A FIGHT TO THE FINISH?
Cyrus Mistry loses his lawsuit in the National Company Law Tribunal against Tata Sons, but this corporate slugfest is not yet over
Cyrus Mistry loses a lawsuit against Tata Sons, but the bitter boardroom battle only appears to be escalating
For the past 18 months since his ouster as chairman of Tata Sons, Cyrus Mistry, 51, had been working incessantly with his lawyers as he took on the might of Tata Sons, the holding company of the Rs 6.8 lakh crore Tata Group. Working from his office in SP House, headquarters of the Rs 28,000 crore Shapoorji Pallonji (SP) Group, Mistry was building his case at the National Company Law Tribunal (NCLT), a quasi-judicial body that decides on issues relating to Indian companies. He was arguing that the SP Group, the single largest shareholder in Tata Sons with 18.4 per cent ownership, be given board representation proportionate to its holdings; that the ‘oppressive’ clauses in the articles of association of Tata Sons that were being ‘misused’ to exert control over the firm by Tata Trusts, which collectively holds over 66 per cent in Tata Sons, be removed; and the September 2017 decision to make Tata Sons private be reversed as it allegedly endangered the interests of the minority shareholders.
However, on July 9, the NCLT dismissed his lawsuit against Tata Sons, saying there was no merit in the allegations of mismanagement in the Tata Group. The two-member bench of B.S.V. Prakash Kumar and V. Nallasenapathy brushed aside the allegation that Tata Trusts chairman Ratan Tata and trustee N. Soonawala were acting as ‘super directors’ of the Tata Sons board. The bench said the Tata Sons board was competent enough to dismiss an executive chairman and added that Mistry’s conduct did not augur well for the functioning of Tata Sons as he went openly against the board. It also rejected Mistry’s demand for proportionate representation on the board and said that it cannot stop Tata Sons from converting itself into a private company. But Mistry is defiant. He is likely to move the National Company Law Appellate Tribunal (NCLAT), a higher authority, against the verdict.
In a statement, Ratan Tata said, “The judgment of the NCLT...has been a vindication of the actions that Tata Sons felt obliged to take in October 2016.” Mistry described the ruling as “disappointing though not surprising”. “The ruling is in line with the earlier position expressed by the tribunal. An appeal on merits will be pursued,” a statement from his office said.
In his five-page letter to the Tata Sons board following his ouster, Mistry had said how the amendments to the articles of association of Tata Trusts, a majority shareholder in the company, were a severe constraint on his ability to engineer a turnaround of the company besides creating “alternative structures” that more generally limited the chairman’s remit. Aryama Sundaram, Mistry’s counsel, argued that the articles of association oppressed minority shareholders on four grounds. One, the board agenda of Tata Sons and group companies needs prior approval of the nominee directors of Tata Trusts, the majority shareholders in Tata Sons. Second, an affirmative vote of the trustees is needed to pass board agenda items. Third, there is a restriction on transfer of shares in Tata Sons, and fourth, the articles compromised minority holders’ economic rights, reports said. Sundaram pleaded these articles be struck down.
Tata Trusts senior counsel S.N. Mukherjee, representing Ratan Tata, had reportedly argued in the NCLT that any presence of SP Group nominees on the board of Tata Sons or involvement with the company in any manner “will not be in the best interest of the Tata Group”. “The continuation of SP Group in Tata Group shareholding is unworkable…per se, the relationship between Tata Trusts and SP Group is irretrievably broken, and to a point where they cannot co-exist (in Tata Sons),” Mukherjee said. Mistry lost his board seat after being ousted from Tata Sons.
In September 2017, Tata Sons sought approval to amend its memorandum of association and articles of association to convert itself from a public limited company to a private limited one, and to change its name from Tata Sons Limited to Tata Sons Private Limited. The shareholders of Tata Sons voted in favour. This is widely seen as detrimental to the interests of the Mistry family since it prevents them from selling off their shareholding without the approval of the company board. Moreover, the Tatas can have their way on key matters
by taking the board’s approval, instead of waiting for the approval of shareholders. Not surprisingly, Cyrus Investments, an SP Group investment firm, alleged that the proposal was “mala fide”. However, Tata Sons has maintained that the reinstatement of Tata Sons as a private company “was considered by the board to be in the best interest of the company”.
In a letter to the Tata Sons board immediately after his ouster, Mistry also picked a few group companies and projects, detailing their problems and arguing why most of these needed fixing—Tata Steel and its European arm, now proposed to be sold; Indian Hotels; Tata Capital; and Tata Motors’ Nano project, among others. Mistry warned that the group may face $18 billion (Rs 1.23 lakh crore) in writedowns because of five unprofitable businesses acquired. Mistry alleged the foreign acquisition strategy of the Tata Group, with the exception of JLR and Tetley, had left a large debt overhang. Corus faced potential impairments of over $10 billion. The foreign properties of Indian Hotels and holdings in Orient Hotels had been sold at a loss. The UK and Kenya operations of Tata Chemicals “need tough decisions”, he had said.
Tata Capital, meanwhile, had a huge pile of bad loans from the infrastructure sector. Any distress sale or shutdown of the telecom business would have cost the group $4-5 billion. The Nano project piled accumulated losses of Rs 1,000 crore. Mistry also said he was pushed by Ratan Tata to enter the aviation sector, in partnership with AirAsia and later Singapore Airlines, through the businesses.
Tata Sons had earlier rebutted every argument of Mistry’s, saying that there were some “problem companies”, but Mistry was fully aware of them through his association with the group. Regarding the three major problem companies—Tata Steel Europe, Tata Teleservices/ Docomo and the Indian operations of Tata Motors—even after four years, “there is no noticeable improvement in the operations of these companies and they have got worse as shown by the continuing huge losses,” Tata Sons said.
One would have thought Mistry’s case got stronger with the recent developments around AirAsia, where the Central Bureau of Investigation has summoned Tony Fernandes, the airline’s group CEO, in connection with alleged malpractices by AirAsia India Ltd and its promoters while trying to get international flying licences. But it was not to be. It has been alleged that the airline, through an agent, bribed officials to alter the previous 5/20 rule, which mandated that an airline needed to operate for five years and needed to possess 20 aircraft in order to get permission to fly overseas. The NCLT rejected Mistry’s allegations against AirAsia.
The missives that Mistry keeps firing at the Tata Group make it clear that he is in no mood to give up. The Tata Group, too, is bracing itself for a fight to the finish, with all its might. While that is the most logical thing to do, it also needs to take a hard look at the allegations Mistry has raised so that the Tata Group’s shareholders do not end up getting a raw deal.