Libertatem Magazine

Ratan Tata v. Cyrus Mistry: The Boardroom Battle inside India’s Biggest Conglomerate

Contents of this Page

Tata Son’s blue eyed son Cyrus Mistry was sacked from the post of chairman almost after 4 years of occupying the post. The decision, taken at a Board Meeting in Mumbai, has appointed the former chief Ratan Tata as the interim Chairman for a period of 4 months, during which time period a replacement would be sought to be finalized.

To give a brief about the sacked chairperson, Cyrus Pallonji Mistry joined as a director on the board of Shapoorji Pallonji & Co. Ltd in 1991 and was designated as the managing director in 1994 of the Shapoorji Pallonji Group. Shapoorji Pallonji has 18.4 per cent stake (single largest individual shareholder) in Tata Sons – the holding company of Tata Group.

In 2012, Cyrus Mistry was appointed the chairman of Tata Sons and simultaneously was also the chairman of major Tata Companies such as Tata Steel, Tata Powers, Tata Consultancy, Tata Motors, Tata Global Beverages, Tata Chemicals and Indian Hotel Company (Taj Group). However, his sacking just after 4 years, the shortest tenure of a group chairperson, at the helm came as a shock.

The Tata – NTT DoCoMo Spat

One of the major reason speculated for the ouster of the chairman was the ugly spat between Tata Sons and NTT DoCoMo, which portrayed the company, which has built its legacy over a century, in a very poor light. The way the $1.17 billion compensation slapped by an arbitration panel over a breach of agreement by Tata Sons is said to be one of the major reasons which irked Ratan Tata. The case relates to a INR 145 billion investment by NTT DoCoMo in India which was based on the terms that if certain targets were not met in 5 years then Tata Group would find a buyer who will purchase 26.5% stake (that the NTT DoCoMo owned in Tata Teleservices) at fair market value or would take over those shares at half the original value of the investment, whichever was higher. On failure to meet the target by Tata Group, NTT DoCoMo exercised this option and the pay out to be made by Tata amounted to $1.17 billion and they sought the permission of the Reserve Bank of India (RBI) to pay out this amount. By this time there was a new law put in place by the RBI which prohibited exit of a foreign equity investor at a previously decided price. The government in light of this law decided to block this payment by Tata to NTT DoCoMo.

In January 2015, DoCoMo decided to take the matter to the London Court of International Arbitration (LCIA). The ruling of the LCIA made the Tata Sons liable to pay $1.17 billion in compensation to NTT DoCoMo, however when DoCoMo came to India and approached the Delhi High Court to enforce the order, the court allowed the RBI to file an intervention application in the enforcement of the award. The case is to be heard next on December 1. It is this handling of the case and natural repercussions that it had on the image of the company that have led to many to conclude that Ratan Tata and the trustees did not approve of the way the litigation unfolded and it was contrary to what was transpired.

Selling the Tata Steel UK Biz

The shedding of loss-making entities by Mr. Mistry, including selling off of the entire steel business in the United Kingdom in March too did not go down well within the Tata hierarchy. The blame for selling of the British business venture was put on cheap imports of Chinese steel, high energy costs and weak demand making for an unsustainable future. The selling of the business can well be what was alleged to be “departure from culture and ethos” of the company as Tata’s growth in the United Kingdom was seen as a matter of pride for the company and the nation, the step was seen as a lack of dynamism and a failure to reorganize the wide array of business that the group has. Sources say that the decision to sell the UK Biz was not the way Tata’s handled businesses of loss making entities. The group culture and ethos suggested to revive the business instead of shutting it down completely. However, the Tatas has stopped the sales process of the Tata Steel UK Ops and are eyeing for other alternatives including joint venture with German giant ThyssenKrupp AG. The company has now entered into discussions with strategic collaborations through a potential joint venture.

Mistry’s Allegations

Mr. Mistry, too, held back no punches after his sacking and made some shocking allegations against the Company and its heads. The most major claim made by Cyrus Mistry post his sacking is that there was no opportunity provided to him to represent himself in front of the board. The section of the Companies Act, 2013 dealing with “removal of directors”, I.e. section 169 states that “A company may, by ordinary resolution, remove a director, .. ., before the expiry of the period of his office after giving him a reasonable opportunity of being heard”. Prima facie, thus, this does seem to be an illegal termination of the chairman. However, a reading of the Company’s (Tata Sons Ltd.) Articles of Association (The articles of association is a document that specifies the regulations for a company’s operations, and they define the company’s purpose and lay out how tasks are to be accomplished within the organization, including the process for appointing directors and how financial records will be handled) specifically art.104 of the same shows that Tata Trusts, which is the Company’s largest shareholder with around 66% sharehoding and headed by non-other than Mr. Ratan Tata, gave itself special powers in nominating, approving and removing chairman of the group holding company, and this was done just few days before Mr. Mistry took over the post. Thus, these may well have been added to protect the interest of the Tata Trusts.

However, in spite of such special provisions, a bare reading of section 6 of the Companies Act,2013 states that:

“Save as otherwise expressly provided in this Act—

(a) the provisions of this Act shall have effect notwithstanding anything to the contrary contained in the memorandum or articles of a company, …; and

(b) any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to which it is repugnant to the provisions of this Act, become or be void, as the case may be.”

Thus it is abundantly clear that it is the provisions of the Companies Act, 2013 which shall have an overriding effect irrespective of anything stated in the Articles of Association and it would be thus interesting to see how the Tata’s can justify not giving a chance of proper representation to Mr. Mistry when the same is his right as per the provisions of the Companies Act, 2013.

‘Tata Nano’ not being shut down due to emotional reasons

Another interesting development that arose post the sacking of Mr. Mistry was his email to the board of Tata Sons wherein he made some startling allegations one of which was that the Tata Nano, Ratan Tata’s one of the most cherished brain child, has consistently lost value and that there was no sight of profitability neither were there any turnaround strategy and hence it required that the production of the car be shut down. He further went on to add that it was only “emotional reasons” that have stopped them from taking this decision. His scathing attack did not stop there has he further insinuated ulterior motives of Mr. Tata in continuing with the Nano production by stating that shutting down Nano would stop supply of Nano gliders to another entity that makes electric cars in which Mr. Tata has a stake.

In the aftermath of the sacking the Tata Sons have filed caveats in the Bombay High Court, to ensure no ex-parte orders are passed against them such staying the sacking or any other similar orders.

Mr. Mistry’s email to the Tata Sons Ltd. board also alleged about how the articles of association was an obstruction in his ability to function freely, and also that the company, which is valued at INR 1.74 lakh crore, could have a possible write down of INR 1.18 lakh crore.

SEBI’s Intervention

In response to the letter to the market regulator – Securities and Exchange Board of India (SEBI) have been reportedly keeping a watch over any violation of corporate governance or listing obligation norms. Furthermore, stock exchanges have sought clarifications from many of the listed companies of the Tata group on the alleged disclosures made by the former chairman. The SEBI thus is looking into the purported disclosures made in the email to the board of Tata Sons. Apart from this the regulator is also keeping a very keen eye on the price movements and trading activities of the listed entities of the Tata group, which are over two dozen in number and have seen a decline in value over the trading sessions after the surprise ouster of its chairman after only four years in charge. Soon after the Q&A from the Stock exchanges, the group companies of Tata Sons have filled reports clarifying them that the accounts are in order.

Legal Advisors

As per reports the Tata Sons are being advised the law firms Karanjawala & Co. and Shardul Amarchand Mangaldas, with briefings being done to seniors – Harish Salve and Abhishek Manu Singhvi. Cyrus Mistry on the other hand has turned to Desai & Dewanji for advice with senior counsels Iqbal Chagla and Janak Dwarkadas being briefed, former partner at J Sagar Associates, Somasekhar Sunderesan is also being briefed. The stage is thus set for a mouth-watering legal battle involving the who’s who of the legal industry representing both the parties, yet whether there will be a legal battle is yet to be seen. Mr. Mistry is yet to file a case against Tata Sons, although counter caveats have been filed by him.

The Tatas and the Prime Minister of India

Although Mistry has been removed as the Chairman of Tata Sons, the holding company for the Tata group, he still remains on its board. More significantly, he is the Chairman of various Tata group entities like Tata Power (Chairman), Tata Global Beverages (Non-Executive Chairman), Tata Steel Ltd (Chairman), Tata Motors (Non-Executive Chairman), Indian Hotels Company Ltd (Non-Executive Chairman), Tata Chemicals Ltd (Chairman), Tata Consultancy Services (Non Independent, Non-Executive Chairman), Jaguar Land Rover Automotive Plc (Chairman).

The Tata trusts hold a majority of the shareholding – close to 66% — in the closely-held Tata Sons. However, their shareholding in their other listed firms is much less.

News18 parsed through publicly available documents of some Tata firms for a closer look at the shareholding pattern:

  • Tata Steel: 32% controlled by promoter and promoter groups (Tata trusts and Tata companies), 9% by Unit Trust of India, 13% by Life Insurance Corporation.
  • Tata Motors: Promoters control 33% while UTI has 4.36%.
  • Tata Chemicals: Promoters control 30%, UTI has 14% and LIC has 3%

Now, if it comes down to a boardroom battle at each of these companies, the promoters, i.e. Tata, will need the cooperation of other shareholders. Getting the government to lend a sympathetic ear to its cause could be an essential part of the strategy if either group wants the support of the state-run shareholders like UTI or LIC.

Tatas are also said to be looking up for potential buyers of the Mistry’s stake in case they become available for buyout.

Tata Global Beverages removed Mistry as Chairman

Tata Global Beverages on 14th November removed Cyrus Mistry as chairman of the company which co-owns and runs Starbucks coffee stores across India, escalating a boardroom battle that erupted after his sacking as head of the $103-billion business empire. Non-executive director Harish Bhat has replaced Mistry, the company said in regulatory filing to the Bombay Stock Exchange (BSE).

Mistry removed from the Board of Tata Consultancy Services

Tata Sons Ltd has removed Cyrus P. Mistry as chairman of Tata Consultancy Services Ltd (TCS) and sought to replace him as a director of the software services provider as the fight between the holding company and its former chairman (and significant shareholder) enters a new phase.

Tata Sons, which has a 73.26% stake in TCS, nominated Ishaat Hussain, a Tata group veteran, as the interim chairman of the company with immediate effect. Thus, Mistry ceases to be chairman of the TCS board, the company said in a stock exchange statement on November 10. Separately, Tata Sons has requested a shareholder meeting of Indian Hotels Co. Ltd (IHCL) to pass a resolution for the removal of Mistry as director. On 4 November, IHCL’s independent directors unanimously backed Mistry’s board position as chairman.

The divorce between Ratan Tata and his once blued eyed son has thus not been particularly beneficial for the company and as the now former chairman has claimed “the board hasn’t covered itself with glory”. Regardless of the fact that whether the dispute goes into litigation or not, in case it does it would be another splash-the-cash level litigation with its billings in billions, the sudden ouster and its aftermath involving the bombshell of an email sent by Mr. Mistry has all but dented the 148-year-old company’s reputation of being well managed. The ouster bringing into light the Articles of Association which protects the right of family members in the family owned business further pecks India down the global corporate governance ladder and is evidence enough to prove that though there are sufficient legislations on protecting minority shareholders right yet the same is yet to be protected in substance.

About the Author