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Tata Sons: A Bitter Pill

The Tata-Mistry battle has now percolated down to the boardrooms of group companies, portending mayhem

The Mistrys have been a trusted partner for the Tatas, building several castles for the group over a century and a half, of which many became landmarks of the vast Tata business empire. As the group rose to a pinnacle to count among the largest industrial conglomerates in the country and among the most respected corporate brands globally, the relationship between the two business families also bonded more strongly.

Ever r since the Mistrys bought F.E. Dinshaw and Co., the first finance dealer for Tisco (now Tata Steel) and a key stakeholder in the Tata group in 1936, this bonding only consolidated in multifarious ways, culminating in a Mistry scion being ceremoniously given the baton of the $100 billion Tata group in 2012. The metaphorical castle that evolved from this long-standing relationship, began to crumble though, with Cyrus Mistry’s mysterious ouster as chairman of Tata Sons on October 24, 2016.

The public spat that erupted from the warring quarters of the Tatas and the Mistrys only confounded industry and analysts about the true bone of contention. The sequence of events of the last four weeks have thrown up several issues to the forefront, however, ranging from simple ego tussles to more serious issues of shareholder interest and corporate governance.

The split is now wide open - among not only board members, especially independent directors of Tata Sons - but also group companies. The Tatas have now moved to the next course of action, to remove not just Cyrus Mistry, but also some “hostile” independent directors from the boards of key group companies.

If corporate and industry experts are to be believed, life has come a full circle for the most diversified and uniquely structured corporate brand, making a fresh beginning imminent. In the new journey, some ace entities in the group may opt out for new orbits and leaderships. The backing of some institutional investors and independent directors who find themselves embroiled in the corporate battle, will now be crucial

Crucial EGMs
So, all eyes are on the extraordinary general meetings (EGMs) of some of the key group companies scheduled in December. The EGMs were demanded by the group that promoted these companies, in which Cyrus Mistry remains chairman, and the agenda is to oust him. The outcome, no matter which side it weighs on, will trigger a new start as warring factions keep options open to part ways if necessary.

Holding company, Tata Sons, has already threatened group companies that it would withdraw brand licences if they went against it. The Mistrys, meanwhile, too could play the spoilsport on the Tata Sons board by virtue of their significant minority shareholding, should Cyrus Mistry finally be ousted from the boards of group companies as well.

Mysteries Abound
While the Tata camp, led by group doyen Ratan Tata, has already succeeded in ousting Cyrus Mistry as chairman of TCS and Tata Global Beverages, Mistry remains at the helm of Indian Hotels Co., Tata Chemicals and Tata Motors, backed strongly by independent directors.

Meanwhile, the Tata Steel board, which should have been the most contentious spot in the group for Mistry, his performance having reportedly come under fire there - did not raise an issue about his leadership at all.

As the boardroom dramas turn fierce within group companies, the Tata camp’s claims about Mistry’s underperformance as chairman of Tata Sons and group companies seem to be dying out. Simultaneously, the more consequential corporate ethics and governance issues raised by Mistry are coming to the forefront.

“The independent directors on the board of Tata Chemicals had reviewed Mistry’s performance this year and couldn’t find any difference from the last time they had evaluated him,” said a Tata Chemical insider, privy to performance evaluation of board directors, including chairpersons, in keeping with the rules of the company. The norms mandate indep e n d e n t directors to evaluate board directors every year.

Conflict Zones
A close look at the series of developments surrounding Cyrus Mistry’s unceremonious ouster from Tata Sons and group companies and the conflicting versions of board members on the subject, throw some light on the points of contention. A key point of contention was the manner in which business was conducted at the October 24 board meeting of Tata Sons. Another cause for discord was the lack of clarity on the real reason for Mistry’s ouster from Tata Sons.

According to a Tata group insider, “Missing the most important business of ouster of a serving chairman in the agenda can only be construed to be a lapse in the best practices of the board.” Mistry had expressed shock at the manner in which the Tata Sons board meeting was conducted on October 24. He also described the Tata Global Beverages board’s decision to oust him as illegal.

The crucial decision to terminate Mistry’s chairmanship at both these boards were primarily backed by a group of newly inducted members, while some of the long serving independent directors were opposed to the move, according to Mistry. A member of the Mistry camp claims that “on becoming chairman and having been a minority shareholder of Tata Sons, Cyrus Mistry uniquely understood that Tata Group needs a strong corporate governance framework that balanced the interest of the promoter with minority shareholders’ rights.”

“In addition, between Tata Trusts, Tata Sons, and the Tata operating companies, there was a need to be compliant with the law relating to insider trading by ensuring communication of unpublished price sensitive information strictly on a need to know basis,” the insider says. “The corporate governance framework developed under Mistry’s leadership attempted to ensure that group companies adhere to group values, share best practices, enable movement of talent, exploit win-win synergies and do all of this without impinging on the independence of the operating companies and the boards that they are ultimately responsible to,” the source went on to say.

In his public statements post the October 24 board meeting of Tata Sons, Ratan Tata had reiterated that the decision to replace Cyrus Mistry as chairman of the board was in the interest of the values and long-term vision of both the company and the group. The Mistry camp, in its turn point to various loss-making projects, such as the Nano car venture, of the Ratan Tata regime.

Nano has already accounted for a loss of at least Rs 25,000 crore of the passenger car division of Tata Motors. The sources also point to investment in the debt-laden tele-services business and costly acquisitions like Corus, during Ratan Tata’s term as chairman. The Mistry faction and independent directors have cautioned of possibilities of a huge writeoff in the group.

Shareholder Interest
As Mistry pointed out in one of his recent statements, he had wanted to put in place a system wherein strategy of individual operating companies would be created by their management and approved by their own board of directors, to protect the interests of all stakeholders, employees and minority shareholders.

“By placing the responsibility where it should lie, with the board of directors of the operating companies, allowed the independent directors to ensure that the interests of minority shareholders were aligned with the operating company’s strategy as well as the overall direction of the Tata Group,” he said in the statement.

Apparently, these strategies and the powers of independent directors have been questioned by the promoter group, saying that such a new structure would “drift away” the operating companies. Since Tata Trusts owns 66 per cent in Tata Sons and between 33 per cent and 74 per cent stake in most listed companies in the group, the outcome of the forthcoming extraordinary general meetings is almost predictable. While voting rights of institutional investors and other significant minority stakeholders are still critical, Mistry would be left with very limited options, should he be voted out of the board of these companies.

As a minority shareholder, Mistry is very unlikely to challenge his ouster legally. He is instead, likely to raise issues like poor corporate governance and non-compliance with best practices for protecting investor interests. It was time, says an industry analyst, for the government and regulatory agencies to intervene in the unending battle to glean the truth from the scores of allegations put out by the warring factions. The regulators should, they feel, settle the issue at the earliest, in the interest of all stakeholders.

TATA-MISTRY SPAT

Oct 24: Tata Sons board meets for other businesses and sacks Cyrus Mistry as chairman in a surprise move. Ratan Tata takes over as interim chairman and appoints an executive committee to select a new chairman within four months

Oct 25: Cyrus Mistry emails a letter to members of the Tata Sons board and trustees of Tata Trusts, expressing his shock at the events at the Tata Sons board meeting. He also provides details of his appointment, Ratan Tata’s interference in the business and the financial challenges facing many Tata Group companies, including a possible write off of $18.5 billion within the group

Oct 26: Tata Sons hits back at Cyrus Mistry, saying that the former chairman had made unsubstantiated claims, malicious allegations and misrepresented facts about business decisions only after his removal and that he had been party to the “allegations” for over a decade, in different capacities

Oct 27: Cyrus Mistry rubbishes the charge that the board of Tata Sons had not been informed when Tata Power decided to close the deal with Welspun Power for the acquisition of its renewable power business

Oct 30: Ousted chairman Mistry seeks an appointment with Finance Minister Arun Jaitley, who also heads the Ministry of Corporate Affairs, possibly to explain his side of the story. But, the government decides to steer clear of the boardroom tussle for the moment

Nov 1: In a letter to Tata group employees, Ratan Tata says the decision to change the leadership of Tata Sons was made after careful and thoughtful deliberation and that the board believed it was absolutely necessary for the future success of the Tata Group

Nov 2: Tata Sons apparently cancels the orientation programme meant for newly inducted independent directors slated for November 16 and the Mistry camp wonders how these new members could have backed his ouster even before they were initiated into the affairs of the 148-year-old group Nov 4: The independent directors of Indian Hotels declare their support for company chairman Cyrus Mistry

Nov 10: Tata Sons removes Mistry as chairman of TCS and the company calls an EGM on December 13 to remove him as director on the board. Ishaat Husain is appointed as the new chairman. Independent directors on the Tata Chemicals board unanimously support Mistry as chairman. Tata Sons asks the company to call an EGM to oust Mistry and independent director Nusli Wadia Nov 12: Tata Steel independent directors are divided on the decision to remove Mistry as chairman and he continues to hold the post

Nov 14:
The Tata Global Beverages board removes Mistry as chairman. Mistry calls the decision illegal. Harish Bhat is appointed new chairman

Nov 15: Majority of independent directors on the Tata Motors board back Mistry’s continuation as chairman. The company has been asked to call a shareholder meeting in December to remove Mistry as a director.

Nov. 17: The Tata Sons board of directors meet to discuss a range of issues including the removal of Cyrus Mistry from the post of chairman in six other companies within the group. A team of Tata loyalists, along with Ratan Tata, ostensibly meet Mistry and his team

unni@businessworld.in; @unni_ch




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