Cyrus Mistry vs Ratan Tata 

On Monday (24/10/2016) evening after the markets closed, Tata Sons Ltd released a statement saying that its board has replaced Cyrus Mistry as chairman. It also added that Ratan Tata, the previous chairman, will take over in the interim and that a search panel has been constituted to find a new boss.

What is Tata Sons and why is it important?

Tata Sons is the holding company of the Tata group of companies. The chairman of the board of Tata Sons is also typically the chairman of the operating companies of the Tata group. As the promoter of Tata-operating companies such as Tata Steel and Tata Motors, Tata Sons decides how much capital to allocate to each of these firms.

So, why did the board sack Mistry?

That part of the affair is still a mystery. Ratan Tata, chairman of Tata Trusts, has not commented so far. There are murmurs of conflict of interest and poor performance.

Still, V.R. Mehta, trustee of the Sir Dorabji Tata Trust, told in an interview that the Tata Trusts were “concerned about falling revenue (since Mistry took over)—funds for charitable work were drying up”. The Trusts were also unhappy about the fact that the performance of Tata Sons was increasingly dependent on just two companies—Jaguar Land Rover (JLR) and Tata Consultancy Services (TCS).

What is Tata Trusts and how is it involved?

Sir Dorabji Tata Trust, Sir Ratan Tata Trust and a bunch of other trusts endowed by the members of the Tata family are collectively known as the Tata Trusts. This trust owns two-thirds of Tata Sons.

While little is known (beyond Mehta’s statement why Mistry was removed), it has been established who was the prime mover behind Mistry’s sacking.

In a statement on Monday, a Tata Sons and Tata Trusts spokesperson said that “…on the recommendations of the principal shareholders decided that it may be appropriate to consider a change for the long term interest of Tata Sons and Tata group.”

Can they just sack the chairman like that?

Just before Mistry’s appointment as chairman, Tata Trusts gave its special powers in nominating, approving and removing chairmen of Tata Sons. For instance, a majority of the directors nominated by the trusts have to approve with affirmative voting the appointment and removal of chairmen. Affirmative vote items are those where, in the absence of participation by the concerned directors, the company cannot undertake an action.

What are the facts of poor performance & conflict of interest?

Poor performance is a relative term and it is difficult to capture performance of a behemoth by a single yardstick.

Still, consider this: In the four fiscal years from 2013 to 2016, essentially Mistry’s regime, the average dividend received by Tata Sons was Rs6,855 crore, a number boosted by the one-off TCS dividend. Adjusted for that (assuming the same dividend for fiscal 2014 and 2015), the average dividend was Rs5,018 crore. In the four years preceding that, the average dividend received was Rs2,730 crore.

However, note that in seven of the last nine years, TCS and JLR contributed at least 70% (and in one year it was as high as 148%) of dividends received by Tata Sons.

What does Mistry have to say about his performance?

Mistry has defended his tenure by saying he inherited a lot of problems. He has questioned the decisions of his predecessor on the entry into aviation, the aggressive bidding for Tata Power’s Mundra power project, the decision to continue with the Nano car, etc.

He has said that he couldn’t function freely given Ratan Tata’s interference. (Remember, the special powers of the Tata Trusts).

In an email to the directors of Tata Sons, he said that two members of the nomination and remuneration committee of the board—which had recently lauded and commended his performance—voted for his removal.

So, Mistry isn’t to blame?

Well, analysts are also raising questions on whether Mistry couldn’t have handled the group’s spat with Tata DoCoMo better. Some insiders also said that he was aloof and could have communicated more.

Is that all?

No. Perhaps the two biggest bombshells in his email are these.

The Tata group is staring at a Rs1.18 trillion writedown. That is two-thirds of the group’s net worth of Rs1.74 trillion.

He has also pointed out instances of corporate governance violation in the group.

What happens next?

Mistry’s letter has taken some gloss off the Tata reputation for being a well-governed Indian corporate group. The Tatas have to now answer Mistry’s claims effectively and publicly.

Separately, the stage seems to be set for a long and messy legal battle although Mistry’s office released a statement on Tuesday saying it was not considering litigation “for now”.

Will the government/courts intervene?

It is possible that the MCA will look into these allegations. Already, exchanges and capital market regulator Securities and Exchange Board of India are asking group companies about these allegations of breaches of law.

What are experts saying?

Of course, opinion is divided.

For instance, Darius Pandole, an independent director with Tata Global Beverages, told Mint, in his personal capacity: “Cyrus Mistry has been impeccable as the chairman of Tata Sons. His dedication, professionalism and value systems allowed him to make a significant positive contribution to India’s most respected and complex corporate group.”

On the other hand, Ratan Tata’s counsel Abhishek Manu Singhvi told in an interview: “Does Mr Mistry think the entire eminent board (of Tata Sons) is insane? They all lost confidence in him. ”

At a larger level, this raises questions about corporate governance practices in India. In an interview to Deepak Parekh, the chairman of HDFC Ltd, said: “We are getting calls from overseas investors asking what to make of it (Mistry dismissal). Issue could have been handled in a more appropriate and more proper manner.”

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