The Securities and Exchange Board of India [SEBI] is looking at whether Tata Sons’ plan of becoming a private limited company from a public one would impact shareholders, especially minority shareholders of listed Tata entities that own shares in Tata Sons. Meanwhile, new structure has also been challenged before National Company Law Tribunal [NCLT].
Tata Sons Limited [TSL] is the primary holding company of over US$ 100 billion conglomerate having presence in almost every major sector viz. power, steel, automobiles, telecomm, 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]. In TCS, TSL has 73% ownership whereas in others, its shareholding ranges from 22% – 31%. But, who controls TSL?
Tata family owned trusts alone hold 66% shares while the remaining 34% is with minority shareholders. The most prominent among them is the family of Cyrus Mistry with 18.4 per cent stake followed by five listed Tata group companies – TSL, TML, TCL, TPL and IHC with 11.41 per cent stake. The remaining shares are held by some members of Tata family and a few individuals.
On September 21, 2017, TSL shareholders had voted 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].
At the time of incorporation under the Companies Act, 1913, the 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. But, the AoA remained unchanged.
Thereafter, the Companies Act was amended in 2000 under which TSL was required to inform the Registrar of Companies [RoC] if it had become a private company. Since, under the new dispensation, ‘deemed public limited’ status could not be allowed, it needed to make choice between ‘public limited’ and ‘private limited’. Yet, for several years, it did not exercise it. Now, suddenly it has decided to go private and its AGM passed a resolution on September 21, 2017.
As a private limited firm, TSL would not need to make as many disclosures as it has to make now as a public one. Second, all minority shareholders including listed firms would need to get Tata Sons’ board approval to sell or transfer their stake to any entity. Third, if TSL defaults in paying dividend for two or more years, its preference shareholders would get voting rights. Fourth, this will curb the fund-raising options for the company.
This tantamount to Tata family owned trusts led by Ratan Tata [RT] taking complete control over TSL and through it, control over all companies under the group. It seeks to catapult itself to a position whereby it need not make any disclosures and minority shareholders cannot even sell their shares without taking prior permission of his masters voice [read: TSPL].
There cannot be a more potent example of corporate governance touching a new low with the promoters usurping even the powers of minority shareholders to decide in regard to latter’s own shareholding forget their participation in decisions relating to running of the company. There are several flaws in what they have done.
First, given its present structure of equity holding, how can a company wherein, 34% of the shares are held by persons other than the promoter be ever called a ‘private limited company’? For that to happen, the promoters should first buy over all minority shareholders. That has not happened. Till then, any move to declare it as ‘private limited company’ is illogical and untenable.
Second, millions of shareholders have stake in Tata group companies [besides general public who have their savings invested in them as loans from banks and financial institutions] who in turn, has significant holding in TSL. For that very reason, it was treated as ‘deemed public limited’ until amendment in Companies Act [2000]. How can its basic character be altered without taking them into confidence?
Third, the proposed change does not serve the interest of Tata Sons and group companies it controls, any better. In fact, by giving absolute control to the promoter, it will take away whatever accountability exists now. Tata’s move to appoint independent directors [purportedly to improve governance] is merely an eyewash as the latter will only listen to the person [read: promoter] who brings them in.
Fourth, the past experience shows that promoters care little for standards of corporate governance. Ever since a non-promoter [C Mistry] took charge in 2012, there were glaring instances of gross interference and financial irregularities [some of these are under regulatory lens]. Now, if the promoter were to appropriate to itself absolute powers, there will be even lesser confidence in the capability of management to effectively address governance issues.
The move to go private may have been triggered by an ongoing tussle between Tata family led by RT and Mistry which culminated in latter’s removal as Chairman in October 2016 [Mistry has challenged this before NCLT as also TSL’s subsequent decision on September 21, 2017 to go private]. But, this cannot be a valid ground for muzzling the voice of minority shareholders.
The conversion of Tata Sons into a private limited company has created an anomalous situation wherein a closely held group [a few family controlled trust, to be precise] has almost ‘absolute’ powers to run dozens of widely held public limited companies in which millions of investors have stake. This is a patently flawed arrangement which is detrimental to the interest of investors and public at large.
SEBI as custodian of investor’s interest and minority shareholders in particular, will do well not to let this go through.