Wednesday, November 22, 2017
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The logo of Tata Motors

Amongst the many shortfalls in corporate governance within the Tata group that Cyrus Mistry’s legal team is sure to highlight, their principal area of attack is likely to be on the Tata Trusts. Sir Dorabji Tata Trust, Sir Ratan Tata Trust and other allied trusts (collectively “Tata Trusts”) are “amongst India's oldest, non-sectarian philanthropic organisations.”

“These trusts own two-thirds of the stock holding of Tata Sons (unlisted public entity), the apex company of the Tata group of (listed) companies. The wealth that accrues from this asset supports an assortment of causes.” The Tata Trusts work inter alia across health, energy, rural upliftment, urban poverty alleviation and education. It is well known that the public work undertaken by these trusts spreads over 17 states and 170 districts across India and the programmes that the Tata Trusts support reach out to millions of households through a network of 450+ partner organisations. However, little to nothing is known about the internal functioning of the Tata Trusts.

The Tata Trusts are governed by their trust deeds and the Maharashtra Public Trusts Act and have a unique position because they hold shares in a commercial entity. Given that the Tata operating companies, which these trusts indirectly control, have a combined market capitalisation of 7.5% of the Bombay Stock Exchange, should not the internal workings of the Tata Trusts also be subject to “public scrutiny”, in keeping with one of the five core values by which the Tata companies do business? Given the unusual pyramidal structure of holdings at the Tata group, should not the governance oversight move from listed companies to their unlisted promoters in the interest of fairness, honesty and transparency that the Tata group advocates? Does not the public have a right to know details about public charitable trusts that enjoy complete tax exemption because of the public functions they undertake?

The Supreme Court of India has held that a body performs ‘public functions’ “when it seeks to achieve some collective benefit for the public or a section of the public which is accepted by the public as having authority to do so. Bodies, therefore, exercise public functions when they intervene or participate in social or economic affairs in public interest.” The Apex Court notes that charities, self-regulatory organisations and other private institutions, like universities or churches, also perform some type of public function. And such non-governmental bodies, including trusts, are just as capable of abusing their power as the government. Public charitable trusts by their very nature perform public functions and by doing so are subject to the very wide writ jurisdiction under Article 226 of the Constitution of India and are consequently subject to judicial review.

Applying this principle of judicial scrutiny, in the recent case of Board of Control for Cricket in India (BCCI) the Supreme Court held that even though BCCI is an autonomous, non-governmental private body and is financially, functionally and administratively not dominated by or under the control of the government, yet, given that it performs an enormous public function, the Board is bound to follow the doctrine of fairness and good faith in all its activities. The Court further held that the functions of the Board are clearly public functions and hence it has a responsibility to act reasonably and it cannot act arbitrarily, whimsically or capriciously. The Court notes that regardless of the fact that the public functions are performed by an autonomous private body or a society or arguably by a trust, to which the government lends assistance, in various forms including tax relief, the entity discharging the said functions is answerable on the standards generally applicable to judicial review of State action.

The test therefore is of the public nature of functions being performed. Holding the BCCI to be discharging “public functions”, the Supreme Court notes that “all actions which BCCI takes while discharging such public functions are open to scrutiny by the Courts in exercise of their powers under Article 226.”

Notably, the Court holds that public policy is not a static concept. It varies with times and from generation to generation. But what is in public good and public interest cannot be opposed to public policy and vice versa. Elaborating on this the Court notes “all those principles of law that ensure justice, fair play and bring transparency and objectivity and promote probity in the discharge of public functions would also constitute public policy. Conversely, any deviation, abrogation, frustration or negation of the salutary principles of justice, fairness, good conscience, equity and objectivity will be opposed to public policy.”

Will not the judicial reasoning given in the BCCI case be applicable to the Tata Trusts? When the Tata Trusts decided to replace Mistry as chairman of Tata Sons, did they follow all principles of fair play? Are the Tata Trusts, as a majority shareholder of Tata Sons, pushing for Mistry’s removal as director of the listed operational entities only to preserve their own longstanding ethos and history, or did they also bear in mind the interests of all the other minority shareholders in these operational entities, in keeping with their core value of unity based on mutual respect? Is there really a chain of command originating from the Tata Trusts leading to the independent directors of the various listed entities? If so, how will that stand the test of public probity? New trustees were appointed a few months ago and trust documents were amended post Mistry’s appointment as chairman of Tata Sons to have the power to unilaterally remove him and will such background acts pass the scrutiny of the high standards of ethics that common citizens like the author associate with the Tata group. The Tata Trusts hold themselves out as “catalysing transformational change in India” which they indeed have undertaken. But are they now ready to transform their own functioning and reform themselves or will they, like the BCCI, have to be reformed under judicial orders?

In the Tata-Mistry match, the Parsis’ innings will hold the key to the game, given their bench strength at the Tata Trusts. If Cyrus Mistry was to bring out his fast pace legal bowlers to seek a writ or other relief as provided for under law against the Tata Trusts and request a neutral umpire to examine the control that the trusts indirectly exert on the listed companies, thereby exposing the shortcomings in corporate governance, there is a strong likelihood that the Tata Trusts may find themselves stumped. But the Tata Trusts must be well padded for such onslaught and ready with their own counter attack, perhaps even a googly. The moment that happens, this game is likely to lose all character of being played in a gentlemanly fashion. As has repeatedly been stated, the real loser in this whole game is the spectator: for it brings into serious questioning corporate governance across the country and is likely to take the ‘bails of’ brand India!

Courtesy: Business Standard

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