In a landmark judgment delivered on December 18, 2019, the National Company Law Appellate Tribunal [NCLAT] has held as illegal the decision of Tata Sons Limited [TSL] in its Board Meeting held on October 24, 2016 to remove Cyrus Mistry then Chairman, TSL as also from the board of three Group companies viz. Tata Consultancy Services [TCS], Tata Industries Limited [TIL] and Tata Teleservices Limited [Maharashtra]. It has also declared appointment of N Chandrasekran as Chairman, TSL [it followed removal of Mistry] illegal. It has directed immediate reinstatement of Mistry.
The Appellate Tribunal has also held as illegal the decision of TSL shareholders in the AGM held on September 21, 2017 to convert itself from extant ‘public limited company’ status to a ‘private limited company’ and change its name from TSL to Tata Sons Private Limited [TSPL] by amending the Articles of Association [AoA]. Accordingly, Registrar of Companies [RoC] has been directed to amend its records to register TSL as ‘public limited company’.
Even as reinstatement of Mistry in three mentioned companies takes immediate effect, for enforcing other portions of the order, NCLAT has allowed four weeks time to enable management of TSL move the Supreme Court [SC].
Given the far reaching ramifications of the order, it is bound to be challenged in the apex court in its entirety. Meanwhile, a close scrutiny of the facts of the case is in order. The three prime focus areas are: (i) removal of Mistry as Executive Chairman; (ii) oppression of minority shareholders; (iii) conversion of TSL from ‘public limited company’ status to ‘private limited company’.
Tata Sons Limited [TSL] is the primary holding company of over US$ 100 billion conglomerate having presence in power, steel, automobiles, telecom, chemicals, information technology [IT] etc. It has controlling interest in high profile companies such as Tata Motors Ltd [TML], Tata Steel Ltd [TSL], Tata Consultancy Services [TCS], Tata Power Ltd [TPL], India Hotels Co. [IHC], Tata Chemicals Ltd [TCL] [to name a few]. Whereas, in TCS, with shareholding of 73%, TSL has majority control on its own, even in other companies, its ownership ranges from 22% – 31% which enables it to exercise full control acting in concert with institutional investors.
TSL in turn, is majority owned and controlled by Tata family owned trusts with shareholding of 66%. The remaining 34% is with minority shareholders. This includes 18.4 per cent with the family of Cyrus Mistry or Shapoorji Pallonji Group [held through Sterling Investment Corporation and Cyrus Investments]; 11.4% held by five listed Tata group companies viz. TCS, TML, TCL, TPL and IHC and 4.2% with some members of Tata family and a few individuals.
The above shareholding structure enables Tata Trusts to call the shots in running TSL and all other companies under Tata brand. All along, during almost one-and-a-half century of operations, a person at the helm of Tata Sons was also the chairman of Tata Trusts concurrently. Needless to say, the person occupying both the positions was always from the family. The tradition was broken in 2012 when Mistry was anointed as Chairman, TSL; however person from the family [read: Ratan Tata] continued to be Chairman, Tata Trusts.
At the time of incorporation under the Companies Act, 1913, the Articles of Association [AoA] of TSL had features of a private limited company. With effect from May 1, 1975, it became a “deemed public company” under the provisions of the Companies Act, 1956. Thereafter, the Companies Act was amended in 2000 under which TSL was required to clarify to the Registrar of Companies [RoC] whether it was ‘public limited’ and ‘private limited’ as under the new dispensation, ‘deemed public limited’ status could not be allowed. Yet, for several years, it kept the position ambiguous till it decided to go private by passing a resolution on September 21, 2017.
With these basic facts in the backdrop, let us analyze the three focus areas. During 4 years at the helm, Mistry’s performance was commended by the promoters of TSL as well as independent directors of all leading group companies. Yet, he was removed in a meeting of TSL board in October, 2016 by moving a resolution under ‘any other item’ in the agenda. He was not even given an opportunity to defend himself – violating principles of natural justice.
The trigger for this was Mistry’s attempt to review the past decisions taken under the previous regime led by Ratan Tata [RT] such as buy-out of Corus Group [2007] and his objection to projects like AirAsia and Vistara Airlines which were thrust upon without conducting due diligence [Tata’s foray in to airlines is under investigation by Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) for alleged corruption and money laundering].
Mistry’s disapproval of continuing with ‘Nano’ despite persisting losses, purchase of real estate property at inflated price, mis-handling of issues with foreign partner NTT-DoCoMo in its telecomm JV Tata Teleservices and mess up in the power sector etc also did not go well with the top brass at Tata Trusts.
The removal was justified on the ground that he no longer enjoyed the trust and confidence of shareholders; that he shared inside information with the media which further harmed their interest. Strangely, the National Company Law Tribunal [NCLT] in its order dated July 9, 2018 used these very arguments to dismiss the petitions filed by Mistry. It saw no merit in latter’s contention that there was oppression of minority shareholders, mismanagement, interference by Tata Trusts and breakdown of governance and. It also saw nothing wrong in the decision of TSL to convert into a ‘private limited’ company.
The ground for removing Mistry was fallacious. How could a person who enjoyed the confidence of shareholders for several years as a director and then, as Chairman suddenly lost it? Merely, because on one fine day, a majority shareholder expressed lack of trust cannot be taken to mean that he committed something horribly wrong. The reality is that Tata Trusts were exercising undue interference [with some members acting as super-directors] in functioning of TSL which was resisted by Mistry culminating in the former literally sacking the latter violating all norms of corporate governance.
The minority shareholders have 34% ownership in TSL. This includes 11.4% held by millions of retail investors vide their investment in five listed Tata group companies. Now, if the company suffers erosion in wealth primarily due to the wrong decisions and irregularities resulting from undue interference by the majority owner, these minority shareholders suffer. There could not be a more potent case of oppression of minority shareholders.
The oppression was taken to its nadir when on September 21, 2017, TSL passed a resolution to change its status from ‘deemed public limited’ into a ‘private limited’ company. With this, all minority shareholders would need to get TSL’s board approval to sell or transfer their stake [besides, it need not make as many disclosures as it has to make as a public limited company]. What sort of ownership is this whereby the person owning the share does not have the right to decide what to do with it.
The market capitalization of all 28 listed Tata group companies is close to Rs 1100,000 crore. Of this, about 1/3rd or Rs 366,000 crore belongs to the minority shareholders. The change of status has meant that such mammoth investment will in effect be at the mercy of Tata family trusts as those shareholders will need its nod. It is like running a public limited company as the fiefdom of a family. This is bizarre!
The NCLAT has rightly declared both the decisions of Tata Sons viz. removal of Mistry as well as change its status from ‘deemed public limited’ into a ‘private limited’ company as illegal [in effect, nullifying the order of NCLT dated July 9, 2018]. This has led to muscle flexing with the management arguing that ‘NCLAT has delivered what was not even asked for by the petitioner’ and some commentators having come out heavily on the order [a leading economic daily has gone that far to term NCLAT as a monarch].
The issue is heading for an intense battle in the Supreme Court. Whether or not it will protect the rights of minority shareholders by upholding the decision of NCLAT or famous adage ‘might is right’ will prevail. One can only wait and watch.