Tatas V Cyrus Mistry: A big question mark on Corporate Governance

Tatas V Cyrus Mistry: A big question mark on Corporate Governance

Author: Krishna Bhattacharya, KIIT school of law, Bhubaneshwar, India

To unfold the ground for disagreements between the renowned Chairman of Tata Sons, Ratan Tata, and Cyrus Mistry; it is important to know the background of the entire tussle between them.

The Mistrys like Tata belonged to close Knit Parsi family. Cyrus Mistry started his career by joining his family business Shapoorji Pallonji group as a director in 1991 and 1994 he was appointed as the managing director of the group while his father was in the board of Tata Group and chairman of Shapoorji Pallonji. After Cyrus Mistry joined the business its international construction business expanded its presence tremendously to more than ten countries. He ushered growth by introducing diversification from construction to designing, building complex projects in the sector of oil, rail, gas, and marine. From this, it could be seen that Cyrus Mistry was a risk-taker that is why he could diversify the business and he expanded the business with little interference from others.

On 1 September 2006, Cyrus Mistry joined the board of Tata Sons after his father retired from Tata Group. Pallonji group had an 18% stake in Tata Group which made it a single largest minority shareholder. He was also named the director of several Tata Companies. Seeing his capabilities in the year 2010 he was assigned the task to find the successor for the position of the chairman held by Ratan Tata as he had decided to retire in the year 2011. Little did he knew a big surprise was waiting for him and In December 2012, after Ratan Tata retired at the age of seventy-five he had passed the baton to Cyrus Mistry, the heir of Shapoorji Pallonji group. Everything was going well and The Tata Group had revenue of US$100.09 billion in 2011–2012 Financial year (FY); it grew to US$103 billion in 2015–2016 FY under Mistry’s tenure.

In today’s world, the rate of attribution is very low. No longer employees stick to the same company for years but is it true for the founders or promoters of the company?

The case of Tata is a prime example that Although Ratan Tata had retired appointed Mistry as his successor, the former still had significant influence over Tata Sons. He headed the Tata Trusts, which has 66 percent shareholding and hence controlling interest in Tata Sons.

The entire matter started when Cyrus Mistry was sacked from the position of group chairman on 24^th October 2016 by a vote in a general meeting where Ratan Tata was also present on the ground on non-performance, without giving him any prior notice or a chance for explanation. The board also named Ratan Tata as the interim chairman of the group. A new panel was set up to find the next chairman in 4 months. Later, in January 2017, Tata’s appointed N. Chandrasekaran as the group chairman.

Does this raise some serious questions as to what went wrong between Ratan Tata and Cyrus Mistry that the former being a one-time mentor turned against Cyrus Mistry? Some of the friction which led to this dramatic event are as follows:

1. Nano was launched in the year 2009 but it never saw overall growth in sales. When Cyrus Mistry took over as chairman he tried to reintroduce Nano as a smart city car and also invested 3000 crores which went into losses. This event had upset Tatas
2. It was alleged that there was a lot of friction between Cyrus Mistry and Ratan Tata as he took a lot of decisions on his own without consulting the board. For example the sale of Indian hotels overseas and the move to shut down UK steel operations. The Tatas wanted to plan out a strategy to turn the loss-making company into a profit-making one but Cyrus Mistry had other plans. The Tatas wanted to run the loss-making unit because they had an emotional attachment and it was also a part of the legacy of Ratan Tata whereas Cyrus Mistry was looking at the matters from a pure business point of view.

• There were issues regarding his family business and the Tatas. It was alleged that after Cyrus Mistry became the Chairman of Tata, the Pallongi group was handed over contracts worth 20 billion for construction in Tata Motors and Tata Consultancy Services.

• The dispute over the Tata-Welspun deal further strained the relations between the two. It was contended that when Cyrus Mistry decided to acquire Welspun Renewables Energy company at `95 billion it was not placed before Tata Son’s board whereas according to the Articles of Association it was supposed to be approved by the holding company. But according to informants, the Tata Sons were informed before releasing the information to the press and the board members including Ratan Tata was kept in the loop.

• A proposal to tie up with US pizza chain Little Caesars was put forward by Cyrus Mistry. This idea was put forth after the successful tie-up with Starbucks but this was objected by Ratan Tata on the ground coffee chain Starbucks was a different proposition since group entities like Tata Global Beverages and Tata Coffee meant that the group had a large presence already in this area but “pizza is a completely different business”.

• This was not all there were many other incidents which strained the relationship such as the Tata Docomo case, the dispute concerning the funding of elections, dispute when two different bids were proposed prestigious army contract, Future Infantry Combat Vehicles and many more. On one hand, Ratan Tata said against Cyrus Mistry: “That was the point in time we got to believe that he had a tendency to do things on his own against the earlier practice of collective decision making” and on the other hand Cyrus Mistry alleged of continuous interference in all his decisions.

The final showdown started when Cyrus Mistry knocked the doors of the National Company Law Tribunal (NCLT) Mumbai, alleging oppression and mismanagement by Tata’s on his sudden expulsion and also the interference of Ratan Tata and N. A. Soonawala in the governance of Tata Sons on 20^th December 2016. A day earlier before filing the case, Mistry disassociated from the Tata empire by resigning from all boards of the Tata group.

NCLT ruled in favor of Tata’s saying Mistry’s allegations had no merit, dismissing his challenge. Mistry later challenged the verdict of NCLT to National Company Law Appellate Tribunal (NCLAT). The NCLAT ordered on December 19, 2019, to restore the position of Cyrus Mistry as the director of Tata Sons and three group companies which are Tata Consultancy Services, Tata Industries Ltd., and Tata Teleservices, in spite of his term bein already ended in 2017. A petition in the Supreme court has been filed to set aside the order of NCLAT.

The Tata son’s contended that the order of the NCLAT was against the decision of the shareholders of Tata Sons who voted in majority to oust Cyrus Mistry and further held that “The direction to restore Cyrus Mistry for his remaining term, without noticing that the term has come to an end is a recipe for disaster, for the reason that it will create unnecessary confusion in the working of companies and lead to more conflict”.

Cyrus Mistry in an official press note on 5^th January 2020 said: “To dispel the misinformation campaign being conducted, I intend to make it clear that despite the NCLAT order in my favor, I will not be pursuing the executive chairmanship of Tata Sons, or directorship of TCS, Tata Teleservices or Tata Industries, but vigorously pursue all options to protect our rights as a minority shareholder”.

The entire episode has brought the main focus on Corporate Governance. Many may call this as board room tussle but in reality, it has put serious questions on Indian corporate governance. Corporate Governance is essential for the working of any entity. It impacts the internal and external environment of the company tremendously. The three pillars of corporate Governance are transparency, accountability, and security. In the present case, all three pillars were violated. Rata Tata called a shareholders meeting and no prior notice for removal was given and Cryus Mistry was voted out as director which automatically debarred him from being the chairman. This showed a lack of transparency and security. There was continuous interference in all the decision making of the founding member or promoters and if things did not go as per their wishes then the person is sacked. It is more startling to see that instead of waiting for 5 more months after which Cyrus Mistry’s term would have automatically ended, they went for public sacking.

It is very evident that there is always a tussle or conflict of interest or difference of opinion among the promoters or non-promoters. To solve this problem the only logical way is to create an environment where people could talk freely and should have a dynamic approach as the industry is changing at a rapid rate and should be open to new ideas. The promoters should not be afraid of experiments and non-promoters needs to be strategic and should be ready with a backup plan. In the end, both are working for the benefit of the company, maybe the approach is different but the endpoint is the same for both.