Tata Sons – oppression of minority shareholders continues

Tata Sons – the primary holding company of over US$ 100 billion conglomerate – is planning to convert itself from existing ‘public limited company’ status to a ‘private limited company’. It has also sought  change in the name of company from Tata Sons Limited [TSL] to Tata Sons Private Limited [TSPL]. For this purpose, it proposes to amend its Memorandum of Association [MoA] and Articles of Association [AoA] and has convened its AGM on September 21, 2017.

Tata Sons is a closely held entity controlled by family owned trusts. Tata family owned trusts alone hold 66% shares. The family of Cyrus Mistry holds 18.4 per cent stake [through Cyrus Investments and Sterling Investments], while the remaining shares are held mostly by Tata family, some group companies and a few individuals. The amendments require a special resolution to be passed requiring at least 75% votes.

Cyrus Mistry [ex-Chairman] is making a determined bid to oppose the resolution saying ‘it is an attempt to oppress the minority shareholders’. To ensure that he does not come in the way, a ground is being prepared to enable persons having ‘preference shares’ get voting right [such shares are held by Ratan Tata and others who are known to support him]. With this, the voting strength of Mistry will get diluted thereby ensuring smooth passage of the resolution.

At the time of incorporation under the Companies Act, 1913, the AoA of TSL had features of a private limited company. With effect from May 1, 1975, it became a “deemed public company” under the provisions of the Companies Act, 1956. But, the AoA remained unchanged.

Thereafter, the Companies Act was amended in 2000 under which TSL was required to inform the Registrar of Companies (RoC) if it had become a private company. The former failed to make any such application to the RoC. Since, under the new dispensation, ‘deemed public limited’ status could not be allowed, it needed to make choice between ‘public limited’ and ‘private limited’. So, TSL wants to be a private limited company. Why now?

This has to do with an ongoing tussle between the Tata family led by Ratan Tata [RT] and Cyrus Mistry. Mistry was made Chairman, TSL in 2012 but removed 4 years later. This was done by moving a resolution under ‘any other item’ in the agenda of TSL board meeting [October, 2016].  He was not even given an opportunity to defend himself – violating principles of natural justice!

RT had in fact, a pre-meditated plan to keep Mistry ‘lame duck’ from the day one. All along, during one-and-a-half century of Tata empire, a person appointed as chairman of TSL ‘automatically’ became chairman of Tata Trusts also. But, in this case, RT continued to be in command of the latter even after Mistry was made head of former. The intent was to run the conglomerate via remote control.

Mistry petitioned National Company Law Tribunal [NCLT] to initiate action against TSL. But, NCLT rejected on the basis that he did not have required minimum shareholding of 10% [in Tribunal’s calculation, preference shares were also included thereby artificially reducing voting power of Mistry et al to below 10%]. Mistry has challenged the order before the Appellate Tribunal.

RT may have won the battle at NCLT, but the very sight of minority shareholders in the holding company [Mistry included] is perceived as a major irritant. This is more so because TSL has control over dozens of high profile companies such as Tata Motors, Tata Steel, Tata Consultancy [TCS], Tata Power, India Hotels, Tata Chemicals [to name a few]. In TCS, TSL has 73% ownership whereas in others, its shareholding ranges from 22% – 31%.

In a mood not to take any chances and determined to have complete control over TSL and through it, control over all companies under the group, Team RT wants to catapult to a position which no one can even question. The proposal to convert into a private limited company is a step forward in this direction. The move raises many hackles.

First, given its present structure of equity holding, the very idea is anomalous. How can company wherein, 34% of the shares are held by persons other than the promoter [holding of Tata Trusts is 66%] be ever called a ‘private limited company’? For that to happen, the promoters should first buy over all minority shareholders. RT has no such proposal on the plate. Hence, any move to declare/record it as ‘private limited company’ is illogical and untenable.

Second, apart from Mistry family, there are a few individuals and group companies who have shares in TSL. In turn, group companies have substantial shareholding by public and institutional investors including foreign investors [for that very reason, the government had treated TSL as ‘deemed public limited’]. How can its basic character be altered now without taking them into confidence?

Third, the proposed change does not serve the interest of TSL and the companies it controls. In fact, by giving absolute control to the promoter, it will take away whatever accountability exists under extant arrangements. Tata’s move to appoint independent director on its board is merely an eyewash. First, you scuttle the voice of minority shareholders and then, nominate directors who will listen only to his master’s voice.

Fourth, the past experience shows that promoters care little for standards of corporate governance. We have seen deterioration ever since Mistry took charge in 2012. There were glaring instances of gross interference and financial irregularities [for instance, Tata’s foray in to airlines is under investigation for alleged corruption and money laundering]. Now, if RT were to appropriate to itself absolute powers, there will be less confidence in the capability of management to effectively address governance issues.

Without doubt, this is bad omen for corporate India. The decline can be stemmed only if all minority shareholders unite to nip the moves of promoters in the bud. For now, this appears to be a distant possibility. One can only wait and watch.

 

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