Cyrus Mistry cannot be removed as Chairman of any of the listed companies of Tata Group unless the articles of association of that company bestow that right on Tata Sons, according to experts. The total equity holding by Tata Sons in the group company will also determine whether Mistry remains on the board of these entities.
“Of the seven listed Tata companies where Mistry is a Director, TCS has the highest promoter holding at 73.33 per cent. The other six companies have a promoter holding of between 30 and 39 per cent. It is to be seen as to what happens with all the other companies where Tata Sons has a holding below 40 per cent. In these companies, the vote of institutional investors will be decisive,” said Proxy advisory firm InGovern Research Services
Tata Consultancy Services, for example, replaced Cyrus Mistry as its Chairman and appointed Ishaat Hussain with immediate effect because Tata Sons holds over 73 per cent stake in TCS.
Tata Chemicals, on the other hand, where Tata Sons owns less than 35 per cent stake, kept Mistry as its Chairman. Going by the trend it is unlikely that Mistry will be removed from Tata Motors or Tata Steel when the companies have their board meetings over the next few days.
Sumit Agrawal, Ex-Asst. Legal Advisor, SEBI & Founder, Suvan Law Advisors said: “Under the Companies Act, where articles of association specifically and categorically provide a right to a major shareholder or group of shareholder to nominate as a Chairman, exercising that right effectively removes the incumbent with immediate effect.”
The Companies Act, 201,3 does not specify a particular provision for appointment or removal of a Chairman and leaves it to the judicious discretion under Articles of Association according to experts.
InGovern Research Services said that the AoA of Tata Motors gives the right of appointment of Chairman, Deputy Chairman and Vice-Chairman to the Board of Directors of Tata Motors and not to Tata Sons. “Hence, Tata Sons will start with replacing Mistry as Chairman in all the companies whose AoA gives it the right to replace the Chairman without the intervention of its Board,” it said.
Another Tata group company Indian Hotels in an exchange filing informed it had received a request to convene an extraordinary general meeting of shareholders to pass a resolution for removal of Mistry as Director of Indian Hotels.
Experts observed that use of majority shareholding could not be used to deprive minority shareholders of their rights, and hence, any decision had to be tested on the absence of malafide.
"In law, the majority rule in essence is supported by the economic approach, in the sense that higher rights and authority are directly proportional to the percentage of ownership, giving the majority greater decision making process. The only rider is that the principle of majority rule cannot be used to deprive the minority shareholders and their rights or cannot be mala fide . In such cases one need not prove bona fide of the decision but absence of mala fide is sufficient legal test held by Indian courts,” Agrawal concluded.