In December 2012, the legendary chairman of Tata Sons (1), Ratan Rata, the holding entity that oversees the enormous and sprawling Tata Empire, retired at 75. After two decades at the wheel, he passed it on to Cyrus Mistry (2), the Shapoorji Palloni Group’s heir. It is a construction conglomerate that shapes the skyline of Mumbai.
The Mistrys, who belongs to the close-knit Parsi community like the Tatas, owns 18.4% of Tata Sons, second only to its charitable trusts.
However, in October 2016, during a dramatic meeting, Ratan Tata and board members of the Tata Sons sacked Cyrus Mistry. As per sources, something had gone incredibly wrong between the two. They added that the Board of Directors removed the former for loss of confidence.
The Beginning of the Legal Battle
The sacking of Cyrus Mistry started an acrimonious protracted legal dispute between the two groups, which is far from over.
After the sacking, Mistry wrote to Tata Son’s board, accusing the trustees of shadow control. He also denies allegations of not consulting the board before purchasing Welspun Power.
Moreover, in August 2017, the board passed the proposal to turn Tata Sons into a private company, which worsened the SP Group matter.
In July 2018, the Mumbai National Company Law Tribunal had dismissed Mistry’s petition, alleging that Tata Son’s affairs were mismanaged and were oppressing minority investors.
In December 2019, the NCLAT, or National Company Law Appellate Tribunal, ruled in favor of the Mistry. This seesaw dispute between the two has now landed with the Supreme Court.
Tata Sons argued that the judgment of NCLAT is a “blow to corporate democracy,” and it has set a fatal legal precedent. They further assured in front of the court that it would not take any steps invoking the power of Article 75 of the Articles of Association against the Shapoorji Pallonji Group, SP Group’s minority shareholders.
The plea came before Chief Justice SA Bobde, Justices BR Gavai, and Surya Kant, the three-judge bench.
The Bonding and Break of Two Families
It is a story of bonding and breaking two Parsi families whose ancestors are believed to have migrated from Persia to Gujarat. It was thought that SP Group received the shares of Tata Sons when they bought the financing entity F. E. Dinshaw and Co in the 1930s.
However, the Tata counsel argued that the Mistrys did not hold any group shares until 1965. It added the group bought the shares later from the JRD Tata siblings.
Whatever might be the case, the SP Group has more than an 18.4% stake in the Tata holding company. It makes the Mistrys the most extensive individual stakeholder in the Tata Group. Notably, the charitable trusts of the Tata family command 66% stake.
Supreme Court’s Stay Order on NCLAT’s Verdict
According to the Supreme Court’s order on the verdict of NCLAT, SP Group entered the Tata Group as a business partner because of the relationship between the two families, in business and outside.
Moreover, Neol Tata, the half brother of Ratan Tata, is married to Aloo Mistry, the daughter of Pallonji Mistry and the sister of Cyrus Mistry.
The order pointed out that the relationship is not purely on a commercial basis but also outside of strictly economic factors. Several members of the Tata Group divested their shareholding for SP Group, which was approved by the Tata Sons board.
It is worth noting that Pallonji Mistry had been the director at Tata Sons before Cyrus took the same post in 2006.
The business world knows the senior Mistry as the Phantom of Bombay house because of his quiet and measured interference in the Tata Empire. Moreover, when the company elected Cyrus as the deputy chairman of the group in 2020, Ratan Tata stated that his appointment is a right and farsighted judgment.
“He has been on the Board of Tata Sons since August 2006, and I have been impressed with the quality and caliber of his participation, his astute observations, and his humility. He is intelligent and qualified to take on the responsibility being offered, and I will be committed to working with him over the next year to give him the exposure, the involvement, and the operating experience to equip him to undertake the full responsibility of the group on my retirement,”
– Ratan Tata.
In 2012, Cyrus took over the chairman post in the Tata Group. However, his top job lasted less than four years. The Board of Directors of the Tatas removed him from the position in October 2016, which shocked India’s entire corporate space. Reports also suggest that Cyrus had no hint about what was going to happen.
Sources tell that Cyrus Mistry has sought ways to reduce the conglomerate’s debts that threatened to undo the Tata legacy. He spearheaded the purchases of Land Rover, Jaguar, and Corus Group, a British Steelmaker, which resulted in his removal.
On October 24, 2016, Ratan Tata and Nitin Nohria, another director, walked into his room and offered him to resign voluntarily. However, Cyrus refused to do so, and the board meeting commenced on the same day removed him.
After the ouster, he alleged legacy problems in the Tata Group and differences with Ratan Tata. He added that he wanted to get out of the group’s businesses like the European business of Tata Steel, telecom, and Nano car. However, in response, the Tata Group cited his performance issues.
Tata also removed him from all the boards, including Tata Sons, which further blazoned the bitterness’s severity between the two groups.
Tata Group Crippling the Mistrys
Later, Tata Group converted Tata Sons into a private limited entity from a public company. It completed crippled the Mistrys as they have no hint at what is happening inside the group. It is noteworthy that the outside agencies valued the stake of Mistrys at 1 lakh crore INR at one point.
With the move, their shareholding in Tata Sons is useless except to get dividends. In August and September, the Mistry family pledged a 9.19% stake of Cyprus Investments with the lenders to monetize their shares in Tata Sons.
However, the move was thwarted as the Tata Sons applied on September 5 to prevent share pledging as it could lead to the violation of the right of first refusal.
In short, the SP Group, who has already defaulted on its loan obligations to subsidiaries and bonds, is stuck with an asset it cannot monetize.
SP Group, a player in the infrastructure and real estate sector, is severely affected because of the COVID-19 pandemic. It is observing a lot of damage in its cash flows from operations and asset monetization.
The fundraising of promoters to aggregate 11,000 crore INR has not been successful to date. Now, it is facing several difficulties to service its 30,000 crore INR debt.
The End Game
As per anonymous sources, the SP Group does not have debt issues. However, it is facing several challenges for maturity and cash flow.
The entity has several short-term borrowings that are coming up for maturity. However, they are not meeting up since asset monetization is not moving at an equal pace. It has already sought lenders for debt restructuring.
The move of Mistrys to pledge shares indicates the beginning of the end game.
Sources say that pledging shares are usually the last resort to sell the family silver. The Tatas can also sense their desperation.
Hence, before the hearing on September 22, Ratan Tata personally briefed Harish Salve, the counsel for Tata Sons. He told Salve that if the Mistrys speak about their financial grief, he should say that the group is willing to purchase their stake at the market value.
“The settlement between Tata Group and SP Group is good news for both parties. The negotiations will now move towards the valuation of 18.4 percent stake in Tata Sons”
Tata Vs. Mistry: Formal Separation Or Co-Existence?
The lawyers of both groups, Harish Salve, the senior counsel, and Karanjawala and Co. for Tata Sons, senior counsel, C. Aryama Sundaram, and Desai & Diwanji for the SP Group, are working on the main petition arguments.
The Mistry firm is likely to seek a formal separation on October 28. There are provisions where if the minority stakeholder believes that there are no other remedies for their oppression grievance, they can seek for separation or stake sale as a final relief, added the source familiar on the matter.
It is worth noting that even NCLAT proposed the same route for settlement while hearing the matter. At that time, SP Group was not seeking to relinquish the shares. However, after Tata Sons applied to prevent the Mistry family from pledging their stakes, they realized that co-existence is impossible between the Tata and SP Group.
Notably, SP Group was pledging its shares to the former IDBI Trusteeship services on September 4 to secure 3,750 crore INR, which the Tata Sons prevented.
Tata Sons to Squeeze Out the Mistry
Whether Tatas would press for effacing the NCLAT findings and orders, a fit case of oppression is crucial. It is most likely that the Tata Group would move to expunge the NCLAT findings for a smoother case process.
However, the entire case would fall if the Mistry agrees to exit. Court typically want parties to go for a peaceable settlement in such cases.
Even if the parties go for a peaceable settlement, there are some worries as both sides have given strong statements. Ratan Tata, in its apex court affidavit, has called the sacking Mistry a painful decision and a ‘trojan horse.’ In response, the Mistrys have also termed Tata Son’s move to block shares pledging and fundraise as a “vindictive move.”
There are chances that the court would suggest settlement without hearing the petition, and the Mistry may have to forgo the oppression charges against Tata Sons.
If the Supreme Court hears the petition and gives the same conclusion, the Mistrys could get a fair, equitable exit. On the other hand, the court can also force Mistrys to keep being a shareholder if it doesn’t find merit in the petition.
“What is the alternative? If the Supreme Court hears the entire petition and comes to the same conclusion that Mistrys must be given a fair, equitable exit. If the supreme court of India does not find merit in the petition, can it force Mistrys to continue being a shareholder? Logically the separation has to be court-monitored without the SP group feeling short-changed” – Ramesh Vaidyanathan.
Tata Sons would get the first right of refusal as per Article 75 of Tata Sons Articles of Association, or AoA for short. Moreover, the Mistrys would also press for Tatas not to use the “squeeze out” clause of Article 75. If used, it would force SP Group to sell the stakes at a depressed valuation.
Even though there are risks for Mistrys to getting squeezed out, a source familiar with Tata Group cited that Tata Sons is likely to avoid this path.
He added that estimating a lower valuation for Mistry shares would hurt the Tata brand and set a pattern for Tata Sons and Group future transactions. At the same time, a one-shot 1.5 trillion INR deal would require grave funds. A staggered deal would make more sense for the Tata Group.
On the other hand, SP Group has valued its stakes at 1.78 trillion INR.
Staggered or Complete Buyout – The Best Option for Tata Group?
Considering large sums’ involvement, a transaction structure with a staggered buyout could be the most logical solution for both Tatas and Mistrys.
Only if Tata Sons would want to avoid dipping into its profits, which fell by 60% in the financial year 2020 as several companies of the group faced the severe impact of the novel coronavirus.
Both the SP Group and Tata Sons are valuing the shares on four parameters:
- The value of Unlisted companies
- The value of listed firms
- Brand value
Previously, the Tata Group has pledged its listed companies’ shares with its financial service businesses. So far, there has never been a concern of control loss. However, considering the large amount, it would need external financiers for fundraising.
“The Tatas know best. I think they will buy out somehow or the other. They wouldn’t have told the court if they don’t have a plan in mind. I don’t think they will buy from the cash flows of group companies. They can buy by selling a stake in a listed entity.”
– Rakesh Jhunjhunwala.
The move would reverse the group’s efforts over the past two years to reduce its debts, shore up its shareholdings in the listed companies, and untangle its cross-holdings. In summary, it would saddle the group with more debts.
According to an analysis, Tata Sons would have to rely heavily on Tata Consultancy Services for a complete buyout. Notably, as of March 2020, the profit of Tata Sons fell to 11,000 crore INR compared to 28,500 crore INR in 2018-19. The cloud continous hound the group over Tata Steel Europe and Tata Teleservices.
Tata Group on the Edge
At present, the Tata Group talks to acquire 49% held by AirAsia Malaysia in AirAsia India. The conglomerate is also looking to increase its footprint in the online grocery space while being in the middle of developing a super-app.
All of these would need funds. So one way to scoop the Mistry stake without taking the debt in the short term is to go for a buyout in parts.
According to the source familiar to SP Group, SP Group does not want to put additional pressure on Tatas and negatively impact their finances. It is open to being flexible as long as they get a fair offer for their shares and receives the practical value of tangible and intangible assets.
“An early resolution needed to be reached to arrive at a fair and equitable solution reflecting the value of the underlying tangible and intangible assets”
– SP Group.
According to reports, Tata Group may offer as much as 3 billion USD or about 21,900 crores INR upfront to acquire a part of the Mistrys’ 18.4% stake in the Tata Sons. A significant portion of the funds would likely come from TCS buyback, where Tata Sons owns a 72% stake.
Tata Sons is expected to scoop about 11,528 crore INR from the share buyback. It would get 3,244 crore INR into its basket from dividends. Moreover, Tata Sons also has its surplus investments.
It would go a long way for the SP Group to reduce its debt of about 30,000 crore INR.
Another option for the Tata Group is to get external investors. However, the incoming investor must be prepared that Tata Trusts would drive the Tata Sons, and he would only benefit from dividends.
“Outside investors in Tata Sons will want the company to go back to being a public company from its current private limited state. The group’s structural constraints will likely come to the fore”
– Amit Tandon.
On October 19, the SP Group withdrew its allegations of serious misconduct in the bidding process of parliament’s redevelopment. Notably, only a few days earlier before the movement, press reports highlighted the claims of SP Group that the presence of two Tata Group entities in the winning bid. It stated that it is a violation of Central Vigilance Commission guidelines.
After the Central Public Works Department did a detailed internal review, the SP Group lets the matter lie. Aloof from the pulls and pressures around the controversial project, no one failed to notice that the development came ten days before the Supreme Court hearing on October 28.
People close to both Tata and SP groups state that both parties want a quick end to a three-and-a-half-year legal battle that started after the group’s unceremoniously sacked Cyrus Mistry purported lack of leadership skills.
However, it seems that it will be far from easy for the AP group to end the bond that has lasted more than 70 years. Especially when the split has become so razor-edged and with so much money at stake.
Notably, the value of the Mistry family stakeholding in the Tata Sons had increased by 2000x since 1965 when it acquired the stakes for 69 crore INR.
“Well, there is a solution. But whether it is a quick fix will depend on the two sides adopting a conciliatory approach on valuations and timelines. Lack of this will drag the matter on and on. Tatas would want this to be finally over, and this solution helps in their financial woes for the SP group. The Supreme Court typically does not want to interfere in private disputes and would anyways suggest a mediation-based approach”
– H. P. Raina.
Conclusion: Would India’s Worst Boardroom Battle Come to an End?
The latest issue this dispute raised is what one should do after sacking someone whose family is the company’s primary stakeholder.
Some would say that buying out their shares is the most obvious thing, while many would say that parting is the best way forward. However, anything that could end the series of legal battles and the continued friction between the Tatas and the Mistrys would be the best.
The indebted SP Group with upcoming debt maturities is likely to prefer a quick deal. Even at depressed valuations, it won’t be easy for the Tata Group or any investor to fork out such a sum at a time when many economies, including India’s, is severely impacted due to the COVID-19 pandemic.
SP Group is all set to file its settlement terms with the Supreme Court, and it would ultimately see the exit of Mistrys from Tata Sons. With this, the Tata versus Mistry case’s hearing is likely to come to an end by next month.