Name Pratik Banerjee

Registration Number 46118210005

Batch 2018-23

Academic Year 2022-23

Specialisation Corporate Law

Subject Corporate Governance

Topic Current Models of Ownership Structure and their role

in the Company Corporate Performance.

Taking a look into Corporate Governance.........................................................................................................3

The Need for Corporate Governance.................................................................................................................5

Discussing Ownership Structures......................................................................................................................7

Abusing Corporate Governance.........................................................................................................................9

Case of Tata Sons Limited.............................................................................................................................9

The Conundrum of the Role of Independent Directors................................................................................12

Case of Infosys Limited................................................................................................................................13

Conclusion........................................................................................................................................................13
Introduction

When we look back at the Corporation's history, we can easily identify three key developments. The first

significant development could be said to be the creation of an artificial entity or identity for the corporation

through legal sleight, the second being the introduction of the concept of limited liability and corporations'

right to invest and hold stock in another corporation, and the third significant development being the shift

from democratic to plutocratic voting rights, moving away from one vote per shareholder to one vote per

share1.

As a result of a range of difficulties, corporate governance has grown in relevance in recent years. While

stakeholders can have an impact on an organization's forbearance and performance, their impact varies 2.

When a company's ownership and management are divided, a well-known principal-agent problem arises.

The essence of the problem is how owners/investors can ensure that the hired professional managers run the

company in the best interests of its owners or that they work as efficiently as possible, therefore maximising

the firm's added value and the owners' welfare. As corporations have grown to produce more than 90% of

global output, corporate governance has become increasingly important in recent decades.

The link between ownership structure and performance has long been a matter of debate in the literature on

corporate governance. In this study, we will examine ownership models and the impact they play in

corporate performance.

Taking a look into Corporate Governance

What comes to mind when we discuss Corporate Governance? When we look at the term Corporate

Governance, we can see that it has something to do with governing corporations or enterprises. Corporate

governance is a framework for governing and managing corporations. In a corporate setting, it is common to

notice that the corporations' owners do not manage or administer the organisations; instead, the

administration and management powers of such organisations are frequently placed in the Board of

Directors and other stakeholders. It is the system, process, and relationship that controls and directs a

1
N. Balasubramanian and R.V. Anand, Ownership Trends in Corporate India, Indian Institute of Management Bangalore (July
2013)
2
Rajesh Pathak, et. al., The Role of Ownership Structure in Firm Performance: A Study of Indian Manufacturing Firms, Volume XI,
The IUP Journal of Corporate Governance (2012)
corporate entity. It consists of rules and procedures for making decisions in corporate affairs, as well as

processes for setting and pursuing corporate entities' objectives in the context of the social, regulatory, and

commercial environment3.

The main basis on which Corporations are created nowadays is that the capital required to run the

organisation is raised from the public. Though promoters contribute a large portion of the capital of these

companies, the rules and standards in India require promoters to hold no more than 75% of the paid-up

capital, with the remaining 25% held by the general public 4. As a result, the person who owns a controlling

part in the firm naturally has authority over the company's management. The mutual trust between

management and stakeholders is what keeps the connection intact. However, there have been occasions

where trust has been violated by company management and boards of directors, resulting in a sour

relationship between investors, primarily minority shareholders, and management.

Principles of Corporate Governance

1. Recognition to Shareholders – The interests and positions of minorities in a corporation are typically

ignored since they have little to no influence on the stock price. Instead, corporations tend to

prioritise the interests of the board of directors and the majority shareholders. But according to

corporate governance, corporate entities are required to respect each shareholder's rights and make

sure that they all participate in and have a voice in the organisation.

2. Duties of Corporate Entity – Every entity has a legal, social, and market driven obligation towards

other stakeholders who do not hold shares, such as the employees, creditors, suppliers, consumers,

etc. Entities must ensure that they fulfil all these obligations and put their interests at the highest

pedestal.

3. Ethical Behaviour – Every organisation should have a code of conduct that encourages directors,

executives, and other members to make morally righteous decisions.

4. Transparency – To give stakeholders a sense of security and accountability, organisations should

have openness in their management and board.

3
Robin, Corporate Governance in India: Issues and Importance, Volume 6, International Journal of Research and Analytical
Reviews, (2019)
4
Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations
The Need for Corporate Governance

Good corporate governance is about 'intellectual honesty' and not just

Mervyn King

In India, the necessity for corporate governance became apparent in the wake of scandals like the Satyam

and Sahara frauds. Only after such scams did it become clear that India needs solid corporate governance in

order to promote a company's transparency and efficiency as well as the public's and investors' faith in the

organisation. Corporate governance gives special attention to all of the company's stakeholders in addition to

the shareholders.

The failure of large, powerful businesses like Sahara and Satyam was sufficient to draw the government's

attention to the urgent need for corporate governance and to draw a distinction between the authority of the

management and the board of directors, which will set the course for a company's operation in a good

governance structure. The need for it is also felt since it enhances a firm's financial stability by ensuring that

it remains competitive in the market. This leads to financial expansion of a company and further

advancement of the accountability system, both of which result in a significant risk management plan.

The following can be said to be the benefits of having a stringent corporate governance structure –

1. Investor-Shareholder Relation – The relationship between investors and shareholders is among the

most important advantages of having a robust corporate governance framework. For a corporation to

earn investment from investors, corporate governance procedures and principles are critical.

2. Investor Satisfaction – Investor satisfaction of a business entity is ensured by a competent corporate

governance framework. In India, corporate governance practises are essential for addressing investor

complaints.

3. Performance Efficiency – The effectiveness of a corporate entity is also guaranteed by a strong

corporate governance framework. A competent regime helps a company to raise capital for itself and
 operate effectively, thereby enhancing the confidence of the investors in participating in the

company. This fact illustrates the importance of corporate governance and the need for it.

4. Global Market Access – In the wake of globalisation, wherein restrictions have been removed and

trade barriers dismantled, the relationship between corporate governance and foreign investment has

become increasingly important.

5. Healthy Market – A robust stock market for the company is another benefit of having a good

corporate governance framework in India.

6. The Fight against Corruption -- Transparent businesses with good systems that allow full disclosure

of accounting and auditing practises, permit transparency in all corporate dealings, and create a

climate where corruption would undoubtedly disappear. A corporation can compete more effectively

and stop fraud and other wrongdoing within the company thanks to corporate governance.

7. Accountability - A crucial component of sound corporate governance is investor relations. Investors

provide management of the company their direct or indirect trust in order to increase the value of

their investment. In order to preserve positive investor relations, the company is therefore required to

provide all of its shareholders with timely disclosures on a regular basis. A board's accountability to

these stakeholders cannot be ignored because of good corporate governance standards.

8. Reduction in Corporate Crisis - An effective risk mitigation system is ensured by effective corporate

governance. The bulk of the covert risks associated with a certain strategy are made known to the

Board of a company through a transparent and accountable approach, which enables the company to

put in place various control measures to make it easier to monitor the linked concerns.

9. Finance - The need for good corporate governance has increased as a result of a number of structural

changes, including the expanded roles of financial intermediaries and institutional investors, the size

of businesses, the range of investment options available to investors, increased competition, and

increased risk exposure. These changes have made it more difficult to monitor the use of capital.

Evidence suggests that organisations with sound governance are valued more highly by the market.

On the basis of the corporate governance practises employed by the organisation, a company's credit

worthiness can be trusted.

As the one factor that determines who will have the last say in a corporate body, ownership structure is a

crucial factor in corporate governance. Ownership can be analysed along a variety of dimensions, such as

the concentration of shareholders, the identity of shareholders, and the divergence between ownership and

voting rights, making it not only a significant and important variable but also a multidimensional one.

Berle and Means embarked on a study in 1932 to determine the function of ownership structure in corporate

governance. Berle and Means demonstrated the importance of ownership structures in corporations and the

principal-agent dilemma that arises when a company lacks influential stakeholders, allowing executives to

prioritise their own interests above those of stakeholders. In such a situation, dominant stakeholders may

attempt to expropriate minority shareholders in addition to dealing with the opportunistic behaviour of

senior management. In other words, there is a chance that there will be violations of corporate responsibility

and corporate governance when there is a dominant stakeholder5.

5
Praveen Kumar, et. al., Ownership Structure, Corporate Governance and Firm Performance, Volume 23, Corporate Governance:
An International Review (2015)
In the Indian setting, promoters with small public shareholdings and institutional investments are principally

responsible for driving the corporate sector. In India, the corporate sector is made up of promoters, promoter

groups, business conglomerates, promoters inside promoters, trusts, and crossholdings, in contrast to the

corporate sectors in Western countries. Subsidiaries of a number of other businesses are listed businesses.

As a result, the ownership structure in the Indian corporate sector exhibits a significant cascading impact6.

1. Concentrated Ownership vs. Dispersed Ownership – Dispersed ownership is linked to one of the

most traditional ownership structure problems of the separation of ownership and control. In the

Indian context, promoters typically have a majority of the ownership. Dispersed ownership describes

a situation in which there are numerous shareholders but none of them is able to dominate or exert

their personal will or authority over the organisation. Contrarily, concentrated ownership refers to a

small number of stockholders who have control over a firm and use it to their advantage.

2. The Tussle between Democracy and Plutocracy – Voting rights can certainly be used as a gauge of

how effective ownership rights are. These can be democratic, with equal voting rights regardless of

the number of shares held, or plutocratic, with one vote per share, or in some circumstances, a hybrid

of the two, sometimes known as the prudent mean.

3. Inter-Corporate Ownership – The acceptance of the notion that corporate entities may own shares in

other companies had a significant impact on the growth and development of the corporate structure

in the nation, one of the three developments that we previously discussed in relation to the Indian

corporate structure. Corporate pyramids were developed through a number of layers of holding,

subsidiary, and affiliate firms, generally with simply majority control at each level, with managerial

clusters or persons at the top of the pyramid being propelled into positions with immense authority

and controlling rights.

4. Board Interlocks – A phenomenon known as Board Interlocking Directorates occurs when a director

of one corporate entity also serves on the board of another, thereby linking the two organisations in a

web of connections.

6
Dr. Velmurugan, et. al., Corporate Governance Abuses and the Ownership Structure of Indian Companies, SSRN (2017)
The ownership structure of a firm is clearly shown to have a substantial impact on the financial success of

the business through, for instance, its impact on incentive systems, decision-making processes, and

performance-monitoring systems.

Abusing Corporate Governance

Case of Tata Sons Limited

Finding and comprehending who has power over a corporate entity is one of the main factors behind

troubles with corporate governance. The ownership structure of the Tata Group is extremely convoluted and

layered. In reality, Tata Sons does not hold any shares; rather, they are held by various organisations under

Tata Sons' control. Although it may initially appear that Tata Sons has no power over the Tata Group

Companies, Tata Sons actually serves as a nodal organisation that exercises control on behalf of a family

who founded many of the companies.

In the case of Late Cyrus Mistry v. Ratan Tata, the promoter of several Tata Group Firms, Tata Sons

Limited, indirectly requested an extraordinary general meeting of the companies, where Mr. Cyrus Mistry

served as a director and chairman, to remove Mr. Cyrus Mistry. A director of a business may be removed by

a resolution voted with a simple majority of the shareholders present and voting on the motion, according to

Section 169 of the 2013 Companies Act. Given that other individual and institutional investors now possess

a majority of the remaining shares, Tata Sons was able to democratically remove Mr. Cyrus Mistry from his

position as a director with relative ease.

The following were the governing laws in the dramatic episode of Cyrus Mistry v. Ratan Tata –

 Section 169 of the Companies Act, 2013 – Calling of Extraordinary General Meeting on

Requisition

1. The Board of directors of a company shall, on the requisition of such number of members of

the company as is specified in sub- section (4), forthwith proceed duly to call an

extraordinary general meeting of the company.

called, shall be signed by the requisitionists, and shall be deposited at the registered office of

the company.

3. The requisition may consist of several documents in like form, each signed by one or more

requisitionists.

4. The number of members entitled to requisition a meeting in regard to any matter shall be-

a) in the case of a company having a share capital, such number of them as hold at the

date of the deposit of the requisition, not less than one- tenth of such of the paid- up

capital of the company as at that date carries the right of voting in regard to that

matter;

b) in the case of a company not having a share capital, such number of them as have at

the date of deposit of the requisition not less than one- tenth of the total voting power

of all the members having at the said date a right to vote in regard to that matter.

5. Where two or more distinct matters are specified in the requisition, the provisions of sub-

section (4) shall apply separately in regard to each such matter; and the requisition shall

accordingly be valid only in respect of those matters in regard to which the condition

specified in that sub- section is fulfilled.

6. If the Board does not, within twenty- one days from the date of the deposit of a valid

requisition in regard to any matters, proceed duly to call a meeting for the consideration of

those matters on a day not later than forty- five days from the date of the deposit of the

requisition, the meeting may be called-

a) by the requisitionists themselves,

b) in the case of a company having a share capital, by such of the requisionists as

represent either a majority in value of the paid- up share capital held by all of them or

not less than one- tenth of such of the paid- up share capital of the company as is

referred to in clause (a) of sub- section (4), whichever is less; or

c) in the case of a company not having a share capital, by such of the requisitionists as

represent not less than one- tenth of the total voting power of all the members of the
 company referred to in clause (b) of sub- section (4). Explanation.- For the purposes

of this sub- section, the Board shall, in the case of a meeting at which a resolution is

to be proposed as a special resolution, be deemed not to have duly convened the

meeting if they do not give such notice thereof as is required by sub- section (2) of

section 189.

7. A meeting called under sub- section (6) by the requisitionists or any of them-

a) shall be called in the same manner, as nearly as possible, as that in which meetings are

to be called by the Board; but

b) shall not be held after the expiration of three months from the date of the deposit of the

requisition. Explanation.- Nothing in clause (b) shall be deemed to prevent a meeting

duly commenced before the expiry of the period of three months, aforesaid, from

adjourning to some day after the expiry of that period.

8. Where two or more persons hold any shares or interest in a company jointly, a requisition, or

a notice calling a meeting, signed by one or some only of them shall, for the purposes of this

section, have the same force and effect as if it had been signed by all of them.

9. Any reasonable expenses incurred by the requisitionists by reason of the failure of the Board

duly to call a meeting shall be repaid to the requisitionists by the company; and any sum so

repaid shall be retained by the company out of any sums due or to become due from the

company by way of fees or other remuneration for their services to such of the directors as

were in default.

 Section 241 of the Companies Act, 2013 – This section provides relief to the members of a

company in cases of oppression.

Any member of a company has a right to apply to the Tribunal if the affairs of the company have been or are

being mismanaged and are conducted in an oppressive manner damaging the interests of the company, its

members or the public at large. The central government can also make an application to the tribunal under

this section if it feels that the affairs of the company are being conducted in a prejudicial or oppressive

manner.
  Section 242 of the Companies Act, 2013 – Powers of the Tribunal

Section 242 states that if, on any application made by any member of a company or the central government

under Section 241, the Tribunal believes that the affairs of the company have been or are being mismanaged

and are conducted in an oppressive manner damaging the interests of the company, its members or the

public at large, or the winding-up of the company would unfairly prejudice such member or members, the

Tribunal may, intending to bring to an end the matters complained of, make an order to regulate the conduct

of affairs of the company regarding the purchase of shares, restriction on the transfer of the share,

termination, setting aside or modification of any agreement, setting aside of any transfer or any orders as the

tribunal thinks fit.

 Section 244 of the Companies Act, 2013 – This section provides for the eligibility criteria to

file an application under section 241 of the Companies Act, 2013.

Section 244 of the act lays down the qualification to be met for an application to be maintainable under

Section 241 of the Companies Act, 2013. 

The Conundrum of the Role of Independent Directors

There were other instances of poor corporate governance at Tata Sons Limited outside the Cyrus Mistry v.

Ratan Tata7 case. Another issue that came up was the matter of independent directors' responsibilities. In

order to stand up against Ratan Tata's interests, Mr. Nusli Wadia, an independent director in three Tata

Group firms, was fired. He did this by encouraging Cyrus Mistry to keep his position as Chairman of the

three companies. This incident served as a crystal-clear, verifiable illustration of the mistreatment of

independent directors in the Indian corporate sector. In a company where promoters hold a strong position,

the independent directors are at the mercy of the promoters, who cast doubt on the board's independence.

Mr. Nohria, the Dean of HBS, experienced a similar situation throughout the episode. He voted in favour of

Cyrus Mistry's dismissal along with other Tata Sons Directors. However, Mr. Nohria was unable to qualify

as an independent director on the company's board of directors because Tata Sons is a significant donor to

7
Tata Consultancy Services Limited vs. Cyrus Investments Pvt. Ltd. and Ors.
HBS. So, it only makes sense that such people would compromise themselves for those who supported their

nomination. This is another instance of corporate governance being abused.

Case of Infosys Limited

Nobody other than Infosys Limited's founder and chairman, NR. Narayanamurthy, admitted that the board

of directors had engaged in severe breaches of corporate governance that were upsetting to the public. At

first, it was in reference to the substantial, exceptional, and generous severance packages given to former

executives David Kennedy and Rajiv Bansal. The founder openly questioned the honesty of the board of

directors' nominating and compensation committee.

Another claim made against Infosys board members is that the business bought Panaya, an Israeli software

startup, despite the then-resistance CFO's and without disclosing or documenting the justification for such a

high value transaction anywhere. Additionally, there were claims of insider trading in this incident.

Conclusion

In this paper, we delve into great length about the subject of corporate governance and the effects of

ownership structure on corporate entities. We also talked about the poor corporate governance practises that

hurt big, powerful corporations like Tata Sons and Infosys. It is discovered that corporate efficiency is

significantly impacted by the ownership structure of a company, namely the identity of the owners and the

concentration of ownership rights. Since corporate governance is an organization's lifeblood, it must be

properly upheld when conducting business in order to promote social and economic progress. In essence,

corporate governance serves as a guiding principle to guide operations, monitor processes, examine

procedures, punish poor management, have an impact on the environment, etc. All stakeholders as well as

the firm as a whole benefit from a solid corporate governance system that upholds integrity. A poor system

of corporate governance may cause fraud, controversy, insolvency, and, in the worst situations, the collapse

of the company.