A veto the SC upheld can be set aside in an afternoon — ease of doing business was never meant for days like this.
Picture a founder who owns fifty-five per cent of his company.
Some years ago he did the sensible thing. He stepped back, hired a professional CEO on a five-year term, and brought two respected independent directors onto the board. His lawyers gave him comfort in the Articles. On the matters that truly count, nothing passes without the affirmative vote of his nominee directors. Those matters are who runs the company, raising capital, selling a business and changing the strategy.
Now the board meets on a proposal he opposes. His two nominees split. One says no. The other has come round to management’s view. The independent director in the chair treats it as a tie and uses his casting vote. The company secretary minutes the resolution as carried. The forms reach the Registrar that evening.
What does he do on Monday morning?
Until this week I would have called that a classroom hypothetical. On 17 September it happened in the boardroom of Tata Sons.
The afternoon that ended the hypothetical
Tata Trusts hold about sixty-six per cent of TATA SONS LIMITED. The Articles say a majority of the Trusts’ nominee directors must vote in favour of the Chairman’s appointment or reappointment. There are two nominees. One voted for N Chandrasekaran’s reappointment and one voted against. A former Chief Justice’s opinion on the table said a casting vote cannot substitute for that consent. The board went ahead anyway. An independent director’s casting vote carried the resolution, and it was recorded as passed four to one.
The Trusts call it a nullity. Sr. Counsel Harish Salve, advising the Chairman, calls the position legally perfect, and says no company can function in deadlock.
I am not writing to decide the Tata matter. A court may do that. My own reading is simple. A casting vote breaks a tie among the whole board. It cannot manufacture the ‘affirmative vote’ as required by the Article 121 of the Directors appointed by the two Trusts. That question did not rise at all. But a reading is all it is until a court says so. Meanwhile the resolution sits in the minute book as passed.
That is the lesson for every founder. This was done to the shareholder holding two-thirds of India’s largest group. The Articles in question had been tested all the way to the Supreme Court in 2021. If it can happen there, it can happen in your company.
How a board takes a company without breaking a single law in one go
Look at the anatomy. It is not one illegal act. It is a sequence of procedural ones, each defensible on its own.
The chair rules. The chair decides the resolution is carried. His casting vote does the rest.
The minutes speak. The company secretary writes the minutes. Under Section 118, minutes are evidence of what happened.
The filings go in. The Registrar receives the forms. The world now reads that the resolution passed.
The company acts. Contracts are signed and appointments made. Outsiders who dealt with the company in good faith are largely protected.
The founder asks for a meeting. He requisitions a general meeting under Section 100. The board has twenty-one days to call it and forty-five to hold it. It may question the requisition, the notice or the quorum. If it does nothing, he may call the meeting himself within three months.
Then the tribunals. He goes to the NCLT, then the NCLAT, then the Supreme Court.
The law itself has never been in doubt. From V.B. Rangaraj in 1992, the Supreme Court held that a restriction binds the company only when it is written into the Articles. That is why every careful lawyer since has written them in.
In Tata–Mistry in 2021, the Court refused to call the Trusts’ affirmative rights oppressive. The High Courts have enforced shareholder agreements built into the Articles on the same footing. The principle we thought is settled?
So the founder will very likely win. That is not the question. The question is when.
Every one of those settled rights must still make the same journey through tribunal, appellate tribunal and Supreme Court. Cyrus Mistry was removed in October 2016. The Supreme Court decided the matter in March 2021. In corporate India, the process is the punishment.
By the time the founder wins, he may have won back a company that no longer looks like his.
Section 166 is clear that a director shall act in accordance with the Articles. The law is not the problem. The problem is that the law does not enforce itself. Section 166 tells a director what he must do. It sends nobody to make him do it.
And there is a harder truth. Under Section 166(2), your nominee director owes his duty to the company, not to you. The most important vote in your Articles sits with a person the law says does not work for you.
Now imagine the mesh
Our founder is the simple case. He holds his shares directly.
Much of large Indian business is not held that way. Control sits several floors up, through holding companies, HUFs, private trusts and investment firms, each owning a slice of the next. Some of this was built for succession. A great deal was built for tax. All of it was built so that no single filing shows the whole picture.
I have spent years helping families maintain these structures. Believe me, it is the most painful exercise in corporate practice. Every layer need board meetings, trustee resolutions, a karta’s signature and an authorised representative under Section 113. All of it has to be correct, current and in the right order, every single year.
Now let a CEO and a few directors decide to take the board of the operating company.
The family’s power to stop them does not sit in one place. It sits across every layer of that mesh. Before the family can requisition a meeting or vote a single share, each entity above must first act. Every one of those acts is a new point to dispute. Was the trust validly represented? Did the trustees properly resolve? Was the karta’s authority complete? Was the holding company’s board resolution in order?
A captured management does not have to win those arguments. It only has to raise them.
Tata offers a small preview. One of the principal Trusts has been barred from even convening trustee meetings while proceedings are pending before the Charity Commissioner. When a shareholder cannot hold its own meeting, it cannot give its own instructions. If that can stall a single, transparent shareholder, think what it does to a family whose control runs through eleven entities.
The mesh was designed to keep outsiders from seeing who is in control. On the day of a boardroom hijack, it may keep the family from proving it.
The world is watching
For years my practice has been bringing foreign companies into India through joint ventures. Every one of them eventually asks the same question. If my partner or the management turns against me, how quickly can I enforce what we signed?
We have spent years telling the world about ease of doing business: faster registrations, online filings, fewer forms. All of that matters. But ease of doing business is not tested on the day a company is incorporated. It is tested on the day a board decides the Articles do not apply.
On that day, the answer we give the world is a petition and a wait.
A foreign investor who holds twenty per cent protected by an affirmative vote will draw his own conclusion from Tata. If the majority shareholder of India’s most respected group must go to court to enforce its own veto, where does that leave him?
That investor is not reading our rankings. He is reading our boardrooms.
So, are founders or the PE Investor safe?
Partly. Their shareholding keeps the last word, and no board can take Section 169 away from them. But an affirmative vote in the Articles is only a promise. It holds as long as the people in the room choose to honour it, and it is enforced at the speed of our courts.
Now look at who else is meant to hold the line.
Tata Sons applied to the Reserve Bank on 28 March 2024 to surrender its registration as a Core Investment Company. It had repaid every rupee of its debt to qualify. The central bank took nearly thirty months to answer one application, and the answer, when it came, was no. Through all of it, the Government watched from the sidelines.
A regulator that takes two and a half years to decide. Courts that take years to enforce what is already settled. A Government that says nothing.
So I will ask India Inc a plainer question than the one we usually ask. Forget ease of doing business. Is it safe to do business?
— Nitin
Connecting Dots — every fortnight, I take a deal, a policy, or a person and tell you the thinking behind it. Insights and instincts.