The National Company Law Appellate Tribunal’s (NCLAT) verdict on Wednesday in the ongoing Tata-Mistry saga is likely to have far-reaching impact on other holding companies in India since the tribunal’s judgement attempts to offer more say to minority shareholders in both listed and unlisted holding firms, many of which are run by family trusts of their promoters.
If the NCLAT decision on Article 75 of the Articles of Association (AoA) of Tata Sons Ltd is upheld by the Supreme Court, unlisted holding companies will neither be able to misuse the powers of the majority shareholders nor can they abruptly convert the status of a company from public to private or vice versa, both of which will benefit minority shareholders.
On Wednesday, besides reinstating Cyrus Mistry as the chairman of Tata Sons—the holding company of Tata group—the NCLAT restrained Tata Sons, its board and shareholders from exercising their power against Mistry and other minority members under Article 75 in the AoA.
Article 75 gives Tata Sons the power to ask any shareholder to sell their holdings by passing a special resolution, a rule that can be potentially used to force Mistry family firms to exit Tata group at any moment. The shares can, however, only be sold to other existing shareholders, or outsiders chosen by the board. The board also decides the fair value of the shares as per the AoA.
Firms of the Mistry family headed by billionaire Pallonji Mistry, namely Cyrus Investments Pvt. Ltd and Sterling Investments Corp. Pvt. Ltd, own 18.4% of ordinary shares in Tata Sons.
The Mistry family has held a stake in Tata Sons for at least 50 years and occupied a seat on the holding company’s board for a significant time. When Cyrus Mistry was removed as director on 6 February 2017, it was the first time in a decade that the Shapoorji Pallonji Group did not have a representative on the board.
Amit Tandon, chief executive officer (CEO) of proxy advisory firm IiAS said, “Orders such as these refocus people’s attention on governance, the structures the company has in place, how the board functions and so on. It raises the bar for companies." “Any clause that gives superior rights to one set of shareholders or restricts the rights of one set of shareholders is not only bad in an AoA but also bad in law," said Tandon.
The NCLAT has judged that powers under Article 75 can be exercised only in exceptional circumstances and in the interest of the company, and this should be intimated to all shareholders concerned. There was nothing on record to suggest that the Tata Sons board had at any time expressed displeasure about Mistry’s performance, which is why his removal is seen as misuse of majority shareholder powers of Tata Trusts given by the AoA, specifically due to the presence of Article 75.
In the past, such powers have been a matter of legal controversies. In 1992, in a case between V.B. Rangaraj and V.B. Gopalakrishnan, the Supreme Court had ruled that while applying majority shareholding powers of a company, it should not be conducted in a manner prejudicial or oppressive to any other member or members of the company and that winding up of the company should not unfairly prejudice any member.
In another case between S.P. Jain and Kalinga Tubes Ltd, the apex court made similar observations.
Mistry was removed as chairman of Tata Sons on 24 October 2016. He was appointed chairman in 2012 when Ratan Tata stepped down from the post. The counsel for Mistry has made several allegations to prove misuse of powers under AoA by Tata Sons.
The NCLAT also found that Tata Sons converted from a public company to a private entity without requisite approvals, which was illegal and ordered that it be reversed.
Public companies attract higher corporate governance standards, compared to a private company under the company’s law. The appellate’s decision to prohibit Tata Sons from conversion will ensure that minority shareholders in every unlisted public company are treated more fairly.
As a public company, Tata Sons would be subjected to a higher standard of governance and with a view to dilute these standards, an attempt was made to convert Tata Sons into a private company leading to an amendment to the company petition in these proceedings, says the order.
Tata Sons was initially a private company but after insertion of a certain clause in the Companies Act, 1956, on the basis of average annual turnover, it assumed the character of a deemed “public company" with effect from 1 February 1975. Once a private company becomes public, it cannot reverse its status until it is approved by the Union government and the National Company Law Tribunal. The same stands true for turning public to private.
Under the Companies Act, a private company can become a public company if no single entity holds more than 25% of the paid-up capital of the company.
Only after such approvals, the company needs to inform the Registrar of Companies and make alterations in its AoA within a month.
Private companies and public companies require different average annual turnovers under the Companies Act. After a private company becomes a public company, it can reduce the number of its members to below seven.
Tata Sons, due to its annual revenue, irrespective of its paid-up share capital, had become a public company. A private company is one that has a minimum paid-up share capital of ₹1 lakh, restricts the right to transfer its shares and limits the number of its members to 200.
There is no provision under the Companies Act, for automatic conversion of “public company" to “private company" or a “private company" to “public company".
Tata Sons merely relied on a general circular dated 13 September 2013 issued by the Union government to turn itself automatically into private company, which the NCLAT found to be wrong. It also said the circular cannot override the substantive provisions of Section 14 of the Companies Act, which is mandatory for conversion of a public company to a private one.
“Curiously, the Tata Sons remained silent for more than 13 years and never took any step for conversion. Even after enactment of the Companies Act, 2013, which came into force since 1 April 2014, for more than three years, it had not taken any step under Section 14. Till date, no application has been filed before the tribunal for its conversion from public company to private company," said the NCLAT.
In the absence of any such approval by the tribunal, the NCLAT said Tata Sons cannot be treated or converted as a private company.