A few kilometers away in the historic Bombay House, the Tata group headquarters, the National Company Law Appellate Tribunal (NCLAT) verdict caused surprise and shock in equal measure. The top leadership of the group went into a huddle. Ratan Tata, the group’s 82-year-old chairman emeritus and Mistry’s former mentor, joined in.
This emotional roller-coaster ride has only intensified in recent days. While the Supreme Court has since granted significant relief to the Tatas, staying the NCLAT order, this high-stake battle is spilling over into new areas. Some of these issues are beyond the confines of court rooms. But the fact is, these fresh twists and turns continue to keep the Tata group and its former chairman in the headlines more than three years after Mistry was unceremoniously sacked over purported lack of leadership abilities.
For one, Tata Trusts, a clutch of philanthropic trusts which control around 66% of Tata Sons, find themselves under regulatory scrutiny for suspected violation of trust deeds. It remains to be seen how Tata Trusts respond to charges that hold them in violation of their own trust deeds as well several provisions of the law.
That said, a Tata group insider on condition of anonymity, insists Tata’s legal strategy will remain focused on forcing Mistry to exit Tata Sons on dictated terms. The Tata group is partially emboldened by an amendment in the Companies Act notified on 3 February, according to which majority shareholders of a company (over 75% of equity shareholding) can buy out minority stakeholders at fair value. Of course, the fact that this “fair value" could equal the GDP of a small country is a huge roadblock.
The Mistry family, which has around 18% stake in Tata Sons, is at the receiving end of these new rules. But they have their own set of issues—the poor financial health of the Shapoorji Pallonji group, for one. But people close to Mistry insist that he is ready for the long haul in the courts to retain his stake.
And finally, complicating matters is the personal factor in this battle between— Tata and Mistry—who are distantly related. Relations between the two have complexly broken down. The Tata group has repeatedly cited declining financial performance and a complete breakdown of values held dear by it as among the key reasons for Mistry’s ouster. In turn, Mistry has accused the group of pandering to Tata’s wishes by refusing to close down businesses, which he claims are running the group’s finances dry.
Obviously, the search for a solution to this impasse is complicated and potentially expensive. Is reconciliation between the two even a possibility? Mint spoke to a cross section of key actors in this drama to understand what could be the next steps in this saga. Questionnaires mailed to Tata Sons, Tata Trusts and Mistry’s office did not receive an answer.
A matter of trust
Widely acknowledged for their work in philanthropy, Tata Trusts (along with several other similar trusts created before 1 June 1973) enjoy a special relaxation that allows them to hold shares in a commercial entity despite being completely income-tax (I-T) exempt. The trusts are, however, not allowed to be involved in any decision-making— such as management changes among others— in such commercial entities.
Almost six years after the initial findings, the I-T department in a sudden move in October last year cancelled the registration of six allied trusts. These were Jamsetji Tata Trust, RD Tata Trust, Tata Education Trust, Tata Social Welfare Trust, Sarvajanik Seva Trust and Navajbai Ratan Tata Trust.
In his submission before the I-T department, people close to Mistry claim that he has pointed to “serious violations" of the governance charter across the Tata group, including Tata Sons. Mistry has claimed these show that the involvement of the trusts in the affairs of Tata group go beyond just philanthropy.
Incidentally, the Comptroller and Auditor General of India (CAG) too had said in a 2013 report that two allied trusts—Jamsetji Tata Trust and Navajbai Ratan Tata Trust—had invested ₹3,139 crore in “prohibited modes of investment". It noted the I-T department had given “irregular tax exemptions" to these trusts, resulting in a loss of ₹1,066 crore to the exchequer.
One of the key reasons for cancellation of registration cited by the I-T department was the violation of section 13 of the I-T Act, which prohibits a trust from holding shares of a company. “It can be seen that the trusts, created for charitable purposes, are being utilised for controlling large business groups through Tata Sons, The Economic Times reported, quoting a letter from the I-T department.
The trusts have, however, contested the I-T department’s claims, saying they had surrendered their registration in February 2015 and are therefore not liable to pay any additional tax beyond that period. The trusts have also claimed that they did not breach the objectives listed in the trust deeds as claimed by the I-T department.
Legal experts, who requested anonymity, told Mint that for now the trusts are clearly on the defensive. What may be particularly worrying for the Tata group is that the six trusts in question actually own a relatively small stake (close to 10%) in Tata Sons. Things could turn far more complicated if Sir Ratan Tata and Sir Dorabji Tata trusts, which own the largest stakes in Tata Sons, are also dragged into the ongoing legal battle. This could increase their tax liabilities in a major way.
In related development, CAG, in its report for FY18, said that a part of the shares held by the larger Tata trusts may not qualify for I-T exemptions. The reason cited is that they do not qualify as the original corpus left by its benefactors prior to 1973. CAG further noted that a part of the shares of Tata Trusts were in fact bonus stocks accrued over a period of time. As these are later additions, they do not qualify for I-T exemptions.
A lasting solution
Given this testing situation, what could potentially be a way out? Mukund Rajan, former brand custodian of Tata group, who has worked closely with both Tata and Mistry, feels one way out could be a steady dilution of the trusts’ holdings in Tata Sons and other group firms. He argues that a complete exit from the affairs of Tata Sons will help the trusts address concerns related to their internal workings as well as settle pending legal matters.
“The trusts can then suitably invest the corpus and use the proceeds to continue their philanthropic work which is their primary role," Rajan told Mint in an interview. “The trusts could consider listing their stake in an overseas market if not in India where there may not be so much liquidity to absorb an IPO of this size. In my opinion, the returns from such an exercise will be much higher for the trusts than what they earn from dividends through their investments in Tata group."
Of course, another option could be the exit of the Shapoorji Pallonji group from Tata Sons. While this may not fully resolve the legal issues of Tata trusts pending with the I-T authorities, it will clear the air around the long-term future of Tata Sons’ management.
The group’s flagship firm Shapoorji Pallonji and Co. Pvt. Ltd remains exposed to high refinancing risk. As things stand, ₹3,966 crore of debt repayments are due for repayment in FY20, including commercial papers of ₹990 crore. In November 2019, the group failed to honour inter-corporate loan repayment commitments made by Sterling and Wilson Solar Ltd. It sought more time from Sterling’s board to repay loans worth ₹2,341 crore, citing unforeseen reasons including a liquidity crisis at the group level.
“The Mistrys are not emotionally attached to the stake," said a person close to the family. As per current market price the value of Shapoorji Pallonji group’s stake in Tata Sons is roughly ₹1.5 trillion ($22 billion), which includes the value of the equity holdings as well as its share of the “Tata" brand name that earns royalties from group firms.
But even if the Mistrys choose to sell, the multibillion-dollar question is who can fund a deal as large as this? Tata Sons may not be able to do so, given its own stretched resources. Secondly, it is highly unlikely that the Mistrys will want to exit the stake without a significant premium to the market price, which will make it an even costlier affair.
Sure, with the recent changes in the Companies Act, the Tatas can force Mistry to sell at a fair value. But it is highly likely that Mistry will resist any such attempt and this may lead to yet another prolonged battle in the courts.
Lessons from the past
According to people close to the developments, the Tatas have at least once in the past made overtures to the Shapoorji Pallonji group to buy out its 18% stake in Tata Sons. Though it is not clear who was backing this buyout bid, the offer was rejected by the group.
The Shapoorji Pallonji group has been an investor in Tata Sons since the mid-1960s when it first bought a stake in Tata Sons, mainly from the three siblings of J.R.D. Tata in a series of transactions stretching over many years.
Although the rising stake of Shapoorji Pallonji group in Tata Sons is said to have upset J.R.D., the two sides amicably resolved their differences, after which Pallonji Mistry was given a board seat in Tata Sons in 1980. J.R.D.’s primary concern is said to have stemmed from changes in regulations those days, which took away the right to vote on shares held by charity trusts that owned Tata Sons.
J.R.D. is also said to have asked Pallonji to consider a voluntary undertaking that in the event of the sale of the latter’s two investment arms, Sterling Investments and Cyrus Investments, Tata Sons’ shares would be excluded and offered back to the Tatas. Pallonji, it is said, had remained non-committal on this request.
The deep relations between the Tata and Mistry families date back to the late 1920s, when Shapoorji Pallonji group first picked up a stake in FE Dinshaw Ltd, the managing agency commission of the Tata Iron and Steel Co. Ltd.
Also, in 1965, Mistry’s father Pallonji started a property development firm with Naval Tata, father of Tata. Landmark projects developed by it include Mumbai’s Sterling Cinema, which stands next to Tata Consultancy Services Ltd’s headquarters in the Fort area.
People close to both Tata and Shapoorji Pallonji groups maintain that “confidence-building" measures could help keep the differences at bay until a solution is arrived at, which is acceptable to both sides.
The next challenge, according to group insiders, is to identify a successor to Tata as chairman of Tata Trusts. Noel Tata, a trustee of Sir Ratan Tata Trust since February 2019, could be a consensus candidate. Noel is married to Mistry’s sister and is also Tata’s stepbrother. However, he is yet to be given a trusteeship in Sir Dorabji Tata Trust, the other primary entity. Without this, Noel’s position as a successor remains uncemented.