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The House of Tatas accused of insider trading by its disgruntled CEO

12/26/2016 11:06 am ET | Updated Dec 26, 2016

Mr Mistry asked the court to appoint an inspector to investigate whether Mr Tata had breached of insiders trading regulation by allegedly seeking price-sensitive information from Tata operating companies that are publicly listed.
Cyrus Mistry brought a veiled accusation that cannot be left unanswered: he accused Ratan Tata and the Trusts of violating insider trading rules, which is a criminal accusation potentially leading in India to an imprisonment up to ten years. Accusing Ratan Tata to be a criminal is despicable and, more importantly, incorrect in fact and in law.
Insider trading in securities may occur when a person in possession of material nonpublic information about a company trades in the company's securities and makes a profit or avoids a loss. To break an insider trading rule, three elements have to be present: the information has to be price sensitive, it has to come from insider sources and it has to be used in trading activities. Let's look at the case.
The request for information is legitimate
JR Varma, professor of finance at Indian Institute of Management, Ahmedabad and a former Sebi board member says, "We can't improve corporate governance by limiting shareholder democracy, and therefore the 'legitimate' governance rights of the majority shareholder must be respected...Policymakers should accept the fact that large shareholders will rule the roost when it comes to decision-making at a company. A structure where the rights of large shareholders are curtailed will unduly empower the management of the company, which will result in negative outcomes."
In this case, the large shareholder is Tata Trusts, and they own 66% of Tata Sons. They are therefore entitled to information on Tata Sons as well as on its assets, in this case, the group companies. The statement by Shriram Subramanian, founder and managing director at proxy advisory firm InGovern Research Services Pvt. Ltd that there is no locus standi for Mr. Soonawala or Mr. Ratan Tata because they are not on the board of Tata Sons completely ignores the right of Tata trusts to approve the allocation of assets by the majority shareholder of Tata Sons.
Does anybody believe that, in the real world, a two-third shareholder would not be directly informed and involved in the decision process of a major investment? After all, Tata Sons is just another company, and Cyrus Mistry is an appointee of the Tata Trusts. He has no locus standi, in law or in fact, to refuse requests of information from Tata Trusts.
The fact that the information is price sensitive does not imply that it is requested for insider trading
Cyrus Mistry single singlehandedly decided that the Tata Trusts who have anointed you and who own 66% of Tata Sons, were not entitled to information about the fate and situation of the listed companies and that such a request was violating insider trading rules calling them "price sensitive".
That was a breach of his fiduciary duties since, as Executive Chairman, he is only the custodian of Tata Sons, not the owner. He now pretends that that request was were a breach of insider trading rules. That accusation is unsubstantiated.
The Tata Trusts and their Chairman do not trade in Tata Companies
What makes the case even more compelling, is that Cyrus Mistry knows for a fact that neither the Trusts nor Ratan Tata do trade in group companies. Neither do the Trustees. They own Tata Sons and only exceptionally own some shares of the listed companies for historic reasons. Even in those shares, they are not traders but long term investments. Their requests were fiduciary in nature, not in the context of trading.
It is ridiculous to use as he and Mr. Wadia did, the fulfilment of Tata Trusts fiduciary duties a search of "price sensitive" information for "insider trading" purpose.
Under no circumstance can their requests for information be construed as supporting nonexistent trading activities. The Trusts did take seriously their own fiduciary responsibility and were not prepared to ignore their own duties. They needed information to exercise those duties.
Tata Sons is accountable to the Tata Trusts
Accountability goes both ways. By virtue of his position, Cyrus Mistry is a Chairman of the listed companies and has access to implied information. Around the Board table, he is actually the only member who disposes from an asymmetric information of confidential nature. Not only does he have access to all the documents, but as the Chairman of the Board of those companies he is able to know important information from the management and his fellow board members.
In a paradoxical way, he is in an even more difficult position than Ratan Tata: he needs to report, but he also needs to be reported to. One cannot have two sets of rules when it comes to transparency and accountability. While he feels empowered to obtain the information from the listed companies (even when Tata Sons does not control them), he does not agree that the similar request from his majority shareholder, the Tata Trusts.
Following his accusations, the Securities and Exchange Board of India (SEBI) has initiated a preliminary examination of the arrangement between Tata Sons and group companies to understand whether it is in accordance with current insider-trading regulations. target="_hplink">
Furthermore, for a Chairman to accuse the companies he chairs of breach of corporate governance norms and listing regulations at various listed companies to SEBI is self-inflicting and undermines the confidence in the accounts of the listed companies. . SEBI asked the audit committees of the companies to investigate the matter.
As professor Sharma puts it, the central problem in Indian corporate governance is how to manage the conflicts between dominant shareholders and minority shareholders. This, however, does not imply that it is sufficient a reason not to give access to the relevant information to large shareholders.
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Aggressive use of the media to spread subjective interpretations and information is one thing. Breach of insider trading norms accusation is another one.
The National Company Law Tribunal on Thursday refused to hear the plea for interim relief of Cyrus Investments company pending disposal of a petition filed by family-owned companies of Cyrus Mistry, the ousted chairman of Tata Sons, alleging "oppression and mismanagement" in Tata Sons. Cyrus Mistry wanted a retired Supreme Court Judge to replace Ratan Tata as Chairman of Tata Sons.
Let's leave the last word to Ratan Tata, who headed the Group for 25 years: over the last two months there has been a definite move to damage my personal reputation and the reputation of this great group--the Tata Group".

Over the past twelve years, the author of this post has been and still is advising the House of Tatas and several of its Group companies.

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