12 May 2017 16:21 IST

How independent are independent directors?

In context of Cyrus Mistry’s ouster, the case study examines corporate governance in Tata group

In the context of Cyrus Mistry’s ouster as Chairman of Tata Sons, this case study examines corporate governance in the Tata group. This is among the best cases presented at the Case Symposium held at the Loyola Institute of Business Administration (LIBA) held on April 7, 2017.

On October 24, 2016, the Tata Sons board — the majority shareholder of the Tata group conglomerate — approved a resolution to oust Cyrus Mistry as Chairman of Tata Sons. This move came as a surprise and a shock to everyone including Mistry himself.

It set off an acrimonious exchange of words between Tata Sons and Mistry, who was hand-picked for the job less than five years ago by Ratan Tata. This was followed by a bitter legal battle that continues to date. Tata Nano, the previous Chairman Ratan Tata’s pet project, seems to have triggered the feud. The manner and pace in which the events unfolded led one to hypothesise on the effectiveness of the Board of Management and the position and extent of power and influence it has.

This case examines the role and the position of the independent directors in a large conglomerate whose majority shareholders are the promoters, and questions the independence of an independent body. It also narrates the events leading to the removal of Mistry as Chairman of the Tata Board and the subsequent removal of an independent director who backed Mistry. The case study examines corporate governance policies in the Tata group and describes the role of the independent director.

Commenting on the issue, L Iyer of LVV Iyer & Associates had asked a pertinent question: “What is at stake right now is not an independent director. What is at stake is the independence of independent directors. If independent directors are under constant threat of being removed, why would they act in an independent manner?”

Global brand

A global enterprise headquartered in Mumbai, the Tata group was founded by Jamsetji Nusserwanji Tata in 1868. The visionary entrepreneurhelped pave the path to industrialisation in India by encouraging businesses in sectors such as steel, energy, textiles and hospitality. Over the last 150 years, the Tata group has grown to comprise over 100 independent operating companies in more than 100 countries. It now employs over 660,000 people and has assets of over $120.6 billion as of 2016.

Each Tata company operates independently under the guidance and supervision of its own board of directors and shareholders. There are at present 29 publicly listed Tata enterprises with a combined market capitalisation of $116.41 billion in 2016. Some notable Tata companies include Tata Steel, Tata Motors, Tata Consultancy Services, Tata Power, Tata Chemicals, Tata Global Beverages, Tata Teleservices, Titan, Tata Communications and Indian Hotels.

Tata Sons

Tata Sons is the principal investment holding company and 66 per cent of its equity share capital is held by philanthropic trusts that support education, health, livelihood generation, and art and culture. The Tata Trusts — the majority shareholders of Tata Sons — has endowed institutions for science and technology, medical research, social studies and the performing arts.

Tata Sons aims to build multinational businesses that seek to distinguish themselves through customer-centricity, innovation, entrepreneurship, trustworthiness and values-driven business operations, while balancing the interests of diverse stakeholders including shareholders, employees and civil society.

Ratan Tata and Cyrus Mistry

Ratan N Tata took over as Chairman of Tata Sons from JRD Tata in November 1993 and has served as Chairman of the major Tata companies, including Tata Motors, Tata Steel, Tata Consultancy Services, Tata Power, Tata Global Beverages, Tata Chemicals, Indian Hotels and Tata Teleservices. During his tenure — from 1992 to 2012 — the Group’s revenues grew manifold, totalling over $100 billion in 2011-12.

Cyrus Mistry, often regarded as Ratan Tata’s blue-eyed boy, was handpicked by the billionaire mogul himself in mid-2012 to head the Tata Group and took charge in December the same year. Cyrus is the younger son of billionaire and construction magnate Pallonji Mistry. The Pallonjis have been a business family for over a century and it was in the 1930s that Cyrus’ grandfather, Shapoorji Mistry, first acquired a stake in Tata Sons. To date, their stake stands at 18.5 per cent and is held by Cyrus’ father. It is the largest block of shares held by a single party.

Tata Motors

Tata Motors is India’s largest automobile company, with consolidated revenues of $34.7 billion (₹1, 88,818 crore) in 2012-13. It is the country’s market leader in commercial vehicles and among the top three in passenger vehicles. It is also the world’s fifth-largest truck and fourth-largest bus manufacturer. Tata Motors’ commercial and passenger vehicles are being marketed in several countries in Europe, Africa, the Middle East, South Asia, South East Asia, South America, CIS and Russia.

The company, formerly known as Tata Engineering and Locomotive Company, began manufacturing commercial vehicles in 1954 with a 15-year collaboration agreement with Daimler Benz of Germany. It has since tied up with international majors such as Jaguar Land Rover and Fiat; developed the light commercial vehicle Tata Ace; the Prima range of trucks; Tata Safari, India’s first sports utility vehicle; Tata Indica, the first indigenously manufactured passenger car; and the Nano, the world’s most affordable car.

Nano’s bumpy ride

The idea of a small, affordable car was born when Ratan Tata noticed middle-class Indian families of three or four members travelling on bumpy roads at night on one two-wheeler. The safety hazards of such situations, combined with his enthusiasm for cars, led to the conception of the Tata Nano in 2003.

It was called the “People’s Car” and was to be priced at ₹1 lakh.

In 2006, Tata Motors announced that the Nano would be manufactured in Singur, West Bengal, and started acquiring land to set up its manufacturing facilities. Since automobile manufacturers usually work in a cluster, the company attracted many of its subcontractors — the OEM (original equipment manufacturer) — to Singur. However, local farmers, led by All India Trinamool Congress president Mamata Banerjee, protested violently the forced acquisition of land. This led to Tata Motors pulling out of Singur and relocating to Sanand in Gujarat. The entire plant, which was in its last stages of completion, had to be moved, which led to heavy losses and delay in production. However, the company decided to manufacture the first 50,000 cars at the company’s facilities at Pantnagar, Uttarakhand.

Tata Motors made automotive history on March 23, 2009, when with much fan-fare, the Nano was launched in Mumbai. The objective of the car was to provide a safe, comfortable, and affordable ride. The car fulfilled the long-standing dream of Ratan Tata.

The company boasted of creating a manufacturing facility at Sanand to manufacture 2,50,000 Nano’s per annum and also of setting up 380 sale outlets to meet the anticipated demands and 450 service outlets to meet the after-sale service needs.

Dwindling sales

The Nano experienced a bumpy ride from the start. Originally set up at Singur in West Bengal, the plant was shifted to Sanand following violent protests over land acquisition. Inaugurated with much fanfare and buzz, the Nano car factory could never achieve full-capacity in production as the car sales remained a challenge for the company.

There were further complications. First, except for the first few customers the company was unable to sell the car at the much publicised price of ₹1 lakh. When bookings opened on April 9, 2009, Tata Motors dealers expected a surge of customers and the company printed over 20 lakh booking forms, expecting more than 5,00,000 bookings. Yet with each passing day, the disappointment became more acute. The dealers’ showroom floors were empty and many had to persuade existing customers to come and have a preview of the Nano.

On April 25, 2009, when the bookings were closed, Tata Motors announced it had received a total of 2,06,703 bookings but would be able to supply only 1,00,000 lucky customers till the last quarter of 2010. The booking received was two to three times less then what was expected. During June-August 2009, the company witnessed a spree of cancellations amounting to more than 50 per cent of the original booking.

Second, the company failed to understand its intended audience — the cost of maintaining a four-wheeler is generally beyond the budget of an average two-wheeler owner. There was a lack of communication between the company and the prospective owner. The company did nothing to create pride of ownership in the Nano. It simply assumed that the customer would walk in, swayed by the low price, without understanding the symbolics of owning a car — it is a status symbol in India.

To top it all, when the incidents of fire in the manufacturing unit started trickling in, the company decided to keep mum, which further dented the image of Nano.

As per company data, Nano sales have been dwindling since 2011-12, when it sold 74,521 cars. The numbers dropped to 53,847 cars in 2012-13, followed by 21,130 cars sold in 2013-14 and 16,903 cars in 2014-15.

Meanwhile, the plant faced a flash strike from a section of its workers. More than 300 workers at the Sanand facility went on strike on February 22, 2016, and allegedly vandalised cars inside the plant.


Key issues

The company was no longer able to sell the Nano at the promised price of ₹1 lakh. The board was forced to take stock of the situation and decide on the future of the car. Tata Motors, however, felt a major part of investments in the Nano factory at Sanand could be utilised for other products. Now, it produces the Tiago hatchback there.

Emotional attachment, nevertheless, seems to counter cogent judgement and discontinuing the Nano’s production altogether seems unlikely. In a letter to the board and the trustees that was leaked to the media, Mistry wrote, “An even more challenging situation arose in Tata Motors, both on commercial and passenger vehicles... The Nano product development concept called for a car below ₹1 lakh, but the costs were always above this. This product has consistently lost money, peaking at ₹1,000 crore. As there is no line of sight to profitability for the Nano, any turnaround strategy requires the company to shut down its production. Emotional reasons alone have kept us away from this crucial decision.”

Take a look at the sequence of events.

Role of independent directors

As per the Companies Act, 2013, the executive authority to control the management and affairs of a company vests in the team of directors of a company, collectively known as its board of directors.

The institution of board of directors, although based on the premise that a group of trustworthy and respectable people should look after the interests of the large number of shareholders who are not directly involved in the management of the company, is dominated by individuals who hold the maximum shares due to the “one share, one vote” policy.

Section 149 of the Act defines an independent director as one who is other than a managing or a whole-time director or a nominee director, who does not have any material or pecuniary relationship with the company/directors. Such directors are obligated to be fully aware of and question the conduct of organisations on relevant issues. Unlike in the United States and the United Kingdom, in India, listed firms are dominated by a major shareholder, usually the promoter, making it easier for the latter to stamp out dissenting independent voices.


In the Tata Sons case, the committee formed to find the next chairman was given four months to do its job. A day after Mistry’s sacking, TCS CEO N Chandrasekaran and JLR chief Ralph Speth were inducted into the Tata Sons board. Apart from these two, Trent MD Noel Tata, Pepsico head Indra Nooyi and former Vodafone Chief Arun Sarin were some of the names that had cropped up as potential candidates. Former TCS Vice-Chairman S Ramadorai’s resignation as the Chairman of the Government’s National Skills Development Agency had further fuelled speculation on his probable appointment as Tata Sons chairman. In the end, N Chandrasekaran was chosen as the next Chairman.

The Tata Nano is still under production. The current price is almost twice the initial price — the ex-showroom price of Tata Nano GenX ranges from ₹2.06 lakh to ₹3.03 lakh, making it still one of the country’s most affordable small cars.

Ratan Tata, in an interview in late 2007, had said: “The Nano was never meant to be a ₹1 lakh car; that happened by circumstance. I was interviewed by the (British newspaper) Financial Times at the Geneva Motor Show and I talked about this future product as a low-cost car. I was asked how much it would cost and I said about ₹1 lakh. The next day they had a headline to the effect that the Tatas are to produce a ₹1-lakh car. My immediate reaction was to issue a rebuttal, to clarify that that was not exactly what I had said. Then I thought, I did say it would be around that figure, so why don’t we just take that as a target. When I came back our people were aghast, but we had our goal.”