Without the vote its own Articles require, the Tata Sons board has set India’s most respected group on a path to litigation
On 17 September, the Tata Sons board approved a third five-year term for N. Chandrasekaran as executive chairman. For a group that has long set India’s standard for corporate governance, the decision is hard to understand. It was taken in haste, and the Group’s reputation will pay the price.
My concern is not the chairman’s ability. It is how the board of India’s largest industrial group has conducted itself.
What changed?
On 12 August, the chairman publicly said he would not seek another term. Five weeks later, the board has reappointed him. Shareholders, employees and the public have not been told what changed.
Nobody makes such a statement casually. A prudent board would have found out the reasons and addressed them before deciding. This board did the opposite.
The directors knew what would follow. They knew the Chairman of Tata Trusts was opposed. They knew the decision would be challenged and debated publicly for months. Knowing all this, can anyone say they acted prudently?
The duty under Section 166
Every director in India is bound by Section 166 of the Companies Act. A director must act in accordance with the company’s Articles. A director must also act in good faith, for the benefit of the members as a whole, and in the best interests of the company, its employees, its shareholders and the community.
Test this decision against that standard. It was taken without the vote the Articles require. It was taken over the objection of the majority shareholder’s representative. It invites litigation, unsettles employees and investors, and hurts a name the public trusts. Prima facie, the directors who approved it have not met the duties Section 166 places on them. Acting in a hurry is the smaller charge.
What the Articles say
Tata Sons’ Articles require that board decisions carry the affirmative vote of a majority of the directors nominated by the Tata Trusts. With two Trust nominees on the board, both must agree. This is how the Trusts, who own about two-thirds of the company, protect the Group.
By all reports, Noel Tata voted against the proposal. If so, the resolution failed the test the Articles set. On first principles, how could the board go ahead?
Even the rule that executives retire at 65, which Ratan Tata himself followed in 2002, was waived only with the Trusts’ support. That support is no longer there.
What the board should have done
The answer was simple. Defer the decision. Sit down with the Trusts. Understand what led to the August statement. Resolve differences quietly, the Tata way. With the current term running until February 2027, there was no hurry.
Instead, an internal difference has become a public dispute. A governance model admired for decades is now in question, and the damage will take time to repair.
The directors who voted for this resolution owe the Group, and India Inc., an explanation. I hope good counsel prevails, and this is settled at Bombay House, not the Bombay High Court.
PS: One more point needs clarity. The board has not decided to list Tata Sons. It has resolved to initiate steps towards compliance with the applicable guidelines and to seek guidance from the RBI, the Tata Trusts and other stakeholders. Reports describing this as a decision to launch an IPO are simply wrong. But what guidance is left to seek? Tata Sons repaid its entire debt of around ₹20,000 crore and applied to the RBI to surrender its registration in 2024 as a core investment company. The intent behind that was never in doubt: the company did not want to list. The RBI has now rejected that application. The choice before the board is therefore a straightforward to contest the rejection by RBI.
— Nitin Potdar, Sr. Corporate & M&A Lawyer
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Disclosure: I have worked on the Tata Brand Equity agreement in the 1990s with the late Mr R.A. Shah. My views here are personal.