The NCLT verdict : What if God is wrong ?

Most boards of companies have a God…. and s/he can’t be wrong ! But what if s/he is … as on earth God is a human too ? That is the prime question Cyrus Mistry asked, but perhaps in a manner which was inappropriate and to the wrong forum. In our legal system there is no place for redressal if, whilst following the letter of the law, the spirit of the law is ignored. This applies most to issues related to corporate governance and,  as I have written elsewhere, even a powerful minority shareholder like Mistry is unlikely to get redressal. Hence, it is hardly surprising that his plea has been dismissed and appeals are unlikely to succeed.

The NCLT’s detailed 368 page order cannot be faulted on most counts as it has strictly stayed within the purview of the law with respect to the petitions under sections 241-246 of The Companies Act 2013. Additionally, some of the petitions were clearly open to outright rejection due to the manner in which they were raised and the sections under which relief was being sought. For example, the removal of the Executive Chairman is clearly an issue of an “employee” dispute  and not that of a “shareholder”  in a situation where the shareholders’ agreement and the Articles of Association did not bestow any nominee rights to the minority shareholder to appoint a Chairman. Oppression and mismanagement can be invoked only when shareholder rights are impinged and it can be demonstrated that the shareholder is being squeezed out or diluted at an unfair valuation. Proving “unfairness” is key for operation of these sections. In the TTSL case involving preferential allotment of shares to Siva at Rs 17/-, the fact that Mistry group was allotted shares at a lower price of Rs 15/- -and without the potential liability of future repayment if DoCoMo exercised it’s put option - could clearly not be deemed as an “unfair” act by  Tata Sons. Similary, Corus, Air Asia and Nano were issues which do not fall under the purview of these sections in the first place  as they dealt with either instances of poor business judgment,  or lack of concrete evidence for alleged criminal activities being investigated under other laws.

Interestingly, the NCLT did not find providing advice and suggestions as  being tantamount to “interference” in the affairs of the company , and the existence of “shadow directors” superimposing their will on board decisions. Whilst the manner in which the order has justified this position could perhaps be tenable, does this observation ignore the reality of how boards are run and decisions are taken ? Whilst commenting on the role and accountability of the Executive Chairman, they have also held that s/he does not have a “free hand” in running the company and his powers are circumcised by the collective decision of the Board. Whilst in principle that is fair, in the context of powerful advisors whose “advice” is tantamount to a “direction”, the outcome would not be far from what Mistry has alleged. In the event of serious differences of opinion on matters concerning the way the company is to be run, this also blurs the line between executive management and the advisers. Paradoxically, and perhaps unfairly, the former has prime responsibility but with limited authority, and the latter has unfettered authority with scant responsibility. This can, and will, create, serious issues impacting the company’s future well  being  on many counts and is a question which has not been settled.

Solely in situations of such a wide, and repeated, divergence of views, a conflict is bound to arise, and, thus, minority shareholders’ perception of mismanagement in running the affairs of the company will not be unfounded. However, our current legal structure does not provide a forum for redressal  for such intricate issues on the “spirit of the law” though the legislative intent for protection of minority rights is prevalent in many contemporary statutes through the “letter of the law”. In view of the NCLT judgment – a precedent setting landmark one at that – the practice will get strengthened as it has unequivocally demonstrated that even powerful minority shareholders like Mistry are in fact powerless in this aspect, and will have to subject itself to the will and judgment of the person who controls the Board through charisma, voting power or sheer influence.

The question is : what if God is wrong ?

For the aggrieved minority shareholder, there is no answer to that question..….yet.

The original, edited version appeared in The Economic Times national edition dated Jul 18, 2018 as a center page editorial column >Article 

The epaper link is on LinkedIn Here

(PRABAL BASU ROY)

A Sloan Fellow from the London Business School, PE Investor and Corporate Advisor, the author has formerly been a Director and Group CFO in various companies.

He is one of LinkedIn's Top Voices ; his views are frequently published in the national media on the intersection of current affairs, leadership and strategy with matters of finance, public policy, financial markets and corporate affairs.

Join me on Twitter.com @PrabalBasuRoy and feedback by email is welcome.