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Ratan Tata Vs Cyrus Mistry: The Feud that Shattered the Indian Corporate Sphere ADRIJA DAS

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What is the first thing that comes to your mind when you hear the word “Tata”?

The trusted Tata Sumo?

Tata Steel?

Tata Consultancy Services?

Or maybe it is the charisma that is Ratan Tata?

The Tata Group needs no introduction. With a plethora of interests and a foothold in most major industries, this influential company often find themselves in the news.

In the last few years however, this company has found themselves entwined in a very unlikely scandal. It all started after the Irish business man Cyrus Mistry was appointed as the Chairman of Tata Sons in 2012.

The entire feud erupted when Mistry was unceremoniously removed from his post as Chairman and evicted from the company in 2016. The battle that ensued has widely been regarded by critics as one of the biggest corporate feuds that have occurred in the recent past in India.

I am sure we have all heard mention of this fiasco in the news, however, it is not always possible to find a conclusive account of the entire timeline of events.

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That, my dear friends, is where I come in.

I have compiled for you, an exhaustive account of all the major events that culminated in this monumental corporate battle.

In true Bollywood style, let us start with the climax.

Cyrus Mistry was removed as Chairman of Tata Sons on 24th October, 2016. Soon after his abrupt dismissal, Ratan Tata was appointed as the Interim Chairman, and then Natarajan Chandrasekharan was named as the Chairman of Tata Sons.

However, Cyrus Mistry wasn’t one to accept this disgrace without protest.

Using two of his family firms, Cyrus Investments and Sterling Investments, Cyrus Mistry moved the National Company Law Tribunal (NCLT), Mumbai mismanagement and mistreatment of minority shareholders by the Tata Group.

Unfortunately for Cyrus Mistry, NCLT ruled that the Companies Act required that only shareholders with a stake of less than 10% are counted as minority shareholders. Mistry, with a stake of more than 18% in Tata Sons, did not fall into that category.

Not losing hope, this time Mistry appealed to the National Company Law Appellate Tribunal (NCLAT). In August 2018, Cyrus Mistry appealed to the NCLAT in a personal capacity, seeking redress against his unjust removal as the Chairman of the Tata Group.

After more than a year, the NCLAT, in December 2019, ruled that Cyrus Mistry’s removal and N Chandrasekharan’s appointment was indeed outside the purview of Company Law, and ordered for the former’s reinstatement as Executive Chairman of Tata Sons. The NCLAT gave the Tatas a period of four weeks in which to either carry out this sentence to fruition or to file their own appeal.

Now, the Tatas are anything but timid when their internal decisions are called into question. As expected, they quickly filed their own appeal with the Supreme Court. The Supreme Court promptly put a stop to the NCLAT order, citing errors and ambiguity. They have decided to review the entire matter again, before coming to a decision.

This story is building up like a soap opera, isn’t it?

Well, let us now revert back to the tried and tested rules of storytelling. We have already established an ending to this suspense-filled tale.

History of Tata and Mistry Relation

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Let us now rewind back to the beginning and give a background to this riveting pinnacle.It all started in 1960s.

The Mistry family bought a partial stake in the Tata Sons group of companies from the family itself. A natural culmination of many years of friendship between the two families, this seemed like the next logical step. After the sale, the Mistry family ended up an 18% share in the company, while the Tata Charitable Trust retained 66% of the company. The remaining shares were sold in the stock market to raise equity capital for expansion of the companies.

Now the question is, what exactly is the relationship between the Tata charitable trust and the rest of the companies that fall under the umbrella of the Tata Group?

Well, it so happens that Tata Sons is like a parent company that owns stakes in all the individual Tata companies such as TCS, Tata Steel and Tata Motors. The framework is structured in this manner to ensure that no individual family member accumulates the majority share in any one of the companies. In fact, Ratan Tata owns only 0.83% share in Tata Sons, while the charitable trust associated with each company owns 66%.

You see, the Tatas have run a family owned business for a couple of generations now.

One of the major reasons why the family is still so strong and the companies all perform as well as they do, is that the family subscribes to a strong code of conduct and maintains a strict set of values.

In fact, Cyrus Mistry is only the second person outside of the family to be appointed as the Chairman of Tata Sons.

Fascinating, isn’t it?

Well, now that we have a beginning and an end to the story, let us now plug in the middle.

The fact that Cyrus Mistry was removed as the Chairman of Tata Sons is common knowledge. The question is, why did this happen?

What Caused Mistry’s Oust? 

There are a few events which led to this drastic decision.

The primary lynchpin in this decision was the acquisition of Welspun Renewable Energy by Tata Power. In terms of the valuation of the company in relation to the market capitalisation of Tata Power, it was quite an impressive buy. However, even though talks of acquisition began in November 2015, the rest of the Tata Sons board was kept in the dark till May 2016.

To such a close-knit company like the Tatas, this secrecy and shrouding of facts was a huge red flag.

Conflict of Interest over Tata Docomo

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The second factor which influenced the decision to oust Cyrus Mistry was the disagreement between Tata Teleservices and NTT Docomo, a Japanese telecommunication company. According to an agreement signed in 2009, Tata Teleservices owed Docomo a sum of about $1.3 billion. However, citing some changes in foreign capital laws as stipulated by the Reserve Bank of India, Tata Teleservices, under the leadership of the Chairman of Tata Sons, tried to avert this payment burden.

There is a saying that the law always has its day.

After a lengthy court battle, Tata Teleservices was forced to honour the deal they had made with NTT Docomo.

While this seems like a very normal occurring in the world of large corporate organisations, it is important to remember the strong code of ethics that the Tata group subscribes to. Ratan Tata, following in the footsteps of his predecessors, believed in maintaining transparency in business decisions and to always honour his promises. To a man with such strong principles, the lengthy legal battle with Docomo proved to be most unpleasant.

Story after the Court Battle

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Such a reaction from Ratan Tata is, of course, most acceptable indeed.

You see, for large companies which operate in the international markets, reputation is everything. Let me give you a very simple example to explain this fact.

Imagine a situation in which you want to renovate your apartment. You have before you the option of choosing from a range of three contractors. Out of the three, one has a reputation for being notoriously over-budget, while the other two have reputations for staying true to their word and ensuring the client’s best interests.

With such a range of choices, would you knowingly choose the unreliable contractor? Or would you hedge your bets and go for one of the options with a better reputation?

The answer is obvious.

Well, the same principle works in the world of large multinational corporates. Reputation plays a huge role in the possibility of creating new partnerships and the Tatas have always tried to maintain a reputation as a fair player. This hard-earned reputation is what was compromised during Cyrus Mistry’s tenure as Chairman, and this proved to an unforgivable sin.

The third major factor which contributed to Mistry’s removal is the conflict of interest which arose as a result of a number of business decisions which were taken by him.

Let me give you a little bit of background to understand this cause better.

Often times, in schools and colleges, we observe a phenomenon when the teachers’ children are enrolled in the same school. When this happens, the principal and the other authorities ensure the fact that the child is never placed in the class which is taught by his/her parent. This, of course, is to ensure that there is no conflict of interest and no special attention is provided to the child.

The situation with Cyrus Mistry was somewhat similar to this example.

While the Mistry family is much smaller in size and power than the Tata group, they too have their own family business, Shapoorji Pallonji and Company. When Mistry was appointed as Chairman, it was stipulated that it would be unethical to conduct business with Shapoorji Pallonji and Company due to the clear conflict of interest.

However, Cyrus Mistry did not heed these warnings, and instead, he took a number of business decisions as the Chairman of Tata Sons which were directly beneficial to Shapoorji Pallonji. It was later revealed that an amount of almost 3 crore rupees had been paid to Shapoorji Pallonji as compensation for a number of civil work contracts.

These decisions were called into question because it could be argued that Mistry was not acting in the best interests of the Tata group. Instead, he was using his position as the Chairman of Tata Sons to drum up business for his family company, maybe at the expense of the company he was appointed to look after.

These were the three major factors which culminated in the events of 24th October, 2016.

Of course, there were other minor factors which also contributed. For instance, the fact that Cyrus Mistry maintained his legal status as an Irish citizen even though he was residing and working in India was always a bone of contention with the Tatas, who felt their company should be chaired by an Indian citizen, not a foreigner.

There was also the fact that the Group Executive Council was set up during Mistry’s tenure as Chairman. This framework allowed Mistry supervise the CEOs of the individual Tata Companies. Now, this decision would not look out of place in a large multinational in which the different segments were headed by distinctly separate individuals. However, for a close-knit family business like the Tatas, this proved to be a major red flag. It created a parallel power structure within the company which was in direct contradiction to the values and principles on which the company had been established.

The feud between the Tatas and Cyrus Mistry have proved to be one of the biggest corporate battles in India.

I have recounted the story up until now. However, there is still more to come.

Stay tuned for more updates.

Happy investing!s

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Adrija