In October 2016, when Cyrus Mistry was unceremoniously sacked by the Tata Group board as the Group Chairman and Ratan Tata became the Chairman, most group stocks cracked. Mr. Mistry was seen as someone who brought in fresh blood, improving efficiencies by sweating out the assets in 3 years to achieve 30% - CAGR in operating cash flows and above all the age factor which provided investors comfort about the long term stability.
Going by the same logic, markets should have cheered Wednesday’s National Company Law Appellate Tribunal (NCLAT) order to reinstate Mr. Mistry as the Chairman, though the Tribunal has given 4 weeks to execute the same. However, in the meanwhile, Tatas are bound to file an appeal in the Supreme Court. This behavior of the market reconfirms the fact that investors like stability and continuity. Generally anything which upsets the “applecart” is disliked by the markets which tend to have a knee jerk reaction.
Opening Pandora’s Box
It seems digging a bit deeper into the order, could open Pandora’s Box. The Tribunal has come down heavily on losses caused due to mis-management prior to Cyrus Mistry taking over as the Chairman in 2012. This relates to Tata Steel Europe, Indian Hotels, Tata Teleservices/Docomo and Indian operations of Tata Motors. It will also bring to fore the real ‘independence’ of the Board and the temptation of ‘back-seat’ driving by Ratan Tata. There is a possibility of drilling holes into the corporate governance high ground held by the Group over the last many decades.
As of now, the markets see this as short- to medium-term uncertainty depending on how the Supreme Court judgement goes in early 2020. If Supreme Court strikes down the NCLAT order, then life returns to normal at Tata Group and we could see the stocks bouncing back immediately. However, if Supreme Court upholds the NCLAT order, there could be couple of outcome. Cyrus Mistry may take over as the Chairman and this could result in a medium-term upheaval with numerous changes at the senior level across the group, thus stalling or reversing some of the recent decisions. This could also end up reducing Ratan Tata’s hold on the group substantially. We could witness a churn in the group stocks with heightened volatility based on Mr. Mistry’s focus areas.
Another possibility could be that Mr. Mistry opts for high moral ground and does not stake a claim for the chair allowing N. Chandrasekaran to continue. But he would certainly sue them for damages to his reputation which could be a heavy price to pay. He can also claim the remuneration of the last few years, but is unlikely to do so. And there could be a formal investigation into mismanagement mentioned in the suit.
Going by the recent incidents in the houses of some of the high priests of corporate governance, it seems there is a huge gap between what is communicated for mass consumption vis-a-vis what is practiced in a closed group within four walls. However, investors would still tend to believe these priests are draped in lighter shades of grey with a few scattered dark spots which can be wiped out with passage of time.
Finally, one fact which Mr Ratan Tata may have overlooked in this drama, is that he was pitted against a deep-pockets man, several decades younger than him, with enough fighting spirit, unlike some of the erstwhile Tata stalwarts like Russi Mody who was ousted in the early 1990s, forcefully pushed into oblivion. It would be an interesting space to watch out next few weeks as how this saga pans out.