Ratan Tata’s EGM gamble is a risky one

“Things have to escalate further before they can de-escalate.” Those were the words of someone very close to Cyrus Mistry when this writer asked him last Tuesday in Mumbai about the chances of a quiet settlement of the boardroom feud in the Tata group.

The words came true in the next two days when Tata Sons, smarting from the decision of Nusli Wadia to back Mistry, issued notices to Tata Chemicals, Tata Steel and Tata Motors, calling for an external general meeting (EGM) of shareholders seeking the removal of Mistry and Wadia as directors.

Wadia’s backing proved crucial for Mistry at the Tata Chemicals board — where the independent directors affirmed their faith in him — and in Tata Steel where his support ensured that the directors opposed to Mistry would not prevail.

Events have panned out exactly as predicted in an earlier article in these columns (‘Ratan Tata’s on a sticky wicket’, November 7) with the three companies now calling an EGM for the removal of Mistry as director.

What’s shocking, though, is the move to unseat Wadia, known to be a good friend of Ratan Tata. Wadia stood by Tata in his early days as chairman when he was battling the different satraps in the group companies to establish his suzerainty.

The move sends out many signals, none of which speak well of Tata Sons and those ranged against Mistry. The biggest of them all is one of vengeance reminiscent of George Bush’s famous line: “You are either with us or against us.” It is significant that Tata is willing to sacrifice a lifelong friendship with Wadia to neutralise Mistry.

Interestingly, Tata has picked only on Wadia, leaving out the other independent directors who supported Mistry, including Deepak Parekh (Indian Hotels). There was really nothing to stop Tata Sons from seeking the ouster of all the independent directors in Tata Chemicals, Tata Motors and Tata Steel who were aligned against its interests.

It is even more interesting that Wadia, a fellow Parsi, chose to align with Mistry. Wadia is an old warhorse who has seen more battles than Prithviraj Chauhan’s Chetak. If it had been an issue of competence or performance by Mistry, Wadia would surely have been on Tata’s side.

He really has no axe to grind here; he is neither a shareholder in Tata Sons nor is he a major competitor in any business where Tata is present. Go Air is but a small entity in airlines where Air Vistara and Air Asia compete.

Also, by siding with Mistry, Wadia was surely aware that he was taking on the might of the Tatas, including the considerable goodwill (now dented?) of Ratan Tata. So, what prompted him to take this difficult road? Is he privy to something we don’t know about?

Wadia’s stance has to be seen in the context of the positions taken by Ishaat Hussain and Farida Khambhata, directors in Tata Sons, during the vote for Mistry’s removal — they abstained.

Tata Sons, as a shareholder, is not required to give an explanation under the law for removal of directors in the group companies, but shareholders, especially foreign investors, are likely to demand one. So, will the Tatas say that Wadia was a non-performer? If so, how will they back it up?

Coming to think of it, Tata Sons will have to prepare a watertight case against Mistry too, as institutional shareholders are likely to demand the logic for his removal as director. Under Section 169(4) of the Companies Act 2013, Mistry is entitled to circulate a written statement to shareholders defending himself. And we can rest assured he will do so.

Tata Sons and group companies hold considerably less equity than institutions in each of the three companies where notice for EGM has been issued. ( See table ) In Tata Motors, FIIs hold 26.11 per cent stake, very close to that of Tata Sons’ 26.98 per cent. In Tata Chemicals, they hold 19.33 per cent while Tata Sons holds 19.35 per cent.

What they think of Mistry and his performance will, therefore, be a crucial determinant of what happens in the EGM. Mistry’s moves to pare costs and reduce liabilities by selling troubled assets (Tata Chemicals, Indian Hotels and Tata Steel), develop newer products (Tata Motors and Tata Steel Europe), and his sharp focus on the bottomline is something that is likely to be applauded by shareholders in general and FIIs in particular.

Unlike charitable trusts, FIIs have no emotional affinities to businesses or assets; they are focussed only on profits and profitability. If they see Mistry as having been on the right track in the three companies till now — and it’s an important if — they will oppose his removal. LIC and other domestic institutions, including mutual funds, who are also guided by profitability, may have no choice but toe the FII line.

Foreign investors also prefer visibility in matters of leadership. The Tata camp may have crucially erred by gunning for Mistry’s removal before finalising his successor’s name. Things would have been easier for the Tatas had they been able to present an alternative to Mistry at the EGM.

They could still do it, though. According to the law, the board has to give 21 days’ notice for the EGM but it is doubtful if Mistry’s successor could be found in the next three weeks. Unless, of course, if it is someone who is already on the Tata Sons board — that’s something that cannot be ruled out. Nitin Nohria, Amit Chandra and Ajay Piramal are directors in Tata Sons and voted for Mistry’s removal.

Whichever way one looks at it, it is hard to escape the conclusion that the Tata camp may have embarked on a dangerous gamble by upping the ante and forcing the removal of Mistry and Wadia through an EGM. If the move backfires, the Tata group will plunge into chaos with a dual power structure — one at the apex level and another at the level of the operating companies.

This is the fear that the Tata camp will play upon while dealing with institutional investors in the run-up to the EGM. They are already in dialogue with labour unions, some of which have pledged support. The Tata camp will be hoping that investors and unions will prefer stability, and side with the majority shareholder, sacrificing Mistry, which is a possibility.

Yet, even if shareholders of one of the three companies vote against the removal resolution, it will be a moral blow to Ratan Tata, give momentum to Mistry and open up many interesting possibilities. Extraordinary times lie ahead for the Tata group companies, their investors and employees.