Battle in Tata sons

On 24 Oct 16, Cyrus Mistry was unceremoniously dismissed as Chairman of Tata Sons. Tata Sons is the holding company of the US$ 103 billion Tata conglomerate. The largest shareholder in Tata Sons is Tata Trusts; 66% of the equity capital is held by philanthropic trusts endowed by members of the Tata family.

Who will win the family feud?

On 24 Oct 16, Cyrus Mistry was unceremoniously dismissed as Chairman of Tata Sons. Tata Sons is the holding company of the US$ 103 billion Tata conglomerate. The largest shareholder in Tata Sons is Tata Trusts; 66% of the equity capital is held by philanthropic trusts endowed by members of the Tata family. The largest of these trusts are the Sir Dorabji Trust and the Sir Rattan Tata Trust, created by the sons of the founder, Jamshetji Tata. The US$ 4.2 billion Shaporji Pallonji Group, the family concern of Cyrus Mistry is the largest private equity holder in Tata Sons, with about 18.4% share.

In 2012, Cyrus Mistry at 43 years of age, was appointed Chairman of Tata Sons and his sudden dismissal was a surprise to the industry and perhaps to Cyrus himself.

Why was Cyrus Mistry Dismissed?

Cyrus Mistry’s removal was engineered by Rattan Tata himself, the man responsible for appointing him, four years earlier. Why did Rattan Tata loses confidence in his successor?

  • Funding of Elections. In 2014 a close advisor of Mistry had proposed a Rs. 10 Cr. funding, for the Odisha Assembly elections. The logic given was that Tatas owned major Iron ore assets in the state. However, members on the Tata Board argued against the idea, citing the Tata’s established practice of only funding parliamentary elections and that too through a trust. The proposal did not pass and Rattan Tata expressed his displeasure to Cyrus that such proposals were not in consonance with the Group’s reputation.
  • Indian Army Contract.In 2016, two companies of the Tata Group made two seperate bids for the Indian Army contract for 2,600 future Infantry Combat Vehicle, worth Rs. 60,000 Cr. Tata Power (Special Equipment Division) with Titagarh Wagons (Birla) made one bid while, Tata Motors with Bharat Forge made the other bid. Ratan Tata felt that a consolidated bid between Tata companies was more in keeping with the Group’s image. Cyrus acknowledges that synergy within the Group was preferable. However, when that approach failed, he respected the independence of Tata companies. The result of the bid has not yet been made public.
  • Tata Power-Welspun Energy. In July 2016, Tata Power acquired Welspun Energy a green-power project. Rattan Tata felt the decision should have been brought before the Tata Sons board, which Cyrus Mistry declined and executed in the Tata Power board.
  • Other Corporate Misunderstandings.Rattan Tata was also reportedly skeptical about the Tata tie-up with US Pizza chain, Little Caesars, which the veteran felt undermines the image of the Tata Group. Rattan Tata was also keen to settle the Tata-Dokomo dispute, for which Cyrus was unable to find a solution.

What is Cyrus Mistry’s Perspective?

Cyrus claims in 2012, after he was appointed Tata Sons Chairman, the Articles of Association (AoA) of Tata Sons were changed. It empowered the Tata Trusts-nominated Directors in the Tata Sons Board to veto decisions. Cyrus says what began with suggestions in 2013, gave way to assertion of rights under the AoA and eventually demands for information on anything and everything that Ratan Tata and other Tata Trusts-nominated Directors thought fit to ask. He says the interference created an environment of ambiguity and a tyrannical breakdown of corporate governance.

What is the Legal Roadmap for Tata Sons?

Following Cyrus Mistry’s removal as Tata Sons Chairman on 24 Oct 16, he was removed from the Board of Directors of Tata Consultancy Services (TCS), at an EGM (Extraordinary General Body Meeting), on 14 Dec 16. Soon thereafter Cyrus resigned from all the boards of Tata companies. 

Tata Sons has announced that Natrajan Chandrashekaran, CEO of TCS as its new Chairman, who shall take charge on 21 Feb 17. Tata Sons also announced an EGM on 06 Feb 17, to seek Cyrus Mistry’s removal from the board.

Cyrus Mistry has filed a petition in the National Company Law Tribunal (NCLT) against Rattan Tata and the Tata Sons board, alleging oppression of minority shareholders. On 18 Jan 17, the NCLT dismissed the petition against Tata Sons but allowed Cyrus Mistry’s lawyers to file an affidavit, on the holding of the EGM on 06 Feb 17, seeking his removal from the board.

Assessment

There is little doubt that Cyrus Mistry shall be removed from the board of directors of Tata Sons, on 06 Feb 17. Tata group of companies, shall have to emerge from this bitter board room battle that has tarnished the reputation of one of India’s most respected business houses. In perspective, Cyrus Mistry was unable to retain the confidence of the patriarch, Rattan Tata, who had selected him as a successor. Did Rattan Tata retain too much control and interfere too much in the functioning of Tata Sons? Ideally functional autonomy should be granted to a new incumbent; however, new incumbents should also fulfill the promise of their selection. Cyrus Mistry had to fill the large footprints of his predecessor and perhaps he did fall short, in the end.

 

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