When ownership is not control: The Tata tussle and what it means for promoter families

The Tata Group, a 158-year-old conglomerate, is currently embroiled in a boardroom conflict that raises questions about the true extent of ownership and control within Indian businesses. Tata Trusts, the philanthropic arm of the Tata family, holds approximately two-thirds of Tata Sons, the holding company of the Tata Group. However, the trust and the board have found themselves at odds over the company's direction, prompting concerns among promoter families.

The dispute highlights a growing divergence in corporate governance between ownership and management. While families and trusts often provide ownership, capital, and long-term vision, professional managers and boards typically oversee day-to-day operations. When directors with no significant stake challenge or seek to displace those who own the company, the traditional balance of power is disrupted.

Sonam Chandwani, Managing Partner at KS Legal & Associates, explained that while a promoter may hold substantial voting power, once directors are appointed, they are expected to exercise their own judgment and act in the best interest of the company. Directors are not simply the promoter's employees on the Board. The issue at hand is whether ownership can remain with the family while effective control gradually shifts to the board.

Parag Srivastava, Partner at Bombay Law Chambers, emphasized that a trust, as a shareholder, has the same rights as any other shareholder, including the right to nominate directors and use special rights in the articles of association. However, under Section 179 of the Companies Act, 2013, the board is responsible for managing the business, not the shareholders.

This means that a trust cannot issue binding instructions to a nominee director, as they must exercise their independent judgment and act in the company's best interest.

The Tata dispute underscores the evolving nature of corporate governance in India. As professional CEOs, independent directors, and institutional investors gain power, the traditional promoter-led model faces challenges. While this shift is essential for global-scale companies, it also creates a potential faultline between ownership and the board. The question now is: who truly holds the reins of power within Indian businesses?

Promoter families are closely watching the situation to determine if ownership can remain with the family while effective control gradually shifts to the board. The outcome of this Tata tussle may force many family-owned businesses to reassess their governance structures and the extent of control they truly possess.