Home >Companies >News >Tata weighs options after NCLAT shock, will move Supreme Court in January
Concerns have been raised over the status of N. Chandrasekaran’s decisions as chairman (Bloomberg )
Concerns have been raised over the status of N. Chandrasekaran’s decisions as chairman (Bloomberg )

Tata weighs options after NCLAT shock, will move Supreme Court in January

  • The Tata group is said to be seeking legal clarity on the NCLAT order
  • The companies can convene an EGM to consider the NCLAT ruling and shareholders can decide to not reinstate Cyrus Mistry

MUMBAI : The Tata group is likely to approach the Supreme Court in the first week of January to obtain a stay against the immediate reinstatement of Cyrus Mistry as the director of three Tata group companies from which he was ousted, two people with direct knowledge of the matter said. The three group companies are Tata Consultancy Services Ltd (TCS), Tata Industries Ltd and Tata Teleservices (Maharashtra) Ltd. The appeal will also seek a stay on the other directions laid down in the NCLAT order.

The National Company Law Appellate Tribunal (NCLAT) order of Wednesday mandates restoring Mistry as a director immediately in these three companies. So, while Mistry technically becomes a director of these companies from the moment of the NCLAT order, in reality he will have to wait till the boards of these companies meet during the third or fourth week of January to consider the December quarter earnings.

The Tata group hopes to obtain a stay from the Supreme Court on the NCLAT order before the board meetings.

In the meantime, the Tata group is also seeking legal clarity on whether the NCLAT order can supersede shareholder rights and processes, the two people said, requesting anonymity.

Legal opinion is divided on this. While some experts say that shareholder rights rule supreme, others say that the NCLAT order has only gone into the merits and legality of Mistry’s removal as a director.

The NCLAT has ruled that Mistry’s removal from Tata Sons on 24 October 2016 was illegal and that he should be restored as executive chairman of Tata Sons. The court also held the appointment of N. Chandrasekaran as the new chairman of Tata Sons as illegal. The implementation of this order has been suspended for four weeks to allow Tata group to appeal.

The second part of the judgement directed that Mistry’s directorship in the three Tata group companies should be restored with immediate effect. The order applies to only three companies as Mistry’s directorship was revoked following an extraordinary general meeting and a shareholder ballot. In the rest of the group companies—Tata Motors Ltd, Tata Chemicals Ltd, Tata Steel Ltd and Indian Hotels Ltd—he had stepped down.

According to the Securities and Exchange Board of India’s listing norms, any change in the board of a publicly traded firm can be effected only after stock exchanges are informed about it. So far, no Tata Group company has told stock exchanges about Mistry’s reinstatement as a director.

A spokesperson for Tata Sons said the company is “evaluating and will take appropriate legal recourse". An email sent to the spokesperson for TCS, the most valuable company in the Tata group, was not answered immediately.

“Companies Act provides for shareholders to decide on who should be the director and who should not. All these companies had gone through the processes required under the Act. It should be very difficult to implement the order of NCLAT for these group companies to reinstate his directorship," said Mohit Saraf, a partner at law firm Luthra and Luthra Associates.

The companies can, however, convene an extraordinary general meeting (EGM) to consider the NCLAT ruling, and shareholders can still take a decision of not restoring his directorship.

Pavan Kumar Vijay, founder of Corporate Professionals, a legal and corporate advisory firm, has a similar view. “The decision to revoke his directorship from the board of these three companies was taken in an EGM and ratified by majority of the shareholders; it is unclear how the decision can be reversed now. It will be now up to the apex court to adjudicate whether the NCLAT order prevails or shareholder rights and board processes are supreme."

However, not all agree. Ramesh Vaidyanathan, a partner at Advaya Legal, argued that Mistry’s removal as a director cannot be looked upon in isolation. “The act of his removal as Tata Sons’ chairman has been viewed as oppressive, so the circumstances which prevailed in his subsequent removal from three companies cannot be ignored. It was a continuous and cumulative action as the NCLAT order was preceded by an act of oppression. Mere compliance with shareholder approval may not be correct," said Vaidyanathan.

Corporate lawyer H.P. Ranina said that the NCLAT order is very clear that the four-week pause to restoring Mistry as chairman applies to only Tata Sons and not for other companies. “Supreme Court has to adjudicate no party can take a unilateral call," he said.

The second concern that stems from the NCLAT ruling is whether the decisions taken by Chandrasekaran as chairman of Tata Sons since February 2017 also stand invalidated, considering that his appointment has been termed illegal.

However, the Companies Act 2013 provides protection against this. Defects in appointment of directors do not invalidate actions taken. Section 176 of Companies Act says, “No act done by a person as a director shall be deemed to be invalid, notwithstanding that it was subsequently noticed that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles of the company".

The order also throws up concerns over affirmative rights granted to Tata Trusts in Tata Sons, particularly with respect to section 75 of its Articles of Association (AoA). NCLAT held it to be oppressive. The section gave Tata Sons the power to ask shareholders to sell their holdings by passing a special resolution. The Mistry family firms—Cyrus Investments Pvt. Ltd and Sterling Investments Pvt. Ltd—own 18.4% of ordinary shares in Tata Sons. In case, the Tata Sons board decides to invoke Article 75, the Mistry family will be unable to stymie it because 25% shareholding support is needed to block a special resolution.

“NCLAT has not struck down the section but cautioned against any misuse. So, such power can be exercised only in exceptional circumstances and in the interest of the company, even before that the reasons should be recorded in writing and intimated to the concerned shareholders," said Vaidyanathan.

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