Tata Sons reviews governance rules ahead of IPO, Tata Trusts' control at stake

Tata Sons has begun reviewing its Articles of Association (AoA) ahead of a potential stock market listing, a move that could affect the special rights held by Tata Trusts over board appointments, voting and governance at the holding company of the Tata group, reported The Economic Times. The review is aimed at aligning the company's rules with Securities and Exchange Board of India (Sebi) requirements for listed companies, according to the report. The proposed changes could cover the appointment of directors, independent board representation, voting rights and restrictions on share transfers.The development comes after the Reserve Bank of India (RBI) rejected Tata Sons' application to surrender its registration as a core investment company.Tata Sons must therefore comply with regulations governing upper-layer non-banking financial companies, which require such entities to list their equity shares within three years of being classified in that category. The review is at an early stage, and no final amendments have been approved.WHY TATA TRUSTS' RIGHTS COULD COME UNDER REVIEWTata Trusts collectively own around 66% of Tata Sons, giving them majority ownership of the group's holding company. Under the existing Articles of Association, the Trusts can nominate up to a third of the board. Certain decisions also require the affirmative vote of a majority of Trusts-nominated directors. A majority of these nominees must be present for a board meeting to constitute a quorum.These provisions could need changes if Tata Sons lists its shares, as listed companies must comply with securities regulations governing special shareholder rights and board composition.Under Sebi Regulation 31B, special rights granted to shareholders must be approved by shareholders at least once every five years. Public shareholders would play an important role in determining whether such rights continue.A listing would not automatically reduce Tata Trusts' majority stake in Tata Sons. However, the way the Trusts exercise their influence at the board level could change depending on the final structure and applicable regulatory requirements.“The real issue is control, not compliance,” Harshal Anjaria, founder of Shreeyam Advisors, told The Economic Times.BOARD COMPOSITION AND APPOINTMENT RULES MAY CHANGEA listed Tata Sons would also have to meet Sebi's requirements on independent directors. If its chairman is an executive director, at least half the board would need to comprise independent directors, according to the report.The process for selecting the chairman could also be reviewed. The existing five-member selection committee includes three nominees linked to Tata Trusts.Board committees would need to be aligned with listing requirements, while restrictions on share transfers could require amendments to accommodate public shareholding and stock market trading.“If a decision is taken on listing, the preferential aspects in the AoA in favour of the Tata Trusts will have to be aligned to Sebi listing requirements,” Ashish K Singh, managing partner at Capstone Legal, told The Economic Times.DIFFERENCES WITHIN TATA GROUP OVER LISTINGThe potential listing has also brought differences within the Tata group into focus.Tata Trusts chairman Noel Tata has favoured exploring alternatives, including restructuring Tata Sons, while the company's board has backed compliance with the RBI framework.The Trusts' majority ownership would continue to give them substantial influence over shareholder decisions. However, any changes to nomination rights, voting provisions and board composition could constrain how that influence is exercised.The extent of the changes will depend on the eventual listing structure and applicable legal requirements. Tata Sons has not commented on the review, and the company has not approved any final amendments to its Articles of Association.- Ends