L’affaire Mistry: The action’s just begun

As L’affaire Mistry unravels, bit by tantalising bit, it is becoming clear that Cyrus Mistry paid the price for not bowing to the wishes of the majority shareholders of Tata Sons — the powerful Tata trusts that own two-thirds of the company. You cannot defy your largest shareholder and hope to survive, that’s the message that seems to have gone out from the trustees of the Sir Ratan Tata Trust and Sir Dorabji Tata Trust, headed by Ratan Tata as chairman.

Nothing unusual here. The way a joint stock company is structured, the shareholders are the ultimate bosses and the directors occupy their posts only at the pleasure of the former. So, if the trusts were unhappy with Mistry for not listening to them, they were fully entitled to ask him to go.

There can be two opinions on whether the trusts are fair when they say Mistry was responsible for falling dividends from Tata Sons. It could be argued, as Mistry has rightly done, that he was handed over a portfolio of under-performing, troubled assets and he did what best he could in the interests of the shareholders. But this is not the issue that we need to be concerned about now. The more important question is: Does the writ of the Trusts extend to group businesses that are not housed under Tata Sons?

Almost all the businesses of the group, including the ones that are under discussion now, are owned by other companies where Tata Sons is a minority shareholder. TCS, Tata Teleservices, Tata Coffee, Tata Investment Corporation, Tata Metaliks, Tata Sponge Iron and Tata Teleservices are the only outfits where Tata Sons holds majority equity.

In the companies under the scanner now — Tata Steel, Tata Power, Tata Chemicals, Tata Motors, Tata Global Beverages and Indian Hotels — the Tata group (through Tata Sons and through cross-holdings by group companies) holds less than a third, on average.( see table ). And by extension, the two Tata trusts would own just over 10 per cent of each of these companies (two-thirds of what Tata Sons holds).

In other words, the trusts are minor shareholders in the steel, power, automobile, chemicals and hotels businesses (among others). The public, including institutions and retail shareholders, are the majority owners of the listed group companies in these businesses. So, it is wrong for the trusts to behave as if they are majority owners and dictate to the chairman how the businesses should be run.

Mistry, as the chairman of Tata Sons, was answerable more to public shareholders than the trusts when it came to these businesses. Assuming this episode turns into a legal battle, Mistry could well argue that the decisions he took were in the best interests of the majority shareholders of these companies.

And that brings us to another important point. It might not be easy for Ratan Tata and Tata Sons now to dislodge Mistry from the chairman’s post in the group companies — certainly not as easy as it was in Tata Sons. Mistry, in legal terms, was appointed as director in the group companies by the shareholders of these respective units. Given that the majority shares of these companies are publicly owned and assuming that either Mistry decides to hold out and not resign, or that the majority shareholders think he’s the right man for the job, easing him out would be next to impossible. Unseating him from the chairmanship would then boil down to the composition of the boards but independent directors will certainly find it difficult to oppose Mistry if the majority shareholders support him.

The only caveat here is that we don’t know what the Articles of Association of these group companies says. If the AoA lays down that chairmanship of the holding company is a pre-requisite to be chairman of group entities, then Mistry would have to go. Else, it might be difficult to dislodge him, unless the public shareholders oblige. Given the disclosures until now from Mistry’s side and the silence from the Tata group, it might not be easy to convince public shareholders of the group companies to vote with Tata Sons.

Mistry’s approach to exit unviable units/businesses to cut losses is something most well-meaning shareholders focused on the bottomline would approve of. The only hope then would be the public financial institutions — assuming they are represented in the boards — in which case it would come down to Ratan Tata’s goodwill with the Government. Clearly, the Tata story is set to get more interesting in the days ahead.