Independence of Directors Vs Corporate Democracy

Foremost in resolving the Tata-Mistry dispute is whether ‘corporate democracy’ overrides all other issues, notably independence of directors.

- HP Ranina

The Tata-Mistry imbroglio has shaken the roots of the Indian corporate sector with regard to two important factors. First, the Tata group, being one of the most reputed corporate groups in India, has suffered an erosion of its brand value. The National Company Law Tribunal observed that even the country’s image may be affected. Second, for the first time, the chairman of various publicly listed companies was sought to be removed as a director on the ground that he has lost the confidence of the principal shareholder.

While allegations and counter allegations may be probed by the appropriate regulatory authorities based on documented evidence, critical issues need to be considered in the context of corporate governance, particularly the sanctity of protecting the independence of directors.

The foremost issue is whether the principle of ‘corporate democracy’ would override all other crucial issues, notably independence of directors, protection of interest of minority shareholders and principles of good governance.

Indeed, it was argued before the Bombay High Court by the counsel of the Tata group that the principle of corporate democracy alone should be applied to determine whether a director can be removed from the board. The counsel of the market regulator, Sebi, argued that Section 169 of the Companies Act, 2013 holds the field and allows removal of even an independent director by an ordinary resolution.

Prima facie Section 169 is clearly worded. While it permits the director sought to be removed to make a written representation to the shareholders and gives him an opportunity to be heard, a resolution passed by a simple majority at a shareholders’ meeting would decide the fate of the director.