Tata storm blows over? Dominant shareholder holds the legal edge

The Tata group has been in the news again for the wrong reasons. A fight has broken out between a Tata family scion, Noel Tata, and a few individuals in positions of authority in the group. 

 

The boards of two important trusts of the Tata family — the Sir Dorabji Tata Trust and Sir Ratan Tata Trust (Tata Trusts) — are said to be riven by differences between a group led by Noel Tata and another group in which Mehli Mistry, a relative of Noel Tata’s, is prominent. Now, we learn that Mehli Mistry, until recently a member of the boards of the Tata Trusts, will not pursue his fight with Mr Tata. In all likelihood, the storm has blown over.

 

Mr Mistry had taken comfort in a board resolution passed by Tata Trusts in October 2024 that stated that all board members at the Trusts would be renewed for life when their term came up for renewal. Accordingly, the term of Venu Srinivasan, a trustee and Noel Tata confidant, was renewed in the third week of October. 

 

Alas, when Mr Mistry’s term came up for renewal, the Noel Tata faction withheld its consent. Mr Srinivasan stayed on but Mr Mistry was out. Mr Mistry subsequently entered a caveat in the matter with the Charities Commissioner. He has since written a letter that suggests he has thrown in the towel. 

 

Many commentators were aghast at the in-fighting and fretted about the grave implications for the fortunes of the Tata companies. Had they closely watched the outcome of the earlier battle between Ratan Tata and Cyrus Mistry, then executive chairman of Tata Sons, they need not have worried. 

 

The battle between Ratan Tata and Cyrus Mistry lasted five years but did not come in the way of the performance of the Tata group companies. Likewise, the Tata group performance is still less likely to be disrupted by the present battle between Noel Tata and a few individuals. The battle makes for great drama in the media, though. 

 

There is much hand-wringing over the functioning of Tata Trusts, their relationship with Tata Sons, the role of the board of Tata Sons, the role of the boards at the Tata group companies and so on. Some commentators say that the Tata group today falls short of the governance standards one would expect of such a highly respected group.

 

Critics of the Tata group need to read the judgment of the honourable Supreme Court in 2021 in the dispute between the Tata group and Cyrus Mistry, who was ousted as executive chairman of Tata Sons. The Court declared, in emphatic terms, that in the matters raised by Cyrus Mistry, the Tata group was fully compliant with the law. Not only that, the group had unilaterally met norms of governance that it was not legally required to meet. 

 

The Tata family exercises control over the sprawling conglomerate through  various trusts, notably the two mentioned above. The Tata Trusts have two-thirds of the shares in Tata Sons, which is the holding company for a large number of companies in the Tata fold, both listed and unlisted. 

 

The Tata Trusts nominees have “affirmative voting rights” at Tata Sons, that is, no decision can be taken by the board of Tata Sons without their approval. The other directors on the board (at present said to be numbering five, including three independent directors) cannot outvote the two Tata Trusts nominees. Critics see this as contrary to the spirit of corporate governance; on a board, should not the majority view prevail?

 

Well, the Supreme Court didn’t think so. It observed that affirmative voting rights are “a global norm” and that a “shareholder or a group of shareholders who constitute a majority, can always seek to be in the driving seat by reserving affirmative voting rights.” It also noted that, by reason of having 66 per cent of shares in Tata Sons, the two Trusts could have packed the board of Tata Sons with their own directors. They chose to limit their nominees to one-third of the board strength. 

 

Tata Trusts also chose to appoint independent directors at Tata Sons even though Tata Sons is not a listed company and is not obliged to have any independent directors on its board. Contrary to what the critics say, Tata Sons is, in technical terms, ahead of the governance curve. 

 

No doubt, the motivation for having independent directors at Tata Sons was to get the benefit of the views of experts independent of the Tata group. But these views, it must be understood, are only advisory in nature. As the Supreme Court noted, at any general meeting of Tata Sons, the Tata Trusts would command the majority of votes. There is thus no question of the board of Tata Sons taking a decision that the principal shareholders, Tata Trusts, would not approve of. The Article that provides affirmative voting rights to the nominees of Tata Trusts on the board of Tata Sons merely codifies this reality. 

 

In most family-managed industrial groups, the head of the group or his family member typically chairs the boards of the group companies. The industrial group would be the majority shareholder or the dominant shareholder in the group companies. All decisions of the group’s boards would require the family’s approval. In listed companies, only one-third of the board would comprise independent directors. There is no question of independent directors overriding the wishes of the family. 

 

The Tatas have far too many companies in their group and too few family members. They have thus adopted a structure that gives the Tata family the final say in all matters without the members of the Tata family having to chair the boards of group companies or even be a director. The group companies are controlled by Tata Sons and Tata Sons is controlled by Tata Trusts. It is delusional to suppose that matters have been left to the various boards.

 

He who rules the Tata Trusts rules the Tata group. And it is Noel Tata who, as chairman, today rules the Tata Trusts. Mehli Mistry has been shown the door at Tata Trusts. One should not be surprised if the same happens to other members of his group. 

Over time, the boards of the Tata Trusts will have members that Mr Tata is more comfortable with. Peace will return. Many like to think the Tatas are different. Well, the Tatas are different in the particular manner in which the family controls the group. However, as in other family-managed businesses, it is the dominant shareholder who calls the shots. And that, as the Supreme Court has averred, is legal.

 

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