Volatility could rise in Tata group firms

The NCLAT order could also create trading and investment opportunities

The National Company Law Appellate Tribunal (NCLAT) judgment reversing Tata Sons’ ouster of Cyrus Mistry is difficult to decode in terms of possible impact on the markets. The judgment is surely going to be appealed in the Supreme Court. There are several aspects to the order and they will have business impacts. The case will also set important precedents in terms of management practices. 

It would be an extremely awkward situation in terms of human relationships, if Cyrus Mistry does actually return as Chairman. Remember, he only wanted a seat on the Board. The Shapoorji Pallonji (SP) Group, which Mistry’s family controls, owns 18.4 per cent stake in Tata Sons. The Tata Trusts, which Ratan Tata and his family control, owns over 66 per cent of Tata Sons. The relationship between these two individuals is perhaps too toxic to repair, given all the mudslinging. 

A second point: Will Tata Sons be forced to revert to being a publicly listed company? It was closely held before it went private. A public listing means share price discovery mechanisms. That could open the door to a stake sale by the SP Group, assuming that it wanted to sell some, or all of its stake. That has implications in terms of control of the Tata Group. 

Third, until this situation is resolved and those questions answered, it won’t be obvious who’s in charge of strategy at the Tatas. The group controls a multi-billion constellation of over a hundred companies, including many blue-chips. Its global revenues are of the order of $110 billion-plus. 

The companies in question are all run by “satraps”, so day-to-day functioning is unlikely to be affected. But strategic decisions requiring a Tata Sons sign-off will be kept in abeyance, until the status of Tata Sons is known and undisputed, and the Tata Sons Board is functioning without friction. This means a freeze on hiring and firing of senior management, constitution of boards at other Tata companies, joint venture negotiations, etc. 

There could be further confusion if Tata Sons reverts to being publicly listed. It was publicly listed when Mistry was removed by a decision backed by seven of the nine board members, including Mistry himself. The NCLAT order suggests majority shareholder approval was not legally sufficient for the ouster and later, that the Board’s appointment of a new chairman was illegal. 

At first glance, these opinions seem odd and management practices could change if this sets a precedent. Moreover, the judgement that the company was taken private illegally is likely to be scrutinised by the Supreme Court. Obviously, all this will turn on complex interpretations of company law and there will be many learned arguments about the rights of minority and majority shareholders, when the appeal is heard. 

What impact does this NCLAT judgement, and a likely appeal have on the group companies? If the judgment is upheld, does it have retrospective effect?  A large number of strategic decisions have been taken by the group since Mistry left in October 2016. Major investments, deals with other businesses, rights issues, transfer of equity, etc. have occurred at various Tata firms and many of these decisions would have needed sign-off from Tata Sons. For example, Tatas and NTT Docomo settled a dispute over Tata Teleservices with the Tatas buying out NTT Docomo and selling off the company to Airtel. The Nano project was shut down. Vistara and Air Asia India solidified partnerships with Singapore Airlines, and AirAsiaBerhad. Such decisions cannot be retrospectively nullified. 

Given slow legal processes, there could be months of confusion, or even years, before the legal situation is resolved. The group would be headless during that period. Or, if Mistry returns as chairman, there may be deadlock with the Board refusing to ratify his decisions. 

Markets dislike uncertainty and investors are usually nervous about companies where the management chain of control is not clearly delineated. On the other hand, these are the Tatas — the biggest brand name in India. The group’s major firms will survive even if there’s an upheaval. 

The market didn’t react much to the NCLAT decision and key listed Tata firms have registered strong gains since. This doesn’t mean you should rule out a spike in volatility every time there’s some sort of legal news flow. Such price-swings could provide trading and investment opportunities.