The NCLAT ruling in favour of Cyrus Mistry poses serious questions about the future course of action for India’s oldest and most respected conglomerate as relations between two key shareholders seem to be beyond repair.
The National Company Law Appellate Tribunal (NCLAT) on December 18 reinstated Cyrus Mistry as chairman of Tata Sons, holding his removal in October 2016 as “illegal”. Nullifying the July 9, 2018, order of the Mumbai bench of the National Company Law Tribunal (NCLT), the two-judge panel of NCLAT further stated that Tata Group’s actions against Mistry were “prejudicial” and “oppressive” and the appointment of N Chandrasekaran as the new chairman was “illegal”.
For the Tatas, the order by NCLAT was a bolt from the blue. “The NCLAT order appears to even go beyond the specific reliefs sought by the appellant (Mistry). Tata Sons strongly believes in the strength of its case and will take appropriate legal recourse,” its statement to the media read.
The order will take effect after four weeks and Tata has the option to challenge the ruling in the Supreme Court. Considering the relations between the two scions, the coming few weeks have the potential to spiral into longer uncertainties.
The battle of partnership
The stakes are high as the battle is for control of a group with over USD 111 billion in revenues, 29 listed companies under its belt, operations in 160 countries, and employing over 660,000 people. A majority of shares in Tata Sons is held by numerous Tata Trusts, headed by Ratan Tata, the Tata Sons patriarch. The Tata Trusts own close to 75 pc stake in the group holding company while Shapoorji Pallonji, Mistry’s family, owns an 18 pc-plus stake that has its origin in an unpaid USD 200 million loan the Tata family took in 1925 to save its then-fledgling steel business. The core dispute is whether the holding company is a quasi-partnership between the Tata Group and the 154-year-old Shapoorji Pallonji, or SP, Group, now run by Shapoor Mistry, Cyrus’s elder brother.
If it is proved in the court that Tata Sons is a partnership then Mistry gets to argue that his minority rights were suppressed. If it isn’t, and he was just a professional CEO in a Tata enterprise, then the board was perhaps within its rights to fire him for non-performance.
In Wednesday’s 172-page Tata-Mistry order, Justice Sudhansu Jyoti Mukhopadhyaya and Justice Bansi Lal Bhat decided that Tata Sons was indeed a partnership:
“We are of the view that for better protection of interest of all stakeholders as also safeguarding the interest of minority group, in future at the time of appointment of the executive chairman, independent director and directors, the ‘Tata Group’ which is the majority group should consult the minority group i.e., ‘Shapoorji Pallonji Group’ and any person on whom both the groups have trust, be appointed as executive chairman or director as the case may be…”
Experts believe that the judgement passed can have a very damaging effect on the reputation of Tata Sons as a part of the ruling by NCLAT says that substantial losses were caused to the Tata Group companies as a result of mismanagement, agreeing with Mistry’s contention in the case.
Analysts believe that this decision will not only have a serious impact on the entire Tata group of companies that is spread in several countries but also on stakeholders. Market participants also believe that the reinstatement of Mistry would not be acceptable to the shareholders of the group companies.
Little wonder then that shares of key Tata group companies tumbled on the BSE following the NCLAT order. Tata Motors fell over 3 pc, Tata Steel 2.21 pc, while Tata Communications was down 7 pc at the close of trading. However, stocks of most of the Tata Group companies traded well, and gained 1-3 pc during intraday trade yesterday, despite speculations of heavy impact after the NCLAT ruling. TCS, Tata Motors, Tata Global and Tata Chemicals gained 2-3 pc during the intraday trade. TCS, the major contributor for the Group, was on the major focus that gained 3 pc.
“This issue of change of leadership and further legal battle could bring in some uncertainty in the short term for the operations of the group. However, in the medium to long term it will not have any impact on the operational performance of the group or stocks. Whoever remains at the helm needs to ensure that the group performance doesn’t suffer as after all these tussles now everyone would be keenly watching the moves of new leadership and group performance. There is a compulsion for the new leadership to perform better. Moreover, Tata Group is an institution and every firm in the group has its own senior executives managing the operations,” G.Chokkalingam, founder & managing director at Equinomics Research & Advisory in Mumbai told Media India Group.
However, Joydeep Mazumdar, advocate, Supreme Court of India, feels that such a decision will have short-term and long-term impact. “…When such a significant ruling affects the constitution (constituent members) of the Board of a Company and thereby affecting the vision and future of the company, it would affect the investor sentiments both among short term players and long-term investors alike. But, since the final word has not been said in vis-a-vis the disputes, everyone would be eyeing the first day of hearing at the Apex Court when Tata Sons would be praying for a stay of the operation of the order of NCLAT dated 18.12.2019,” Mazumdar told Media India Group.
“This judgement from NCLAT also provide an opportunity to the key decision makers on both sides to show maturity and bury the hatchet and workout some amicable solution(s), which would certainly be the most endearing news for all investors,” Mazumdar added.
Analysts feel that Tata group shares will remain under pressure until the Supreme Court rules on the matter.
The question of public or private
The NCLAT while passing the judgement had also said that Tata Sons’ move to turn private from a public company was unlawful and ordered a reversal. However, the Ministry of Corporate Affairs (MCA) plans to challenge the NCLAT’s December 18 order that termed the change in status of Tata Sons from a public to a private entity as ‘illegal’. MCA is considering challenging the order in the Supreme Court.
NCLAT had set aside the Registrar of Companies’ (RoC) decision to allow conversion of Tata Sons into a private company despite the absence of any order from the Tribunal under Section 14 of the Companies Act, 2013.
A lot of the issues related to the company are likely to be debated again in the Supreme Court as the matter will soon be headed there. Till then none of the operating companies, such as Tata Motors Ltd., which owns Jaguar Land Rover, or Tata Steel Ltd., which acquired the former British Steel assets in 2007, will be able to make any strategic decisions till the matter is resolved.
“The dispute between Cyrus Investments Pvt. Ltd. (Cyrus Mistry) and Tata Sons Ltd. (Ratan Tata) is far from over. The decision rendered by NCLAT on December 18 would have to pass the rest of the Supreme Court of India. The apex Court having gone on winter recess from December 18, the next set of legal fights would have to wait the reopening of the court which in slated on January 6, 2020,” added Mazumdar.
The latest and most significant battle boardroom battle in India is set to hit the headlines for some more time to come.