The National Company Law Appellate Tribunal (NCLAT) delivered a body blow to the 150-year-old, $110-billion, salt-to-software Tata group when it reinstated former chairman Cyrus Mistry, who was unceremoniously removed in October 2016. It also asked current Tata Sons chairman N. Chandrasekaran to resign. That's not all. The appellate tribunal, whose decision can be appealed only in the Supreme Court, has ordered reversal of the Tata group's decision to convert holding company Tata Sons into a private limited firm from a public entity. None of these were anticipated.
The NCLAT has, in fact, reversed the 2018 order of the National Company Law Tribunal (NCLT), which had dismissed Mistry's petitions.
Tata group needs a stay from the SC against the NCLAT shocker within four weeks to maintain status quo. However, if the SC upholds any of the orders of the NCLAT, it will not just be a huge embarrassment but would also leave one of India's largest groups, with over 100 companies, in disarray. The order tests the supremacy of Ratan Tata, who appears checkmated for now. It could also mean the Pallonji Mistry family, the second largest stakeholder after Tata Trusts in the Tata group, may have a greater say. And it could leave current chairman Chandrasekaran in a spot.
What happens next? In his letter to Tata employees after the judgement, Chandrasekaran said, "Tata Sons firmly believes in the strength of our case and will pursue the appropriate legal recourse."
Will Chandrasekaran have to step down immediately? Unlikely, unless SC concurs with the NCLAT. If the Tatas secure a status quo, he is likely to continue until the SC gives its judgement. As for Mistry, far from recapturing the chairman's post, he is more focused on protecting his family's 18.4 per cent stakeholder interest in Tata Sons, say sources. "Mistry is a mature man who fought for stitching up the wounded pride of his family. He wanted the family name to come clean," says a source.
However, in the unlikely scenario that Chandrasekaran does have to step down, the group may see another round of shuffle in top management. Remember, when Mistry had to leave, his team - including Madhu Kannan, Nirmalya Kumar, N.S. Rajan and Mukund Rajan - had to exit as well.
Can Mistry be reinstated? Extremely unlikely. After all, majority rules. The rule of majority in running an enterprise is the primary principle of corporate law across the world. Minority empowerment balances power on the board, but majority still runs it. Tata Trusts and family members own as much as 80 per cent of group holding firm Tata Sons. Shuva Mandal, Group General Counsel, Tata Sons, said the order is unclear, and added, "The NCLAT order appears to even go beyond the specific reliefs sought by the Appellant (Mistry)."
Also, Mistry's return would lead to a clash of egos between Tata and Mistry camps. It will destabilise the group and affect business prospects and valuations. Investors shun companies facing internal conflict. That won't be in the Mistry family's interest. Mistry has issued what is being interpreted as a conciliatory statement, perhaps indicating he would like a say but won't necessarily run the group. "I believe it is now time that all of us work together for sustainable growth and development of the Tata Group, an institution that we all cherish," he said, insisting the NCLAT order is a vindication of his stand.
Mistry's counsel, Aryama Sundaram, presented the case, tracing down decisions of Tata group companies, boards and committees, while Mistry was chairman. NCLAT chairperson Justice S.J. Mukhopadhaya and Member (Judicial) Justice Bansi Lal Bhat were of the view that Mistry made a clear case of 'prejudicial' and 'oppressive' action of Ratan Tata and nominee directors Nitin Nohria and N.A. Soonawala, among others. They said in the order that majority stakeholders (Ratan Tata through Trusts) acted as 'Super Board' and ignored the well laid and statutorily recognised principles of law while managing the company.
Points of View
What do legal experts say? The NCLAT's order has more weightage before the SC than the NCLT's. But experts say the court may not take a harsh decision since disturbing the structure of the Tata group will have socio-economic implications. Ramesh Vaidyanathan, Founder and Managing Partner, Advaya Legal, says the court may take a view that much water has flowed under the bridge and it may not be ideal to reverse the clock. The NCLAT's order may be harsh, but its findings are not faulty, he adds.
Another senior corporate lawyer, who requested anonymity, disagrees and believes the judgement bordered on corporate activism. "Activism will not work in corporate law," he adds.
The NCLAT's order against entities that are not parties in the case has set a wrong precedent, lawyers who support the Tatas say.
Legal Observations
The Tata group's arguments have been countered by the apex tribunal point-by-point. For instance, four months before the ouster, the 'Nomination and Remuneration Committee' appreciated Mistry's performance and sought clarity in the functioning of the Tata Sons board. The review of the committee was unanimously approved by the board of Tata Sons. Besides, the boards of Tata group companies had also praised Mistry's performance.
It is relevant to note that three directors who also voted for the removal - Amit Chandra, Ajay Piramal and Venu Srinivasan - had been inducted into the Tata Sons board only on 8 August 2016, after the appraisal report of 'Nomination and Remuneration Committee'. Two of the other directors - Ranendra Sen and Vijay Singh - were also members of the committee.
If losses in Tata group companies were due to mismanagement by Mistry, why did the nominated directors of Tata Trusts - Ratan Tata and Nitin Nohria, who have affirmative voting rights over the majority decision of the board - allow the companies to function in such a manner?
The tribunal said that Mistry's removal was "without any basis" and "without following normal procedure under Article 118". It termed the removal and change of Tata Sons into a private company as "illegal". The decision of the Registrar of Companies (RoC) to allow conversion of Tata Sons to a private company from public is "against the provisions of Section 14 of the Companies Act, 2013". The tribunal called the move as "prejudicial" and "oppressive" to minority shareholders and instructed the RoC to make a correction in its record.
Another order is that Ratan Tata and the nominees of Tata Trusts should desist from taking any decision in advance on behalf of the board or shareholders.
Mistry's family firms opposed the conversion to private company as it would restrict them from selling stakes to outsiders. As a private limited company, Tata Sons would need just a board approval for taking crucial decisions and would not need shareholder consent. This would mean the Mistry family would have no say in the board despite being the biggest shareholder after Tata Trusts, sources close to Mistry say.
The appellate tribunal has shaken the Tata empire, but the ball will soon be in the Supreme Court.
@nevinjl