The decision of the independent directors of Indian Hotels Company to throw their weight behind Chairman Cyrus Mistry queers the pitch for Ratan Tata and his plans to wrest back control of the group companies from the former.

The Indian Hotels board move sends out several important signals — to Tata, to financial institutions such as LIC that may play a key role in the battle to oust Mistry from other major group companies, and to common shareholders. Most important of all, it is a message that independent directors of other companies such as Tata Motors, Tata Power, Tata Steel and Tata Chemicals, whose board meetings are coming up, will find difficult to ignore.

Unprecedented action When individuals of the eminence of Deepak Parekh, Keki Dadiseth and Nadir Godrej take a stand on an issue, you cannot but listen and take note. And they’ve not just taken a stand but gone public with it through a notice to the stock exchanges, which is unprecedented.

“Taking into account Board assessments and performance evaluations carried out over the years, the Independent Directors unanimously expressed their full confidence in the Chairman, Mr. Cyrus Mistry and praised the steps taken by him in providing strategic direction and leadership to the Company”, says the notice signed by the Vice-President-Legal and Company Secretary of Indian Hotels.

As votes of confidence go, it cannot get better than this. And it is a definite spanner in the works for Tata and the Trusts that are ranged against Mistry. Two of the independent directors in Indian Hotels — Vibha Rishi and Ireena Vittal — serve in a similar position in other group outfits: the former in Tata Chemicals and the latter in Tata Global Beverages, Tata Industries and Titan Company.

In theory, it is possible to argue that they may not, and need not, take an identical position with the boards of the other companies as they did at Indian Hotels. The issues in each company are different and Mistry’s performance assessment could vary in each of them.

Yet, it is difficult to believe that a man who has been complimented for his “strategic direction and leadership” in Indian Hotels could have been a non-performer in the other companies. This is where the independent directors will have to tread carefully. Their action will be under close watch and they will have to produce convincing arguments if they decide to oppose Mistry.

Upcoming strategies There are crucial board meets of Tata Chemicals (November 10), Tata Steel (November 11) and Tata Motors (November 14) coming up this week. Blindsided by the action in Indian Hotels, the Trusts and Tata will surely be plotting their strategy carefully for the other companies.

The problem for Tata is that if the boards of these companies repose their faith in Mistry as chairman, the only option left to wrest control will be to eject him from his post as director. And that requires calling an EGM and voting by shareholders on the resolution for removal. Though procedurally cumbersome, the resolution needs only a simple majority of shareholders present and voting for it to be passed successfully. This might be of some comfort to Tata as the promoter holdings (Tata Sons plus group companies) is just about a third of equity in most of the companies where Mistry may want to hold out.

Tata would need the support of institutions, especially LIC in the case of Tata Steel (where it holds 13.62 per cent) and Tata Power (where it holds 13.12 per cent), and hope that FIIs and mutual funds vote with him. If common retail shareholders display the apathy that they’re known for in matters of voting at general meetings, it will work to Tata’s favour.

A sticky point, though, is that according to Sections 169 (3) and (4), Mistry will have the right to put forth his point of view defending himself and also demand that it be circulated to all the shareholders of the company. This, in turn, presupposes that Tata will have to build up a watertight case against Mistry, whether for non-performance or any other reason that warrants his removal as director. The show at the October 24 meeting of the Tata Sons board where Mistry was summarily dismissed as chairman without being given so much as a chance to defend himself cannot be repeated in the group companies. The problem with this is that a number of inconvenient facts hidden from public view until now might tumble out into the open. And this is precisely what Mistry might want.

As a man fighting to prove that he wasn’t an incompetent boss, Mistry will pull out all stops, and that might embarrass the Tata group. This is something the group can ill-afford. There is one important point to note in all this. We don’t know what the Articles of Association of the group companies say in the matter of the chairman’s appointment. If they mandate chairmanship of the holding company as a qualification, then all bets are off for Mistry. But going by the action at Indian Hotels, this does not seem to be the case.

From any which way one looks at it, the Tata group appears to be on a tricky wicket. There is always the court from which to seek justice but it will be a messy, long-drawn battle. Tata doesn’t have time on his hands. Besides, a legal battle will distract the group companies from their business focus and importantly, may also put off potential suitors from outside the group to the chairman’s post at Tata Sons.

The best option The best option in the prevailing circumstances appears to be a private settlement with Mistry involving, if necessary, elders from the Parsi community who have been pained by the developments. What exactly the contours of such a settlement can be is difficult to guess. The Tata group is not just India’s biggest and most well-known, but also an iconic one. Convulsions in the group can be painful for most well-meaning people and it is certainly not good for India.

The sooner this episode ends, the better. But will Ratan Tata step back from the battle he set off?

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