Tata vs Mistry: Independent directors queue up for legal opinion

The disputes, revelations and allegations in the ongoing Tata-Mistry battle seem to have got independent directors on boards of listed companies a little worried. According to sources, top law firms are receiving a lot of queries seeking possible legal implications due to their position on boards.

The queries are related to their roles and liabilities and also the ramifications for controversial past decisions a company may have taken during their tenure, said a senior lawyer at a leading firm who has received dozens of such queries.

Independent directors, who are on boards of more than three companies, are particularly perplexed on whether they should continue on all the boards, he added.

 

This cautious and proactive approach of independent directors comes in the wake of allegations of corporate governance failure at Tata group companies by former Tata Sons chairman Cyrus Mistry. Independent directors on boards of some Tata companies had issued statements on their views in some Tata group companies. 

“The independent directors are under a legal obligation to balance the conflicting interest of key stakeholders, exercise objective judgement and act in a bona fide manner whilst not getting influenced by any extraneous considerations. Any non-compliance may result in an action by Sebi (Securities and Exchange Board of India) since the regulator may take cognisance of any regulatory violations of the norms prescribed by it under the listing norms,” said Tejesh Chitlangi, partner, IC Legal.

Under Sebi’s listing regulations as well as the Companies Act, independent directors have an important role in ensuring good board governance. For instance, independent directors are required to separately meet every year to review the performance of the company chairperson among other agenda items, and communicate the issues, if any, to the board of directors.  

Further, they can also raise objections on the company’s core decisions and promoters cannot surpass such objections.

Other say the liabilities of independent directors are limited under the new Companies Act; however, in case of any mischief they are answerable. “This (Tata) episode proves that the appointment and removal of independent directors is based on whims and fancies,” said Sandeep Parekh, founder, Finsec Law Advisors. 

Other experts believe this is more of a personality conflict and, in the process, may have compromised interests of the wider community of shareholders. 

This is not the first time when the autonomy of the independent directors has been questioned. The role of independent directors had come under sharp focus during the Satyam scam where the court had prosecuted them for favouring the merger of Maytas with Satyam.

Taking account of all the developments, former Sebi chairman M Damodaran had said in an earlier interview, “The current situation is a reason they (independent directors) are feeling obliged to stand up and speak. If you find directors who are applying their mind and who are articulating their thoughts, then clearly they are discharging their duties.” 

Soon after the Mistry revelations on the lacuna at the part of Tata management, the market regulator had clarified its stand. “Independent directors have a fiduciary duty to perform and that they have their loyalty and obligation to all the shareholders. So, they must take care of interests of all shareholders, besides following Sebi guidelines (Sebi Act as well as Companies Act),” Sebi Chairman U K Sinha had said at a recent event.