons, the industrialist Venu Srinivasan, also vice-chairman of the Tata Trusts, who voted in favour of Chandrasekaran getting an extension. But the ‘no’ by Noel Tata is significant because under the Tata Sons Articles of Association (AoA), a majority of the Tata Trusts nominees on the Tata Sons board must approve any decision of that board. This is a protective mechanism that honours the pre-eminent ownership of the Tata Trusts, which is in effect armed with a veto to ensure that the board of Tata Sons is aligned with its majority shareholder.

What happens when the two Tata Trusts nominees vote differently? On a plain reading of the Articles, the resolution must fail because one out of two is not a majority. But the resolution is now said to have passed and holds, at least for now, framing a boardroom battle that will have its deleterious impact on the entire group.

The battle will be bitterly fought. On Sunday (September 20), the Tata Trusts issued a statement that said the appointment of Chandrasekaran was void ab initio because these decisions cannot be taken by a simple headcount of the board. The Tata Sons AoA, or rule book, “provide that no decision can be taken unless it has the affirmative support of at least a majority of the Directors nominated by the Tata Trusts,” the statement said. 

Relations Have Broken Down

That the Trusts have chosen to call out Chandrasekaran publicly, and in such clear terms, shows how far relations have broken down: “It is unfortunate that the Chairman of Tata Sons, a company renowned for setting high standards of corporate governance, is contending reappointment on such an untenable interpretation of the Articles.”

Chandrasekaran’s supporters will likely argue that the board majority has spoken, that one Trusts nominee backed him, and that his record at the helm has been strong. None of this settles the question. His record is not what is in dispute; the rules are. A protection written into the AoA precisely for situations such as these has, on the Trusts’ reading, been overridden by the Tata Sons board. A chairman assuming a new term in such a case weakens the very governance he is meant to embody. And even if the board’s reading were to survive a legal challenge, the question of how a chairman accepts a new term in the teeth of opposition from his principal shareholder will linger.

For and Against Listing

The dispute is tied to listing. Reserve Bank of India (RBI) rules require an “upper layer NBFC” to list, and the central bank has classified Tata Sons as one, even though the company has paid off its debts and therefore applied to deregister as an NBFC. Being allowed to deregister means Tata Sons comes under no compulsion to list, which is what the Tata Trusts seek, reiterating a long-held Tata view. 

But this application to deregister was rejected by the RBI in September, after lying pending for over two years, days before the crucial September 17 board meeting. The RBI also filed a caveat in the courts asking to be heard if its decision was challenged, a highly unusual move, leading to fears that someone from New Delhi might be pulling the strings. The regulator owes an explanation for this timing.

Supporters of listing argue that it will mean tighter supervision and more open governance. Yet there is something unseemly about lecturing the Tatas on governance when the group has long been prized for its leadership in governance and charity, whatever its lapses. More to the point, the listing rule exists to contain systemic risk from large finance companies that run on borrowed money. Tata Sons has repaid its debt. Forcing it to list applies a rule to an entity it no longer fits. The Trusts say that “pulling apart a hundred-year-old structure to fill an imaginary gap is taking a sledgehammer to crack a nut.” 

Listing will help minority shareholders, notably the debt-ridden Shapoorji Pallonji (SP) group, get the full market price for its 18.4% holding. Getting a fair value for its holding is a reasonable ask from the point of view of the SP group, which has welcomed the majority board decision to list. But there are other ways to meet that ask, such as a buyout of the SP stake at an independently determined fair value, that honour the stand of the Tata Trusts against listing.

This is not the first time that the Tata group has faced a crisis. In 2016, when the Trusts under Ratan Tata lost confidence in Cyrus Mistry, the board removed him as chairman, and the Supreme Court later upheld that decision. This time, for the first time, the board has sided with a chairman against the controlling shareholder. 

Avoid Regulatory Overreach

Would events have played out this way without a nod from political circles backing the side opposed to the majority owner? The government must resist the temptation to pick sides here. It must instead build bridges. Partisan meddling in a private institution is dangerous for everyone, not only the Tatas: if a regulator can be drawn into one boardroom fight, it can be drawn into any.

The Tata group is a national icon, a picture of enterprise, growth and service packed in a business model that many Indians cherish and hold as an exemplar. That model, in which the bulk of a great enterprise’s profits flows to charitable trusts for the public good, is rare anywhere in the world. It should not be dismantled by regulatory overreach without a clear, stated reason. Nor should its future turn on a chairman’s reading of rules that his principal shareholder rejects. 

On August 12, Chandrasekaran said he would not continue without unanimous support. He should hold to that word, and the RBI should explain itself.

(The writer is an Indian journalist and commentator and faculty member at SPJIMR, Mumbai. The views expressed are personal. By special arrangement with The Billion Press)