Mistry bust-up threatens investor trust in Tata

Upheaval raises questions over Indian conglomerate’s corporate governance
Cyrus Mistry © AFP

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Cyrus Mistry had other plans for the October 24 board meeting at which his fellow directors unceremoniously dethroned him as chairman of Tata Sons, the holding company of India’s largest conglomerate.

Mr Mistry had proposed for discussion a document outlining corporate governance standards for the group that implied limits on the strategic influence of his predecessor Ratan Tata, according to two people with direct knowledge of the document.

The document’s contents shed light on the internal debate over Tata’s governance structure, which bubbled to the surface again on Thursday when Tata Sons issued a statement accusing Mr Mistry of having sought to “dismantle” the traditional organisation of the group.

Tata’s corporate governance, long seen as admirably stable, suddenly has come under scrutiny in India’s business world after the unexpected upheaval at the group.

Even after handing over the chairmanship of Tata Sons and the group’s key operating companies to Mr Mistry in 2012, Mr Tata remained at the helm of the Tata Trusts, charities that control 66 per cent of the holding company’s stock.

Tension had grown between Mr Mistry and 78-year-old Mr Tata in the months before the October board meeting, over the extent to which Mr Tata and his advisers should be involved in key business decisions, according to people close to both men.

The corporate governance document — distributed to the directors two weeks before the meeting — set bounds on the Tata Trusts’ participation in such decisions, which were to be made by the boards of the operating companies.

The board of Tata Sons, which typically holds large minority stakes in the listed Tata companies, was entitled to engage with its nominee directors at the operating companies, “not with a view to approve but to provide feedback”, according to the document.

It said that Tata Sons’ engagement with the trusts would take the form of yearly meetings to discuss its annual and five-year business plans.

Acceptance of the proposed norms would have eased the pressure on Mr Mistry from Ratan Tata and other trustees — one of whom had sent him a detailed critique of the group’s strategy in December 2015, to which Mr Mistry responded with a letter and presentation of about 100 pages.

But Mr Mistry’s effort to draw a clear distinction between the roles of the various parts of the Tata Group was attacked by Tata Sons on Thursday in a nine-page denunciation of its former chairman.

The statement said Mr Mistry had undermined the established structure of the group, as a result of which “the operating companies are drifting farther away from the promoter company and their major shareholder”. 

In an indication of the trusts’ renewed control over Tata Sons’ public position, two pages of the statement were a direct reproduction of an internal memo, seen by the Financial Times, that was written by one of the trustees and circulated among them days before Mr Mistry’s dismissal.

But while the statement proclaimed the merits of this close relationship between the parts of Tata’s complex governance framework, others are now finding cause to doubt it.

“People are going to question a lot of this — how decisions are taken, what is the relationship between Tata Trusts, Tata Sons and the Tata companies,” says Amit Tandon, founder of Institutional Investor Advisory Services. “So far nobody’s really thought about asking this question, because it's been chugging along that way for years.”

The potential problems were illustrated by a flashpoint in the Mistry-Tata relationship, triggered by Tata Power’s acquisition in June of renewable energy assets for $1.4bn. Mr Mistry, as Tata Power’s chairman, authorised the disclosure of the deal’s details to the Tata Sons board and to Mr Tata 12 days before the announcement to other shareholders on June 12.

In an email seen by the FT, Mr Tata complained that the Tata Sons board should have been notified of the plans sooner. Yet while the 12-day advance warning was insufficient to satisfy Mr Tata, it could still constitute a breach of insider trading rules, says Anshul Jain, a lawyer at Luthra & Luthra. 

Tata Power denies any impropriety, saying it “followed all norms in respect of the regulations”. Mr Jain says the disclosure to the controlling shareholder ahead of others would be legal if there were a clause explicitly permitting it in the company’s articles of association. No such clause exists, says Nawshir Mirza, a director of Tata Power.

Mr Mirza is one of a growing number of independent directors who have taken a public stand in defence of Mr Mistry, who remained chairman of seven listed Tata companies, even after his ousting from the Tata Sons chair. The board of Tata Chemicals issued a statement endorsing his continuation as chairman on Thursday, following the lead of Indian Hotels Company directors last week.

“Now the independent directors are being independent, and this is coming as a shock to [Tata Sons],” says Mr Mirza.

Tata Sons sought to bypass potential board opposition at Tata Consultancy Services — the group’s main profit generator — by invoking a clause in the company’s articles of association that entitles Tata Sons to nominate its chairman. 

That triggered TCS’s announcement on Thursday that Mr Mistry had been removed as chairman — a move condemned by a person close to him, who said that a board meeting was required to approve it.

TCS and four other Tata operating companies have announced shareholder meetings to vote on Mr Mistry’s removal as a director.

As Mr Tata’s battle to banish his successor sinks deeper into acrimony and mutual accusation, the group’s reputation for governance has been tarnished, says Mr Tandon.

“After the way Tata Sons has behaved, that trust is no longer going to exist between the investors and the group,” he adds. “A huge amount of damage has been done.”

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