The ongoing legal feud between ousted Tata Sons chairman Cyrus Mistry and India’s most-respected conglomerate is set to intensify in the coming weeks with Mistry prepping to appeal the National Company Law Tribunal (NCLT) verdict that went against him.
The Mumbai bench of the NCLT dismissed petitions filed by the Mistry family, which reportedly owns some 18.3 percent of Tata Sons. Those petitions alleged oppression, of minority shareholders, and questioned the corporate governance standards of the nation’s largest corporate entity. The bench also ruled that the Board of Directors at Tata Sons was “competent” to remove the executive chairperson of the company.
The Mistry-Tatas fracas raises two questions – Do existing corporate governance standards protect the interests of minority shareholders? And, should the buck stop with the boards of companies, empowered to sack a chairperson?
“The issue here is of corporate governance and the manner in which Mistry was sacked,” Shriram Subhramanian of Ingovern, a proxy advisory, and corporate governance firm, told Firstpost.
“The Board may be competent enough to oust a chairperson, but then on what basis is competence measured? That’s not clear,” Subhramanian said. If the Tata Sons board’s manner of working were to be emulated by other company boards and deemed ‘competent’, then issues of mismanagement, favouritism, among others, will never surface.
“That is the issue. One needs to look into the details of the parameters used to measure competence,” he added.
“[The matter] points to the issue of [the rights of] minority shareholders. Mistry’s family owns a little over 18 percent of Tata Sons, which is majority owned by Tata Trusts. But does that take away his right as a minority shareholder is a moot point?” according to N Chandramouli, CEO, TRA Research, a brands insights company, formerly Trust Research Advisory.
“It is not a Cyrus Mistry versus Ratan Tata issue but primarily an issue of the rights of minority shareholders and a CEO who was summarily sacked,” said an analyst, on condition of anonymity.
The question staring corporate India in the face is: For how long can you question the decision of a Board and where will the finality result, said Shailesh Haribhakti, a corporate governance expert and the chairman of auditing firm Desai Haribhakti.
That apart, there are these two questions about the nature of the relationship between a board and a CEO and the relationship between the board, a highly influential shareholder, and the CEO – two sets of relationships that need to be scrutinised, said Haribhakti.
The Companies Act mandates that a petitioner should hold at least one-tenth of the issued share capital of a company or represent 10 percent of the total number of members to file cases alleging mismanagement and oppression of minority shareholders.
While the Mistry family owns around 18.3 percent of the closely-held Tata Sons, that holding reduces to less than three percent if preferential shares are excluded.
After he was ousted, in October 2016, Mistry and his family-run investment firm moved the NCLT, which had initially dismissed his petition, saying his under 10 percent ownership did not make him a minority shareholder. Mistry, however challenged the verdict at the National Company Law Appellate Tribunal (NCLAT), which waived the minimum ownership norms and asked the Mumbai bench to hear his plea afresh.
Therefore, what needs to be ‘fundamentally’ clarified is the definition of 10 percent holding, according to Haribhakti. “Is it 10 percent, or two companies that you hold together constitute 10 percent?”
The legal battle
Ratan Tata termed the NCLT verdict a ‘vindication’ of the actions that Tata Sons felt obliged to take in October 2016. Not many agree. “[The NCLT] verdict neither vindicates nor affirms anything,” said Chandramouli. “It is an ongoing battle. There are huge stakes in it for Tata Sons and their right to have ousted him legally,” said Chandramouli.
Mistry is trying to protect his own sense of self-worth, destiny and his ability to do something worthwhile with his family’s roughly 18 percent stake in Tata Sons, while Ratan Tata is seeking to protect the group’s aura, the Tata brand and his personal standing in society. There are many issues that the conflict raises. “They need to be addressed but instead the debate is getting lost in the noise of who lost and who won. That is not the conclusion,” said Haribhakti.
“In any [court] case, of an individual versus an organisation, seldom has the former won,” said an analyst.
However, the legal tussle will be tracked closely by both experts and the industry, who expect the row to spawn a new framework that will drive corporate boards and all those who serve on them.