Setback for the Tatas

NCLAT judgment raises several questions

The National Company Law Appellate Tribunal’s (NCLAT’s) decision to reinstate Cyrus Mistry as chairman of Tata Sons and term illegal the appointment of N Chandrasekaran as his successor will undoubtedly cause ripples of uncertainty through the Tata empire and the broader corporate sector. The move to take Tata Sons private has also been declared illegal and reversed. Though the decision will be implemented after four weeks, giving time to the Tata group to contest it, the charges are serious: Oppression of minority shareholders (the Shapoorji Pallonji group is one of them), mismanagement at Tata Sons and undue haste in removal of Mr Mistry as chairman. If the NCLAT judgment is upheld by an appropriate forum, several critical decisions taken by the new management will come up for scrutiny.

 
It is clear from the NCLAT’s judgment that much will have to change at Tata Sons. The Tata group has traditionally been held to represent the gold standard for Indian corporate governance, but the NCLAT’s judgment reveals that there were instead severe problems within Tata Sons. It is a severe setback to the Tata group and to  Ratan Tata personally, who has been asked by the tribunal to “desist” from interfering in the affairs of the group. Mr Mistry’s complaint that directors left a board meeting midway in order to discuss issues with Mr Tata, and that he had to report on issues to the Tata Trusts separately instead of solely to the board of Tata Sons, factored into the NCLAT’s decision. It is clear, therefore, that the Tata Trusts (and therefore Mr Tata) will have to properly and transparently manage their interest in Tata Sons in future. They will have to do something to address the allegation that the shareholding trusts of a holding company with minority holdings in operating companies take key decisions, not the chief executives or the boards of the operating companies. This is a manifestation, essentially, of the managing agency system that was abolished half a century ago. The Tata group’s corporate structure is a similar opaque throwback, with two-thirds of Tata Sons’ shares held by trusts, and must be modernised. 

 
Broader questions about the appointment and removal of chairmen are thrown up by this decision as well. How can a chairman who has lost the confidence of the board and principal shareholders, for whatever reason, be allowed to continue? The Mistry group had alleged that the chairman was removed without any notice or explanation, making it illegal. But the fact also is that seven out of nine Tata Sons directors had voted in favour of Mr Mistry’s removal. Hopefully, both the executive and the Supreme Court will deliberate carefully on the implications of the NCLAT judgment and make suitable changes as needed. The tribunal’s observation that majority shareholder approval of a chairman’s appointment is not enough and concurrence of the minority shareholder is necessary is also contentious. Questions must be asked about the implications of this judgment, unless overturned by the Supreme Court, for companies more generally. For example, the NCLAT insists that in spite of a notification and rules outlining a method for companies to go private without a tribunal order, the original requirements of such an order in the Companies Act, 2013, must be followed. The Union Ministry of Corporate Affairs had better clarify this uncertainty as soon as possible.