Tatas-Mistry case. Tatas hold all the aces

Cyrus Mistry is in a very difficult spot indeed. He may have fought on principles to uphold corporate governance in the Tata group but post the Supreme Court verdict on Friday, it is the Tata group that holds all the aces.

Forget the fact that the Supreme Court did not agree with Mistry’s contention that he was oppressed in the Board of Tata Sons by the majority shareholder. Forget that none of the corporate governance issues that he raised — and some of them were valid indeed — found favour with the apex court.

What’s important is that the judgment leaves Mistry and the Shapoorji Pallonji (SP) group, which holds 18.37 per cent in Tata Sons, completely at the mercy of the Tatas. The natural culmination of the controversy that began in October 2016 with the shocking, unceremonious sacking of Mistry as the Chairman of Tata Sons would be for the SP group to exit Tata Sons by selling their stake. Indeed, that’s exactly what SP told the Supreme Court in September last year. Yet, it may not be that easy.

Right of first refusal

Just look at how the dice is loaded against the SP group. Tata Sons holds the right of first refusal if any of the minority shareholders wish to sell their shares. Until Friday’s judgment, Tata Sons was willing to buy out the SP group, even if the two disagreed over valuation of the stake. While the SP group set the value of its shareholding at ₹1.75 lakh crore, the Tatas put it at between ₹70,000 crore and ₹80,000 crore only.

But after the judgment, it is quite possible that the Tatas may refuse to play ball with the SP group by stalling any efforts of the latter to sell the shares. The provision of first right of refusal to Tata Sons puts the SP group at a disadvantage if the Tatas don’t engage with them on this matter. But why will the Tatas do that? Wouldn’t they want closure too by evicting the SP group from Tata Sons once and for all?

Of course, that’s what they would like, in principle. In practice though it may not be so easy. Let’s leave aside the dispute and possible litigation over valuation. Finding the money to buy out the SP group, even at the valuation of ₹80,000 crore that the Tatas are talking about, may not be easy. Tata Sons’ revenue stream is mainly dividends from the group companies, the lion’s share of which comes from TCS. The Tata Trusts, which engage in philanthropy, depend on dividend from their 66 per cent holding in Tata Sons. There is no way that Tata Sons can use its cash flows to buy out the SP group. The cash flows will be inadequate for this anyway.

Options to fund stake buy

What are the other options? Offloading stakes in group companies such as TCS, Tata Motors etc. is an option but that’s something that Tata Sons may not want to do.

Even if it were to do so, it has to find a single buyer for the portion that it wants to offload as the market does not have the depth and the price of the shares will crash. Exchanging shares in group companies for the Tata Sons’ stake is another option but here again there could be disputes over valuation.

Finding an investor such as a private equity fund to park the SP group stake is another option but PEs come with their own demands and governance standards — Tata Sons’ standards may not match their expectations. Besides, PEs also come with a clear visibility of exit and one cannot see what kind of assurance Tata Sons can give them on this. Also, the Trusts may not be comfortable with a PE in their midst.

It will not be surprising, therefore, if the Tatas strategically decide to let the SP group remain where they are as minority shareholders. They don’t have a board seat and after the decisive SC judgement they cannot be a nuisance anyway. But such a strategy will not go down well with the SP group which clearly wants to exit, and exit right away. The battle could go back to the courts. Thus, the legal battle between the two may not have ended with Friday’s verdict.

And where does this leave Cyrus Mistry and the SP group? In a very difficult place indeed. The SP group is in deep financial trouble and it is banking on monetising the Tata Sons’ stake to redeem its debt. But that’s not going to happen so easily. As for Cyrus Mistry, he fought a battle on principles and this may be an unfair result. But that’s how the coin drops sometimes.