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Business News/ Companies / News/  Cyrus Mistry’s ouster held illegal in big NCLAT blow to Tata Sons

Cyrus Mistry’s ouster held illegal in big NCLAT blow to Tata Sons

  • The verdict comes three years after Mistry was removed as chairman of Tata Sons on 24 October 2016
  • In another reversal for Tata Sons, the appeals court struck down a move to convert the company from a public to a private entity

The NCLAT bench has given Tata Sons four weeks to affect the change in chairmanship.

MUMBAI :In a big blow to Tata Sons Ltd, an appeals court on Wednesday reinstated ousted chairman Cyrus Mistry and held as illegal the appointment of N. Chandrasekaran as his successor, triggering a new spell of uncertainty for India’s largest conglomerate.

The National Company Law Appellate Tribunal (NCLAT) cited the haste in removal of Mistry as chairman of the Tata group’s holding company, ignoring the interest and oppression of minority shareholders, and mismanagement at Tata Sons as reasons for the ruling.

Decoding the verdict

The court’s order casts uncertainty over Chandrasekaran’s plans to simplify the group’s structure, revive growth, cut costs and invest in future growth areas.

“With the appointment of N. Chandrasekaran being declared illegal, there are various permutations and combinations, but the NCLAT judgement may not allow to reopen or question the decisions already taken bona fide by him," said Sumit Agrawal, founder and partner of RegStreet Law Advisors. “Such decisions may not be deemed invalid; only a chairman’s casting vote may be called into question. There is no other option but to approach the Supreme Court. This can be done on questions of law and not on facts."

In another reversal for Tata Sons, the appeals court struck down a move to convert the company from a public to a private entity. The two-member NCLAT bench, headed by chairperson Justice S.J. Mukhopadhaya, directed the Registrar of Companies (RoC) to revert Tata Sons to its public status. The change in status, undertaken in September 2017, would have required Mistry’s family firms to seek approval from the Tata Sons board to sell their shares. Firms of the Mistry family headed by billionaire Pallonji Mistry, namely Cyrus Investments Pvt. Ltd and Sterling Investments Pvt. Ltd own 18.4% of ordinary shares in Tata Sons.

While the bench did not rule in favour of winding up Tata Sons considering its size and various operating and listed companies, NCLAT said it was a fit case for a winding-up order.

The tribunal held the conversion into a private company as illegal as it was done without the approval of the National Company Law Tribunal (NCLT).

In a statement, Mistry said, “The outcome of the appeal is a vindication of my stand taken when the then board of Tata Sons, without warning or reason removed me, first as the executive chairman, and subsequently as a director of Tata Sons."

In a statement, Tata Sons group counsel Shuva Mandal said: “It is not clear as to how the NCLAT order seeks to overrule the decisions taken by shareholders of Tata Sons and listed Tata operating companies at validly constituted shareholder meetings. The NCLAT order appears to even go beyond the specific reliefs sought by the appellant.

“Tata Sons strongly believes in the strength of its case and will take appropriate legal recourse."

The NCLAT bench has given Tata Sons four weeks to affect the change in chairmanship, during which the company is expected to challenge the appellate tribunal’s order in the Supreme Court.

Share prices of Tata group companies fell soon after the pronouncement of the order. Tata Motors declined 3.05% to close at 174.70, Tata Global Beverages fell 4.14% to close at 311.80 and Indian Hotels Co. Ltd lost 2.88% to close at 145.

The verdict comes three years after Mistry was removed as chairman of Tata Sons in a surprise move on 24 October 2016. He was later also ousted as a director from the holding company’s board, followed by his removal from several operating companies in the group. Mistry was appointed chairman in 2012 when Ratan Tata stepped down from the post.

After Mistry’s ouster, Chandrasekaran, a former chief executive and managing director of Tata Consultancy Services Ltd, was appointed chairman of Tata Sons. He took charge on 21 February 2017.

Soon after Mistry’s ouster, the two investment firms controlled by the Mistry family approached NCLT. The petition alleged mismanagement at Tata Sons and oppression of minority shareholders.

The petition was filed under Sections 241 and 242 of the Companies Act, 2013. Section 242 gives the tribunal wide-ranging powers, from regulating the conduct of affairs of the company to the removal of directors. NCLT on 10 June 2018 dismissed the plea on the grounds that it did not find merit in the allegations of mismanagement at the conglomerate.

During arguments at NCLAT, the counsel for Mistry firms alleged that the Articles of Association (AoA) of Tata Sons oppressed minority shareholders on four grounds. One, the board agenda of Tata Sons and group companies need prior approval of nominee directors of Tata Trusts, the majority shareholders in Tata Sons. Second, an affirmative vote by the trustees is needed to pass board agenda items. Third is a restriction on transfer of shares in Tata Sons and fourth, AoA compromised minority shareholders’ economic rights.

The petition also alleged that articles “have been converted into a regime enabling the control of Tata Sons by Ratan Tata and Noshir Soonawala, trustees of the Tata Trusts".

“Article 121 (of AoA) provides a veto on every decision to be taken by the board of Tata Sons to trustee nominee directors—as opposed to conventional affirmative rights provisions being available to the minority (shareholders) on select matters," alleged the Mistry firms.

Taking cognizance of the allegation, NCLAT asked Ratan Tata to desist from interfering in Tata Sons’ affairs.

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ABOUT THE AUTHOR

Jayshree P Upadhyay

Jayshree heads a team of reporters focussing on legal, regulatory, investigative stories. She has worked for over a decade, reporting on financial scams, legal stories and the intersection of corporate and regulatory issues. She is based in Mumbai and has previously worked with Business Standard, Mint, The Morning Context and Bloomberg TV India.
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