Mumbai: Tata Sons Pvt. Ltd’s governance framework faces a tough test at Thursday’s board meeting, as a sharp rift between the representatives of its controlling shareholder threatens to stall key decisions on leadership and a potential public listing.
The six-member board of Tata Sons will meet on 17 September, the first time since chairman N. Chandrasekaran said he would leave when his term ends in February. While Sir Dorabji Tata Trust (SDTT), the largest shareholder, accepted the decision and initiated a search panel under the firm's Articles of Association, an internal division and a regulatory order have stalled the process.
Tata Trusts enjoys unique rights over the functioning of Tata Sons, such as the right to choose a new chairman, and approve changes to capital structure that a potential IPO would bring. The board meeting comes against the backdrop of a deadlock over the chairman selection process, as well as differences among the trustees over an IPO.
Tata Trusts chair Noel Tata wants Tata Sons to remain private, a stance that trustees earlier agreed to, while Venu Srinivasan, the Trusts' vice chairman and second nominee on Tata Sons' board, has reversed his stance and endorsed a public listing.
“The chairman of Tata Sons is requested to exercise best endeavours to ensure that Tata Sons does not change its current status as an unlisted private company and that Tata Sons fully engages with the Reserve Bank of India in this regard,” read a resolution passed at the board meeting of Sir Ratan Tata Trust, the second principal trust, on 28 July last year.
Veto rights
Tata Trusts’ nominees on the board have veto rights over eight broad areas of Tata Sons, according to its AoA. These include approval of a five-year strategic plan, the annual business plan, any investment over ₹100 crore, how Tata Sons votes at group companies’ general meetings, and any borrowing that would push total debt beyond twice net worth.
The other three clauses where Tata Trusts’ nominees have final say are changes in capital structure, pledging or selling Tata group company stakes, and anything affecting Tata Trusts' shareholding in Tata Sons.
This means Tata Sons cannot independently decide on an IPO, and that one of the trustees of its controlling shareholder has reversed his stance from what the Trusts had directed earlier, throwing up a dilemma after the RBI's Saturday decision that essentially mandates a public listing.
Since a potential listing would change Tata Trusts' ownership from its current 65.9%, only a consensus between Noel Tata, who wants to keep Tata Sons private, and Srinivasan, who wants an IPO, can resolve the deadlock.
“There is no casting vote of Tata Sons chairman as the rules clearly say this decision is to be made by Tata Trusts,” said a group executive. “Tata Trusts would ask Tata Sons in the board meeting to keep the group company private.”
“Going to court,” the executive answered when asked what options the Tata Group has now.
Articles 121A(e) and 121A(g) of Tata Sons’ AoA classify any capital issuance and dilution of Tata Trusts' shareholding as reserved matters requiring affirmative votes from both Trust nominees on the board. Because Noel and Venu have opposing views, their deadlock prevents an affirmative majority and blocks approval of a new resolution.
On 13 August, SDTT accepted Chandrasekaran's decision to leave and began the search for a successor by announcing that a five-member panel would be set up.
Head of board
Chandrasekaran heads Tata Sons’s six-member board. Besides Noel Tata and Srinivasan, the board includes group chief financial officer Saurabh Agrawal, and independent directors Harish Manwani and Anita Marangoly George. Trustee Vijay Singh, who also favours a Tata Sons IPO, is no longer on the board of Tata Sons, though he continues as a trustee on SDTT.
Chandrasekaran’s renewal as director on Tata Sons’ board could not be taken up at the 18 August annual general meeting due to a lack of quorum, as Sir Ratan Tata Trust (SRTT) could not jointly appoint a director with SDTT. This is because the Maharashtra Charity Commissioner prevents Sir Ratan Tata Trust from holding board meetings or making decisions.
A Tata Trusts executive said signing the prospectus and related IPO documents as a promoter will be challenging because almost all trustees, except Srinivasan and Vijay Singh, have reaffirmed their stance on keeping Tata Sons private.
A separate clause, Article 104B, acts as a tie-breaker, but only when the two Trusts disagree on appointing directors.
Under Article 104B, when there is any difference between the SDTT and the Sir Ratan Tata Trust (SRTT), the majority of all trustees counted in aggregate across both Trusts shall prevail.
Unclear stance
For now, it is unclear whether SDTT would ask its nominees what stance to take and whether this clause would be used to break the deadlock between two of its representatives on the board of Tata Sons.
SDTT, which owns 27.98% of Tata Sons, counts Noel Tata, Venu Srinivasan, Vijay Singh, Darius Khambata, Noel’s son Neville Tata and former Titan Co. Ltd. CEO Bhaskar Bhat as trustees. SRTT, which owns 23.56%, has five trustees. Besides Noel Tata, Srinivasan and Khambata, the trustees are Pune-based businessman and philanthropist Jehangir H.C. Jehangir and Ratan Tata’s younger brother, Jimmy Tata.
Tata Trusts is an umbrella entity that comprises 15 philanthropic entities, seven of which own shares in Tata Sons. Besides SDTT and SRTT, JRD Tata Trust owns 4.01% while Tata Education Trust and Tata Social Welfare Trust own 3.73%. MK Tata Trust owns 0.6% and Sarvajanik Seva Trust owns 0.1%.
Shapoorji Pallonji Group owns 18.38% in Tata Sons, nine Tata Group companies own 12.86%, and seven individuals own the remaining 2.87%.