Be­hind Tata, Mistry clash, dis­tinct set of gov­er­nance rules

A dis­tinct set of gov­er­nance rules led to spat in In­dia’s largest con­glom­er­ate

Kuwait Times - - FRONT PAGE -

When Ratan Tata re­tired as chair­man of Tata Sons Ltd in 2012, he pro­posed a change in the laws gov­ern­ing the re­la­tion­ship be­tween In­dia’s largest con­glom­er­ate and its key share­holder, ac­cord­ing to sources fa­mil­iar with the sit­u­a­tion.

Un­til then, the Tata Trusts - pub­lic char­i­ties own­ing two-thirds of the com­pany had eas­ily pro­tected its in­vest­ment. A Tata fam­ily mem­ber had for decades held the chair­man­ship at both the Trusts and the com­pany, whose busi­nesses in­clude cars, soft­ware and steel. But an out­sider, Cyrus Mistry, had just taken the top job at Tata Sons. Tata wanted to make sure the Trusts, that rely on Tata Sons for div­i­dends to fund their char­i­ta­ble work, could keep hav­ing a ma­jor say in com­pany de­ci­sions, the sources said.

Mistry agreed, and in do­ing so sowed the seeds of his ouster from the com­pany last Oc­to­ber, ac­cord­ing to in­ter­views with more than half-a-dozen cur­rent and for­mer Tata ex­ec­u­tives and advisors, and a re­view of meet­ing min­utes, emails and a court pe­ti­tion that Mistry has filed against Tata Sons.

Mistry’s de­par­ture - and the re­in­state­ment of the 78-year-old Tata as in­terim chair­man - has trig­gered a bit­ter, pub­lic spat that has con­trib­uted to nearly a $10 bil­lion de­cline in the mar­ket value of Tata’s many listed com­pa­nies. Even if the con­flict is re­solved, the com­pany could face fu­ture gov­er­nance is­sues as the struc­ture re­mains un­changed, which means it could weigh on any new chair­man. “It is go­ing to be very dif­fi­cult for an ex­ter­nal per­son to take the role,” said Shri­ram Subra­ma­nian, founder of proxy ad­vi­sory firm InGovern Re­search.

Mistry wrote in a let­ter to the Tata Sons board on Oct. 26 that Tata im­prop­erly used the change in by­laws to in­ter­fere in the af­fairs of the com­pany and cre­ated an al­ter­nate power cen­ter at the group, which made it hard for him to do his job.

Tata Sons spokesman De­ba­sis Ray said Tata asked Mistry to do only what was in the by­laws and got in­volved in the com­pany’s af­fairs when he was asked. Tata Sons has cited Mistry’s per­for­mance as the main rea­son for fir­ing him, hold­ing him re­spon­si­ble for ris­ing ex­penses and im­pair­ment pro­vi­sions.

Still, in­ter­views with sources on both sides and the re­view of doc­u­ments show that the changes in by­laws helped cre­ate the con­di­tions that caused fric­tion be­tween Mistry and Tata and in­creas­ingly hin­dered smooth func­tion­ing of the group.

Over the past 30 months, Mistry met Tata - of­ten along with fel­low trustee Noshir Soon­awala - more than two dozen times to up­date them on deals and other strate­gic de­ci­sions at group com­pa­nies. In sev­eral cases, the meet­ings and ex­pla­na­tions led to dis­agree­ments, the sources said.

Changes to by­laws

The changes in by­laws, which were fi­nal­ized in 2014 af­ter more than a year of dis­cus­sions, sub­stan­tially in­creased the ac­count­abil­ity of the chair­man of Tata Sons to the direc­tors nom­i­nated by the Trusts. The Trusts can nom­i­nate one-third of Tata Sons’ direc­tors. The new by­laws re­quire ma­jor de­ci­sions, such as deals and changes to the com­pany’s cap­i­tal struc­ture, be ap­proved by a ma­jor­ity of the Trusts’ nom­i­nees. The chair­man was also now re­quired to present five-year and an­nual busi­ness plans to the board and have them ap­proved by a ma­jor­ity of the nom­i­nees, the by­laws show.

The chair­man, though, was not di­rectly ac­count­able to any of the trus­tees, in­clud­ing Tata. The Trusts’ nom­i­nees were ex­pected to rep­re­sent their in­ter­ests on the Tata Sons board, sources fa­mil­iar with the rules on both sides of the con­flict said.

Mistry said in his let­ter that the fam­ily’s pa­tri­arch nev­er­the­less con­tin­ued to di­rectly in­ter­fere in the con­glom­er­ate’s af­fairs and called the nom­i­nees “post­men” who did Tata’s bid­ding.

Mistry also wrote that Tata’s in­ter­fer­ence “se­verely con­strained” his abil­ity to make the nec­es­sary changes to turn around many of the con­glom­er­ate’s loss-mak­ing busi­nesses.

Of the three nom­i­nees of the Trusts on the nine-mem­ber Tata Sons board at the time of Mistry’s oust­ing, one de­clined to com­ment and two others could not be reached. Tata Sons’ Ray de­nied that Tata in­ter­fered with op­er­a­tional mat­ters af­ter step­ping down. Tata never at­tended the group’s board meet­ings and any in­ter­ac­tion be­tween Tata and Mistry was at Mistry’s be­hest, Ray said.

The dis­pute is now be­ing lit­i­gated. Mistry filed a pe­ti­tion on Dec. 20 at the Na­tional Com­pany Law Tri­bunal, a quasi­ju­di­cial body that deals with cor­po­rate griev­ances in In­dia.

In his pe­ti­tion, Mistry has asked the court to stop Tata and the trus­tees from in­ter­fer­ing in the af­fairs of the com­pany, re­place the en­tire Tata Sons board and or­der an in­ves­ti­ga­tion into the role of the trus­tees. Tata Sons has called his ac­cu­sa­tions base­less and ma­li­cious and said it be­lieves that Mistry’s pe­ti­tion is not main­tain­able in law.

Many meet­ings

While the ex­tent of Tata’s in­flu­ence re­mains in dis­pute, sources on both sides ac­knowl­edged that Tata and Mistry of­ten met to talk about the af­fairs of the com­pany, and some­times dis­agreed on the best course of ac­tion.

For ex­am­ple, when Tata Power de­cided to buy $1.4 bil­lion worth of re­new­able en­ergy as­sets from ri­val Wel­spun En­ergy this sum­mer, Tata and Soon­awala - who is also a for­mer Tata group fi­nance chief and close con­fi­dante of the fam­ily’s pa­tri­arch got in­volved. Emails from early July be­tween Mistry and Soon­awala show that Soon­awala had ideas about how the deal should be struc­tured that were dif­fer­ent from the pro­pos­als made by bankers who were ad­vis­ing the group.

Soon­awala also told Mistry to get Tata’s sign off be­fore fi­nal­iz­ing the deal, two sources close to Mistry said, adding that the in­volve­ment of the two men led to the deal be­ing de­layed by sev­eral weeks.

Ray said Soon­awala, 81, got in­volved be­cause he was asked by Mistry to do so. An­other Tata Sons spokesman said “there were no de­lays be­cause of con­sul­ta­tion with the trus­tees”. Sources close to Mistry deny he asked for Soon­awala’s ad­vice. Reuters could not in­de­pen­dently con­firm whether such a re­quest was ever made.

In an­other in­stance, just weeks be­fore an In­dian tele­com air­waves auc­tion in the au­tumn, Mistry met Tata and Soon­awala on three sep­a­rate oc­ca­sions to dis­cuss Tata Te­le­ser­vices’ bid­ding strat­egy, two sources close to Mistry said. They said the meet­ings lasted for hours, as the two sides dis­agreed on how much ex­tra spec­trum Tata Te­le­ser­vices should buy.

Reuters could not in­de­pen­dently de­ter­mine who asked for the meet­ings. Tata and Soon­awala wanted the pur­chase to be kept at a min­i­mum be­cause the com­pany was al­ready bleed­ing, but Mistry and Tata Te­le­ser­vices ex­ec­u­tives wanted to buy more, ar­gu­ing it could help in­crease value and draw in­ter­est from suitors, the sources said. Tata Te­le­ser­vices ended up pay­ing 46.2 bil­lion ru­pees ($681 mil­lion) for some of the spec­trum be­ing sold, gov­ern­ment data showed. What is not clear is who pre­vailed in the in­ter­nal ar­gu­ment over the bid­ding. — Reuters

MUMBAI: Cri­sis erupted in In­dian con­glom­er­ate Tatas af­ter Cyrus Mistry (left) was ousted as Tata Sons chair­man on 24 Oc­to­ber, 2016.

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