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TATA – Mistry Corporate Conundrum Drags On…

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The boardroom battle between TATA Group and Cyrus Mistry which began with the ouster of the latter from the Chairmanship of the Group on 24th October 2016 has dragged on ever since. The tussle has seen an array of allegations being made from both sides over the management of the prestigious conglomerate. It led to the removal of Cyrus Mistry from the Board of Directors of some of the TATA companies and finally on 19th December, he decided to quit from Board membership of remaining companies as well and decided to pursue the matter legally. Mistry had filed a contempt petition before the National Company Law Tribunal (NCLT) against Ratan Tata and other directors of the TATA Sons alleging the violation of an earlier NCLT order dated 22nd December 2017. The petition was dismissed by the NCLT on 17th January. The feud got further embroiled when the firms owned by Cyrus Mistry filed a case against TATA Sons Leadership in the NCLT for mismanagement and oppression of the minority shareholders. Since then, various turns have been taken by the imbroglio including appointment of new Chairman N Chandrasekaran, dismissal of petition by NCLT, appeal against the dismissal by the Mistry firms and 100 days of N Chandrasekaran being at the helm of affairs and speculations that TATA Group is keen to buy Air India which the government is thinking to disinvest in the near future. The present article tries to magnify various points which construe the larger picture of this mega power struggle in the corporate sector.

Dismissal of petition by NCLT

The petition filed by the investment firms of Cyrus Mistry against the TATA Sons before NCLT on the charges of mismanagement and oppression of the minority shareholders was dismissed by the Tribunal in April 2017. The petition contended that the TATA Group former head Ratan Tata had been working as a shadow or ghost director and it had led to oppression of the minority shareholders. The petitioner had sought a waiver of the rules pertaining to minimum shareholding for the admission of the said petition. The matter related to the Section 244 of the Companies Act, 2013 which makes it mandatory to hold a minimum of 10% of the shareholding in order to a petition on the charges of mismanagement and oppression of the minority shareholding. It is pertinent to mention that the Mistry firms own 18.34% [The Hindu Business Line, Setback for Cyrus Mistry as NCLT rejects waiver petition] of the equity in the TATA Sons, but when the preferential shareholding is taken into consideration the holding of the petitioner is only 2.17%. It is much below the stipulated minimum shareholding of 10% for filing such a petition as per the law. The petitioner had also sought a waiver of the condition given in Section 244 in order to admit the petition before NCLT. The Tribunal ruled that the petition was not maintainable because the waiver sought from the shareholding condition could only be granted in the cases of fraud, misappropriation of the assets, breach of the Articles of Association (AOA) or fraudulent payout from the company funds.

The NCLT order while rejecting the petition said that the waiver from the conditions can only be given in exceptional cases and the present petition did not constitute a fit case for the same. The order also mentioned that the petitioner has failed to show that how the economic interest of the Mistry firms has been damaged by the action of TATA Sons. The presiding member of NCLT B.S.V. Prasad called the litigation by Mistry’s firms a ‘proxy litigation’ because the petitioner had failed to raise the matter at the earlier instances in spite of the fact the allegations pertain to the period when Mistry was still the Chairman of the TATA Group before his 24th October ouster.

Mistry’s appeal against the NCLT Order

The investment firms controlled by Cyrus Mistry filed an appeal against the NCLT order dismissing their petition dated 17th April 2017. In the appeal before the National Company Law Appellate Tribunal (NCLAT), it was pleaded that the NCLT should first decide whether the petition seeking relief from oppression is maintainable or not. It also sought that the waiver of the 10% [FE Bureau, Financial Express, Now, Cyrus Mistry appeals to NCLAT after NCLT dismissed plea] shareholding condition should be granted to the petitioner. The NCLAT admitted the appeal and stated that the hearing on the appeal would begin on 3rd July and would continue till 7th July. Though the legal luminaries are divided on the issue of the waiver of the 10% condition in the present case, it is going to be an uphill task for Mistry to make up a strong case before NCLAT and attain the sought relief against the TATA Sons. It will be interesting to see what path the legal battle transcends in the coming days.

 N Chandrasekaran as Chairman – 100 days Assessment

In admits the legal battle between Cyrus Mistry and TATA Sons leadership, the appointment of N Chandrasekaran as the new Chairman of the TATA Group was a critical one to improve the corporate standing of the conglomerate. The standing of the TATA Group took a serious hit with the unfolding of this mud-slinging controversy which shook the entire corporate sector with its unprecedented levels of a power struggle. N Chandrasekaran took the charge of the TATA Group from 24th February 2017 and since then he has tried to stabilize the affairs in the conglomerate. If the economic assessment of the 100 days of new Chairman is done, the fortune of the TATA Group has revived to a great extent. The total market capitalization of the TATA Companies had dropped about 1.3% to ₹8.6 trillion from ₹8.71 trillion since the removal of Cyrus Mistry in October[Live Mint, N. Chandrasekaran planning merger of smaller Tata companies]. The new leader has improved the economic position to about Rs. 8.74 trillion as the market capitalization has increased by 1.6%.

The stable and robust leadership under N Chandrasekaran has catapulted the TATA Group to growth trajectory from its reeling fortunes due to the prevailing power tussle. The new Chairman has instructed the Chief Executive Officers (CEOs) of the TATA Companies to focus on profit making. In what is being dubbed as a ‘pruning exercise’, the conglomerate is trying to focus on profitable businesses and is conscious of any money splurging ventures. He is believed to have adopted a ‘Cluster approach’ in which all the TATA companies have been grouped in six-seven clusters for better management of the resources and financial prudence. The main aim is to create synergy between the companies to optimize the revenue generation. A reconstruction of the TATA Motors is being pursued with cost cutting leading to an estimated layoff of 1500 workers. He has successfully handled the precarious case of TATA Steel and has focussed on reducing the production costs along with the sale of its loss making subsidiaries. The good work done by the new Chairman seems to have caught the attention of the TATA Sons as well and they have lent him full support for the same. In a move that is being seen as a vote of trust from the TATA Sons, N Chandrasekaran was also appointed as the Chairman of Tata Global Beverages Ltd. (TGBL) on 3rd July 2017. He seems to have the full confidence of the Board and is set to continue to guide the TATA conglomerate to greater heights in times to come.

Changes in TATA Group cross holdings

The TATA Group is witnessing major changes in the corporate structure of the companies in a bid to improve its financial health. Amongst the changes, one of the major revamp is being pursued in the form of the changes in the TATA Group of companies cross holdings. The TATA conglomerate is one of the biggest and the most diversified entity manufacturing a wide array of products from common salt to motor cars. In an attempt to prune the Group to make it easier to manage its affairs, TATA Power is likely to witness changing in its cross holdings. The phenomenon of cross holdings is associated with big corporate groups and helps in supporting sister companies in the time of need. In the contemporary times of super specialists, the ‘cross holdings’ is regarded more as a liability than an asset and the trend is to limit the expanse of Group to improve revenue generation.

TATA Power is one of the biggest companies of the TATA Group and holds stakes in seven TATA companies including TATA Communications, Volta, etc. TATA Power is considering selling off its non-core assets. The move is also being seen as a reaction to the Mundra Plant verdict of the Supreme Court where the Apex Court ruled against the compensatory power tariffs. It is estimated that the TATA Power could generate more than ₹1100 crores by the sale of the cross holdings. The TATA Power is also mulling a change in the coal source arrangements for its Mundra Ultra Mega Power Plant in order to improve its viability. It is expected that these changes will improve the fortunes of the company and will lend support to the entire TATA Group as well.

Purchase of Air India by TATA?

The Air India is one of the premier public sector airline in the Indian aviation market. In spite of the years of experience, the airlines are facing stiff competition from private airlines. Its share in the domestic market has reduced from about 35% a decade ago to about 14% in 2016. In the present times, it has become a ‘white elephant’ for the government and is under a debt of about ₹52,000 crore even after crores spent by the government to change its fortunes. The interest burden of about ₹4,000 crore ensures that it has been running in losses since 2007. The NITI Ayog has recommended to the Union Government to privatize the airlines in order to ameliorate its financial status. The Union Government is expected to form a Group of Ministers (GOM) to decide upon the question of disinvestment. The GOM will finalize the intricacies of the disinvestment and the quantum of sale to revive the ailing airlines. In the market rife with speculations regarding the impending sale of Air India, it is being said that TATA Group is also keen to buy the airlines. It is interesting to note that the TATA Airlines which was started in 1932 by J.R.D. TATA was nationalized in 1953 as Air India by the Government. The fact that now the TATA Group is trying to bid for the Air India stake would seem like an anti-thesis in the light of current TATA-Mistry grapple for power.

The new Chairman N Chandrasekaran has provided a robust and poignant leadership to the conglomerate and has been instrumental in improving the Group’s financial status. The purchase of Air India by TATA Group could prove to be a ‘shot in the arm’ for the TATA Sons to improve its global standings and corporate stature. Amongst one of the greatest hurdles that stand in the way of TATA’s acquisition of Air India is the keen interest shown by IndiGo in the purchase. It is useful to mention that IndiGo is the largest player in the domestic aviation segment with a total market share of about 40% [Reuters, Air India privatization: IndiGo, other airlines show interest in buying airline stake ]. It has also submitted a formal letter of interest to the civil aviation ministry regarding the same. Other than IndiGo, more than a dozen international players are also expected to bid for the disinvested share of Air India to acquire a presence in largest growing aviation market in the world. If TATA Group somehow, acquires Air India. It could prove to be a potential game-changer for the Group and could usher an era of financial stability and growth.

The Road Ahead…

The current status of the TATA-Mistry power struggle seems to be complicated with Mistry’s appeal before the NCLAT against the dismissal by NCLT scheduled to be heard in July. The verdict of Appellate Tribunal could have grave ramifications for the TATA Group leadership. The chances of Mistry securing a favorable decision look bleak but even in that situation, an appeal to the Supreme Court would lie with the aggrieved party. It has proved to be a boom with most of the companies registering a financial turnaround because of cost reduction and robust financial prudence. The changes in the cross holdings of the TATA Companies is bound to propel the Group to a leaner structure and being better attuned for revenue generation. Whether the TATA Group is able to acquire Air India or not would depend upon final agreement between the Government and the bidding corporates, but it could be dubbed as a ‘splendid comeback’ by the TATA Group from its ailing corporate standing of January 2017 to staking a claim to acquire the India’s third largest domestic airlines.

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