THE TATA- MISTRY CONTROVERSY AND ITS NARRATIVE ON CORPORATE GOVERNANCE IN INDIA M. SRINIDHI
BREIF BACKGROUND:
In the year 2012, Cyrus Mistry the owner of Cyrus Investments Ltd. was elected as the successor of TATA Sons Ltd., which is the holding company of the TATA Group. Mr. Mistry is the minority shareholder of the aforementioned company with of 18.5%shareholding. Mr. Mistry was made Chairman to the Board of the company. Eventually Mr. Mistry’s regime was subject to legacy issues. This included the 15 billion dollar Corus Steel Investment, grant of loans to Mr. Sivashankaran, the founder of Aircel Group. These investmnts paved its way towards series of unprofitable transactions. However, Mr. Mistry was lauded by the Board for his expertise and skill. On 24thOctober, 2016 the Board of Directors of TATA Sons Ltd sacked Mr. Mistry without any form of discussion. A new agenda was proposed right before the General Meeting, and a vote was immediately cast resulting in the removal of Mr. Mistry. The company changed its status to that of a Private Limited Company from that of a Public Limited Company and Mr. M.N. Chandrasekaran was appointed as the Chairperson of the Board of TATA Sons.
JUDICIAL OVERVIEW:
With the removal of Mr. Mistry as the Chairman a suit was instituted in the National Company Law Tribunal (NCLT). The NLCT decided in the favor of TATA Sons. Ltd. An appeal was filed by Mr. Mistry at the National Company Law Appellate Tribunal (NCLAT). The NCLAT vide its 172 – page Order dated 18th December2019, held that the acts constituting of the following namely: the removal of Mr. Mistry, appointment of Mr. N. Chandrasekaran, changing of the nature of the company from a Public Limited Company to that of a Private Limited Company, and the entire affair of TATA Sons Ltd., were illegal in nature. The Hon’ble Tribunal stated that due process was not followed by the Board while terminating Mr. Mistry, and the reason for his termination was fictitious in nature. Additionally, the NCLAT also noted that TATA Sons Ltd. had majority directors who were nominees of the TATA Trust and held a virtual veto on all the decisions made by the company. Thus, shifting the blame on Mr. Mistrayon the grounds of non-performance was not feasible in nature. The NCLAT gave 4 weeks’ time to TATA Group to appeal to the Supreme Court.
The Supreme Court on 10th January, 2020 through a three judge bench led by Hon’ble Chief Justice Bobde stayed the order of the NCLAT. In the month of May, the Supreme Court agreed to hear Mr. Mistry’s plea seeking representation on the Board. A counter affidavit was filed by Mr. Ratan TATA in the month of August. The matter is yet to be decided by the Supreme Court.
ISSUES PERTAINING TO COPORATE GOVERNANCE:
· DISMISSAL OF MANAGERIAL PERSONNEL: The primary concern that arises in this case is the summary dismissal of a key managerial personnel without conducting an enquiry, and without following due process. The performance of Mr. Mistry was lauded in the recent past. This indicates that the position of the minority shareholder is being mistreated by the majority.
· CORPORATE PRACTICES:There exists an array of ambiguities in this case. The corporate practices are far away from being good. Firstly, it is the election of a non-executive chairman without serving any sort of prior notice. Given that TATA is an enormous entity. Secondly, the dismissal of CEO/ MD on the basis of non-performance whilst ignoring the fact the CEO/MD work under the constant control and supervision of the Board.
· VOTING SCENARIO: This issue is to be understood on two grounds. Firstly, from the standpoint of that of the directors. If the directors of a company subject to voting without ensuring accountability. Secondly, from the perspective of the shareholders. That if there exists a distinction between the shareholders rights and the voting powers of the directors, and if there a need for a system where all members of the company are treated equally with the Chairman acting as its head.
· REPRESENTATION OF MINORITY SHAREHOLDERS: From this case, it has become evident that there exists oppression and mismanagement of minority shareholders by the majority shareholders. It should be noted that, one cannot avoid this scenario altogether. However, the directors should be obliged to make a representation on behalf of the minority shareholders in order to safeguard their interests. Furthermore, the interests of the minority shareholders must be protected at all costs by instituting additional safeguards.
CONCLUSION:
With the matter pending in the Supreme Court of India, and the divergent holdings of the Company Law Tribunals four key questions are to be answered in this case. Firstly, what would constitute a role of a regulator under the given scenario. Is SEBI ought to make an intervention determining relevant practices of corporate governance. Secondly, if due process is to be followed especially in the case of termination of a key managerial personnel. Furthermore, should a notice be served on a prior basis before such a termination. Thirdly, how to safeguard the interests of minority shareholders such as Mr. Mistry himself. Lastly, should the Companies Act, 2013 regulate the conversion of a company from a Private Limited company to that of a Public Limited Company and vice versa. This ambit was covered under Section 43 A of the Companies Act, 1956 where Private Limited Companies would be considered as Public Limited Companies based on three givencriteria. This provision was scrapped off while incorporating the 2013 Act. This provision needs to be revisited. The TATA Group owing to its nature of being an extensive conglomerate owes a responsibility to millions of shareholders spread across 160 countries and employees who account more than 60,000 in number.
It should also be taken into consideration that on a business front, this personalized battle has already resulted in plummeting losses. It should be noted that if the profits of TCS are kept aside, the TATA Group currently has a loss of 13,000 Cr. Thereby the decision of the Supreme Court would not only shed light on the aspect of corporate governance, but also determine the fate of the TATA Group.
SOURCES:
1. SarveshMathur, The Crucial but Unspoken Governance Issues Exposed by the Tata-Mistry Saga, Moneylife (Jan. 30, 2020), (https://www.moneylife.in/article/the-crucial-but-unspoken-governance-issues-exposed-by-the-tata-mistry-saga/59054.html.
2. FP Staff, Sivasankaran says Cyrus Mistry destroyed Tata group value, Rs. 200cr Tata Capital loan settled, First Post (Oct. 31, 2016), https://www.firstpost.com/business/sivasankaran-says-cyrus-mistry-destroyed-tata-group-value-rs-200-cr-tata-capital-loan-settled-3080582.html.
3. Saurabh Sharma, Here’s why Cyrus Mistry says decision to buy Corus was based on one man’s ego, Business Today (Nov. 23, 2016), https://www.businesstoday.in/current/economy-politics/heres-why-cyrus-mistry-said-decision-to-buy-corus-was-based-on-one-mans-ego/story/240971.html.
4. Cyrus Investments Pvt. Ltd and Ors. Vs. Tata Sons Ltd. and Ors. , [2020] 157 SCL 360, https://nclat.nic.in/Useradmin/upload/13425174335dfa10b733e05.pdf.
5. Priya Gard, The Tata Corporate Governance Episode: The ‘India- Specific’ Issues and Concerns, IndiaCorpLaw (Aug.14, 2020), https://indiacorplaw.in/2017/09/tata-corporate-governance-episode-india-specific-issues-concerns.html.
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