Has India slipped down the ladder of corporate governance?

Despite important steps to improve corporate governance, perception about corporate

governance standards in India remains low
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THE MINT October 26, 2016

Sachin P. Mampatta

An alternative database of the World Bank suggests an improvement in corporate

governance norms in India in recent years.

The latest boardroom drama at the Tata group has raised uncomfortable questions on corporate
governance in India. Were it not for the enviable legacy of the salt-to-software conglomerate, the
return of a family patriarch to oust a successor appointed by him just four years ago would have
attracted far greater opprobrium.
While the latest episode may be a one-off event, it begs the question: how does India fare
compared to peers when it comes to corporate governance norms?

It seems the answer depends on whom you ask.

The latest Global Financial Stability report published earlier this month by the International
Monetary Fund (IMF) suggests that while corporate governance norms have improved across
emerging markets, corporate governance standards fell in India between 2006 and 2014. The
report examined country-level performance on variables such as strength of investor protection,
protection of minority shareholder interests, and disclosure and reporting norms. In most of the
key indicators, Indias score seems to have dropped. As the chart below shows, Indias score in
protection of minority shareholder rights has declined, the report suggests.

Click here for enlarge

The apparent decline in corporate governance norms is puzzling as the past few years have
witnessed three important changes that have strengthened minority shareholder rights and
corporate governance regulations: first, a new Companies Act which has tightened norms to be
followed by firms; second, tightening of regulations relating to minority protection by market
regulator Securities and Exchange Board of India or Sebi, and third, a surge in investor activism
in the country which has helped minority shareholders take on promoter groups.
Corporate governance experts in the country agree that the country scores used in the report are
counter-intuitive.
In my opinion, since the disclosures have increased in India as stated in the report and as is
evident from the companies Act, 2013 and provision of e-voting facility to the shareholders, the
indices for Protection of Minority Shareholders Interests and Strength of Auditing and
Reporting Standards ought to increase, said J.N. Gupta, co-founder and managing director of
corporate governance advisory Stakeholder Empowerment Services.
Shriram Subramanian, founder and managing director of corporate governance advisory firm
InGovern, said that scores on audit and reporting standards should have seen an improvement
after rules were tightened especially after the Satyam scam.
A closer look at the data shows that most corporate governance-related indicators were drawn
from the Global Competitiveness Indicators published by the World Economic Forum (WEF).
The corporate governance indicators are all based on responses to questions asked in a survey of
executives (the Executive Opinion survey). For instance, the survey asks respondents to rate on a
scale of 1-7 the extent to which minority shareholders are protected by law in their home
country. Similar questions cover other indicators as well. The sample size of the India survey was
211 in 2014, and 68 in 2006. Such surveys largely reflect perception and sentiment on corporate
environment, and may not always reflect changes in laws and regulations.
It is possible that the corruption scandals and corporate scams which emerged after 2008
impacted sentiment negatively. In fact, companies which were politically connected saw their
stock prices fall sharply during this period, according to an index of connected companies
constructed by brokerage house Ambit Capital. Heightened sensitivity to such issues may have
affected the survey responses. But the responses show a similar trend even after 2014, the WEF
website shows, suggesting a disconnect between regulatory changes and executive sentiments.
An alternative database of the World Bank, however, suggests an improvement in corporate
governance norms in India in recent years. The World Bank reports on doing business show that
India improved its rank in protection of investor and minority rights significantly over the past
decade, as the chart below shows. These rankings seem to be in sync with the views of corporate
governance experts cited earlier.

Click here for enlarge

The World Bank reports are also based on surveys but these surveys are more detailed and
attempt to elicit information on changes in securities regulations, company laws, civil procedure
codes and court rules of evidence rather than rely on sentiment. The reports for a particular year
are released before that year begins. For example, the Doing Business 2017 report was released
on 25 October 2016. The World Bank reports show that Indias rank in investor protection had
fallen between 2007 and 2013 before rising sharply in 2015. India ranked seventh among all
economies surveyed in 2015, ahead of several advanced economies.
The 2016 and 2017 Doing Business Reports showed that Indias rank on investor protection (of
minority shareholders) slipped to 8 and 13, respectively. However, its distance to frontier or DTF
score was 73.33 in the latest survey, slightly better than the 72.5 recorded in 2015. The score
measures how close a country is to the best possible performance on a given indicator, with
higher scores indicating better performance. This suggests that the latest drop in Indias rank has
more to do with other countries catching up, rather than India regressing on governance
practices. The DTF score suggests that investor protection standards have in fact improved
slightly since 2015.

The World Bank reports seem to indicate that corporate governance standards in the country may
not be as dismal as one may infer from the WEF and IMF reports.
It remains to be seen if executive sentiment on corporate governance catches up with the changes
in the regulatory environment in the coming years, or the disconnect between the two remains as
stark as it is today.
Dipti Jain contributed to this story.

Cyrus Mistry vs Ratan Tata: A guide to the key issues involved

FAQs on the controversy surrounding the ouster of Cyrus Mistry as Tata Sons chairman
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Ravi Krishnan

A file photo of Cyrus Mistry. Photo: Reuters

On Monday evening after the markets closed, Tata Sons Ltd released a statement saying that its
board has replaced Cyrus Mistry as chairman. It also added that Ratan Tata, the previous
chairman, will take over in the interim and that a search panel has been constituted to find a new
boss.
Mint brings you some FAQs on the biggest corporate story of the year.
What is Tata Sons and why is it important?
Tata Sons is the holding company of the Tata group of companies. The chairman of the board of
Tata Sons is also typically the chairman of the operating companies of the Tata group. As the
promoter of Tata-operating companies such as Tata Steel and Tata Motors, Tata Sons decides
how much capital to allocate to each of these firms.
So, why did the board sack Mistry?
That part of the affair is still a mystery. Ratan Tata, chairman of Tata Trusts, has not commented
so far. There are murmurs of conflict of interest and poor performance.
Still, V.R. Mehta, trustee of the Sir Dorabji Tata Trust, told NDTV in an interview that the Tata
Trusts were concerned about falling revenue (since Mistry took over)funds for charitable
work were drying up. The Trusts were also unhappy about the fact that the performance of Tata
Sons was increasingly dependent on just two companiesJaguar Land Rover (JLR) and Tata
Consultancy Services (TCS).
What is Tata Trusts and how is it involved?
Sir Dorabji Tata Trust, Sir Ratan Tata Trust and a bunch of other trusts endowed by the members
of the Tata family are collectively known as the Tata Trusts. This trust owns two-thirds of Tata
Sons.
While little is known (beyond Mehtas statement why Mistry was removed), it has been
established who was the prime mover behind Mistrys sacking.
In a statement on Monday, a Tata Sons and Tata Trusts spokesperson said that on the
recommendations of the principal shareholders decided that it may be appropriate to consider a
change for the long term interest of Tata Sons and Tata group.
Can they just sack the chairman like that?
Just before Mistrys appointment as chairman, Tata Trusts gave its special powers in nominating,
approving and removing chairmen of Tata Sons. For instance, a majority of the directors

nominated by the trusts have to approve with affirmative voting the appointment and removal of
chairmen. Affirmative vote items are those where, in the absence of participation by the
concerned directors, the company cannot undertake an action.
For more about special powers of Tata Trusts, Read Here
What are the facts about this poor performance and conflict of interest?
Poor performance is a relative term and it is difficult to capture performance of a behemoth by a
single yardstick.
Still, consider this: In the four fiscal years from 2013 to 2016, essentially Mistrys regime, the
average dividend received by Tata Sons was Rs6,855 crore, a number boosted by the one-off
TCS dividend. Adjusted for that (assuming the same dividend for fiscal 2014 and 2015), the
average dividend was Rs5,018 crore. In the four years preceding that, the average dividend
received was Rs2,730 crore.

Still, the compound annual growth rate of dividends

received during the Mistry years was 18.1%, a slowdown
from the 21% growth in the four preceding years when
Ratan Tata was chairman.

However, note that in seven of the last nine years, TCS and JLR contributed at least 70% (and in
one year it was as high as 148%) of dividends received by Tata Sons.
For more about dividends, Read Here
What does Mistry have to say about his performance?
Mistry has defended his tenure by saying he inherited a lot of problems. He has questioned the
decisions of his predecessor on the entry into aviation, the aggressive bidding for Tata Powers
Mundra power project, the decision to continue with the Nano car, etc.
He has said that he couldnt function freely given Ratan Tatas interference. (Remember, the
special powers of the Tata Trusts).
In an email to the directors of Tata Sons, he said that two members of the nomination and
remuneration committee of the boardwhich had recently lauded and commended his
performancevoted for his removal.
So, Mistry isnt to blame?

Well, analysts are also raising questions on whether Mistry couldnt have handled the groups
spat with Tata DoCoMo better. Some insiders also said that he was aloof and could have
communicated more.
Is that all?
No. Perhaps the two biggest bombshells in his email are these.
The Tata group is staring at a Rs1.18 trillion writedown. That is two-thirds of the groups net
worth of Rs1.74 trillion.
He has also pointed out instances of corporate governance violation in the group.
What happens next?
Mistrys letter has taken some gloss off the Tata reputation for being a well-governed Indian
corporate group. The Tatas have to now answer Mistrys claims effectively and publicly.
Separately, the stage seems to be set for a long and messy legal battle although Mistrys office
released a statement on Tuesday saying it was not considering litigation for now.
Will the government/courts intervene?
It is possible that the MCA will look into these allegations. Already, exchanges and capital
market regulator Securities and Exchange Board of India are asking group companies about
these allegations of breaches of law.
What are experts saying?
Of course, opinion is divided.
For instance, Darius Pandole, an independent director with Tata Global Beverages, told Mint, in
his personal capacity: Cyrus Mistry has been impeccable as the chairman of Tata Sons. His
dedication, professionalism and value systems allowed him to make a significant positive
contribution to Indias most respected and complex corporate group.
On the other hand, Ratan Tatas counsel Abhishek Manu Singhvi told NDTV in an interview:
Does Mr Mistry think the entire eminent board (of Tata Sons) is insane? They all lost
confidence in him.
At a larger level, this raises questions about corporate governance practices in India. In an
interview to ET Now television channel, Deepak Parekh, the chairman of HDFC Ltd, said: We

are getting calls from overseas investors asking what to make of it (Mistry dismissal). Issue
could have been handled in a more appropriate and more proper manner.
Heres an analysis of corporate governance in India.
Shrija Agrawal contributed to this .

Mumbai: A reading of Tata Sons Ltds articles of

association shows that Tata Trusts, its largest shareholder,
gave itself special powers in nominating, approving and
removing chairmen of the group holding companyjust
days before Cyrus Mistry took the top job in December
2012.
While the reasons for Mistrys abrupt removal on Monday
remain unclear, there is no doubt that the board of Tata
Sons had the power to remove him.
Tata Trusts, which consists of a clutch of trusts such as
the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust,
owns two-thirds of Tata Sons, and has special rights in the
holding company of the conglomerate, especially when it
comes to the appointment and removal of chairmen,
according to Tata Sons articles of association.
According to article 104B, as long as Tata Trusts has at
least 40% shareholding, it can nominate one-third of the
directors of the Tata Sons board. The quorum for a
meeting of the Tata Sons board shall include a majority

of the directors who are appointed pursuant to Article

104B.
The Articles also say that the selection committee will
consist of three people nominated jointly by the Sir
Dorabji Tata Trust and the Sir Ratan Tata Trust who may or
may not be directors of the company, one person
nominated by and among the board of directors and an
independent outsider selected by the board.
More importantly, a majority of the directors nominated
by the Trusts have to approve with affirmative voting the
appointment and removal of chairmen. Affirmative vote
items are those where, in the absence of participation by
the concerned directors, the company cannot undertake
an action.
ALSO READ | Ratan Tata seeks to rally group firms
after Cyrus Mistry ouster
Some of these special powers seem to have been added
to the articles of association at the time of Mistrys
appointment as chairman and after that. To be sure, these
may have also been added to protect the interests of Tata
Trusts. Mistrys appointment as chairman of Tata Sons
was only the second time the trusts and the holding
company had different chairmenRatan Tata and Mistry,
respectively. The first instance was when J.R.D. Tata was
the chairman of the Tata Trusts and Ratan Tata was
chairman of Tata Sons for a few years in the 1990s.
The article relating to the selection process of chairman
and the constitution of the selection committee was
added by a special resolution passed at an extraordinary
general meeting (EGM) held on 6 December 2012. The
article relating to affirmative votes of a majority of
directors nominated by the Trusts was passed at an EGM
on 9 April 2014. Perhaps, because of these, a prominent

Mumbai-based corporate lawyer said, on condition of

anonymity, that it would not be advisable for Mistry to
take the legal route.

Mumbai: One key reason for Cyrus Mistrys sacking was the
displeasure of Tata Trusts in not receiving enough dividends on
their shares. On Tuesday, V.R. Mehta, trustee at the Sir Dorabji
Tata Trust, which holds a 27.98% stake in Tata Sons, said as
much in an interview to NDTV.
However, a look at Tata Sonss filings with the Registrar of
Companies shows that the firms dividend distribution has been
steady. It distributed Rs283 crore as dividends to ordinary
shareholders in each of the fiscal years from 2008 to 2010. From
fiscal 2011 to fiscal 2016, the dividend paid has been Rs323
crore, except for one year. In fiscal 2015, Tata Sons gave out

Rs647 crore to shareholders because of a special dividend

received from Tata Consultancy Services Ltd (TCS), where it
holds close to 73.5%.

Click here for enlarge

The trusts were concerned about falling revenue (since Mistry
took over)funds for charitable work were drying up, Mehta told
NDTV. The trusts are dependent for philanthropic activities on
dividends on shares we hold. The performance of Tata Sons was

becoming more and more dependent on just 2 companiesTCS

& JLR (Jaguar Land Rover).
Earlier this year, the Trusts withdrew Rs3,951 crore by redeeming
preference shares they held in Tata Sons, according to the latters
directors report for 2015-16. These shares were redeemed about
10 years before maturity.
What about dividends earned by Tata Sons from its holdings in
key Tata operating companies?
In the four fiscal years from 2013 to 2016, essentially Mistrys
regime, the average dividend received by Tata Sons was Rs6,855
crore, a number boosted by the one-off TCS dividend. Adjusted
for that (assuming the same dividend for fiscal 2014 and 2015),
the average dividend was Rs5,018 crore. In the four years
preceding that, the average dividend received was Rs2,730 crore.
Still, the compound annual growth rate of dividends received
during the Mistry years was 18.1%, a slowdown from the 21%
growth in the four preceding years when Ratan Tata was
chairman.
The contention that the group was increasingly dependent on
TCS and JLR is true to a certain extent, but it is a matter of
degree.
For seven of the nine years for which data is available, dividend
from TCS and Tata Motors (consolidated for JLR) accounted for at
least 70% of Tata Sonss income from investments. The two bluechips accounted for as much as 148% of Tata Sons dividend in
fiscal 2010. In the last three financial years, it was close to 100%
and exceeded 109% in fiscal 2014.

Click here for enlarge

Sir Ratan Tata Trust, Sir Dorabji Tata Trust and a clutch of other
Tata family member-endowed trusts together are called Tata
Trusts, which own a collective two-thirds in Tata Sons. Tata
Trusts gave itself special powers in nominating, approving and
removing chairmen of the group holding companyjust days
before Cyrus Mistry took the top job in December 2012.
To be sure, these may have also been added to protect the
interests of Tata Trusts. Mistrys appointment as chairman of Tata

Sons was only the second time the trusts and the holding
company had different chairmenRatan Tata and Mistry,
respectively. The first instance was when J.R.D. Tata was the
chairman of the Tata Trusts and Ratan Tata was chairman of Tata
Sons for a few years in the 1990s.