The Securities and Exchange Board of India (Sebi) is doing a preliminary examination of the arrangement between Tata Sons and group companies to understand whether it is in consonance with current insider-trading regulations.
Sebi is also examining whether price-sensitive information was disclosed to Tata Sons directors and Tata Trusts nominees before it was approved by the boards of operating companies.
“We are taking note of the events unfolding at Tata companies and examining whether there has been any securities law violations,” said a senior Sebi official. He declined to elaborate further but added that the regulator will make up its mind in the next few days.
A Tata Group spokesperson, replying to an ET questionnaire, said the group has a view on the subject and it will convey it to Sebi. He declined to elaborate.
Sebi insider-trading rules stipulate that price-sensitive information be shared only on a needto-know basis and that executives who don’t have to decide on the matter should not be informed before the board decision. This need-to-know list includes only board members, not outsiders including relatives of the promoter family.
Cyrus Mistry said that the CEO of Tata Power had made presentations to Tata Sons board on the utility major’s proposed acquisition of Welspun Renewables and that key Tata Trusts trustees were part of the discussions.
The former chairman in a mail to the Tata Sons board on October 25 also said that Trusts’ directors (Nitin Nohria and Vijay Singh) left a Tata Sons board meeting in progress, keeping the board waiting for almost an hour, to obtain instructions from Ratan Tata.
‘SUPERBOARD’’ STRUCTURE GOES AGAINST THE RULES
“Such a work pattern has also created the added risk of contravening insider-trading rules,” Mistry had said. After the mail became public, it was, for the first time, also revealed that strategic decisions like acquisitions and capex initiatives undertaken by Tata entities required the approval of the Tata Sons board with majority votes from the Tata Trusts-nominated directors.
Article 121 of Articles of Association (AoA) of Tata Sons states that certain strategic decisions of operating companies have to be ratified by the Tata Sons board. For the resolution to pass, it required an “affirmative vote” of a majority of directors nominated by Tata Trusts on the Tata Sons board. This (majority vote by Tata Trusts nominated directors) was incorporated in 2014.
Corporate governance experts and lawyers were sharply critical of this practice. A former Sebi chairman said this (rules of engagement) is against the spirit of Sebi’s insider-trading rules and the Companies Act. The Tata Group has 29 publicly listed companies. “As a result of the AoA, all Tata companies, in effect have a superboard which is not accountable to the shareholders of individual companies, who face the risk of losing value in the process,” said Rajiv Kumar, senior fellow, Centre for Policy Research.
The ‘superboard’ structure goes against the rules that requires boards of every listed company to be independent and autonomous and take standalone decisions keeping the best interest of the company. Section 166 of the Companies Act states that a director of a company shall act in good faith to promote the objects of the company for the benefit of its members as a whole and in the best interests of the company.
“Although the directors are appointed by the shareholders of the company, their primary duty is to the company and they are legally bound to act in the best interests of the company and not in the best interests of its majority shareholders,” said Sandeep Parekh, founder of Finsec Law Advisors and who was an executive director of Sebi. Cyrus Mistry was the first chairman of Tata Sons in the history of the 148-year-old Tata Group who was not a chairman of Tata Trusts, mainly Sir Dorabji Tata Trust and Sir Ratan Tata Trust, which holds 66% of Tata Sons. He didn’t have absolute power like his predecessor Ratan Tata, who was the chairman of both.
Regulation 3 of the insider-trading rules specifies that unpublished price-sensitive information should be shared strictly on a need-toknow basis and not communicated to others who are not involved in the transaction irrespective of their position in the company or their relationship with promoters and senior management.
This rule was buttressed by Sebi in its October 3 order which pulled up Piramal Enterprises and its main promoters, Ajay and Swati Piramal, for disclosing unpublished price-sensitive information to their son Anand Piramal about a transaction. Anand, although a part of the promoter group, was neither a director nor an employee of the company.
The Tata issue here is a little different. One of the reasons behind Mistry’s ouster was supposed to be his reluctance to communicate early on to the Tata Sons board about Tata Power’s decision to buy the renewable energy business of Welspun Renewables. Tata Sons was peeved that the communication was made to them after the approval of the deal by the Tata Power board and the signing of the shareholders agreement. They also wanted a say in the decision as Tata Sons is a major shareholder in Tata Power. They admitted, however, that Tata Sons board was informed about the decision to buy Welspun Power.
Whether this requirement violates Sebi’s insider-trading rules remains to be seen. Some corporate lawyers, including Parekh of Finsec Advisors, think it does. “Sebi’s rules are clear that no insider should communicate, provide or allow access to unpublished price-sensitive information relating to a company to any person including other insiders,” said Suhail Nathani, managing partner, Economic Laws Practice.
“Confidential information pertaining to the deal revealed by the officials of Tata Power to the board of Tata Sons violates provisions of the Companies Act as well as Sebi’s insider-trading regulations,” said Parekh.
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