Image: Sameer Joshi / Fotocorp
On the morning of December 22, as the Mumbai bench of the National Company Law Tribunal (NCLT) began hearing a petition filed by the investment firms of the Shapoorji Pallonji (SP) Group against alleged mismanagement of Tata Sons, and oppression of its shareholders (like the SP Group) by the directors of Tata Sons, the Tata Trusts, and its trustees, a small development took everyone by surprise.
As soon as the opening arguments were put forth by Aryama Sundaram, the Counsel for the petitioners, Cyrus Investments and Sterling Investment, opposing Counsel Abhishek Manu Singhvi (representing Tata Sons) raised an objection. This was even before Sundaram got down to making any concrete allegations. All that he said was that this suit was being brought forth by these two SP Group firms, which collectively own around 18.4 percent of Tata Sons, the flagship holding firm of the salt-to-software Tata group.
Singhvi was objecting to the level of shareholding of these two companies (controlled by Cyrus Mistry, the former chairman of Tata Sons whose sacking on October 24 triggered a chain of events leading up to this lawsuit, and his brother Shapoor Mistry) in Tata Sons, as quantified by Sundaram.
Singhvi termed the articulation of Cyrus Investments and Sterling Investment’s collective 18.4 percent shareholding in the company – something that was accepted as public knowledge since the power struggle at Tata Sons broke out – as inaccurate. Everyone in the courtroom, including Sundaram and a battery of lawyers in the petitioners’ corner, was left stumped. What could possibly be wrong about what Sundaram said?
Sundaram and his colleagues protested and cautioned that if there had been any dilution in the Mistry family’s stake in Tata Sons, effected through a fresh issue of equity behind their backs, it would call for fresh grounds of oppression to be added to the existing petition. Singhvi didn’t say much for the rest of the hearing, except to clarify that the SP Group companies held 18.4 percent of the ordinary shares of Tata Sons. But if the company’s outstanding ordinary and preference shares were to be taken into account collectively, the SP Group’s holding stood at only 2.17 percent.
Not much attention was subsequently paid to this point, being considered a technical issue, and the argument went on with Sundaram outlining the various counts of allegations enunciated in the petitioners’ 300-page petition.
Yet, it is this small technical issue, and the tribunal’s view of the same, that will decide the maintainability of the SP Group’s petition. This fact, and Singhvi’s expected line of argument on January 31 when the tribunal re-convenes to resume hearing the case, is clear from a reading of Tata Sons’ 200-page response to the petition filed against it.
Tata’s response states that the SP Group holds only 2.17 percent of Tata Sons’ issued share capital (including ordinary and preference shares). “It is submitted that the petition purportedly filed under Sections 241 and 242 of the Act (Companies Act, 2013) is not maintainable inasmuch as the petitioners do not possess the requisite legal competence to sustain such petition under Section 244 of the Act,” the company’s response said. “The issue of maintainability needs to be decided as the preliminary issue.”
According to the Companies Act, 2013, petitioners that invoke Sections 241 and 242 (dealing with oppression and mismanagement) should not hold less than one-tenth of the issued share capital of the company, or should not represent less than one-tenth of the total number of shareowner members.
The two SP Group firms that have petitioned the case hold ordinary shares with an aggregate face value of Rs7.40 crore of Tata Sons. If the aggregate face value of the ordinary and preference shares of Tata Sons is taken into account, it amounts to Rs335 crore. This translates into the petitioners holding only 2.17 percent of the total issued share capital of the company. Also since the number of shareowner members in this case are the two SP Group companies, the criteria of members petitioning a case representing not less than one-tenth the total number of such members is also not met.
Legal experts state that Tata Sons has a valid technical ground on which they can challenge the maintainability of the petition and may seek its dismissal. But there may still be hope for the Mistry camp (though the petitioners are SP Group firms that are shareholders in Tata Sons, these companies are controlled by Cyrus Mistry, who by virtue of being former chairman of Tata Sons has been named as a respondent in the case by the petitioners).
“It is a legally valid argument. The courts have held previously that issued share capital refers to both ordinary shares and preference shares,” says Prem Rajani, managing partner of Rajani Associates, a Mumbai-based law firm. “Though the Tatas are technically right, the court still reserves the option to waive off the clause if it decides that it wants to consider the petition.”
Rajani also said that it was about time the government considered altering the definition of issued capital, as mentioned in the Companies Act at present to remove ambiguity. The Act should clearly state that issued share capital refers to ordinary shares and convertible preference shares, since redeemable preference shares are like debt instruments, Rajani explained.
Tata Sons’ legal response preempts that Cyrus Investments and Sterling Investment may seek waiver of this clause and request the tribunal to continue hearing the matter. In its response to the petition, Tata Sons says that the petitioners haven’t sought the leave of the tribunal for a waiver of these conditions at the time of filing the petition and any such leave, if sought now, will only be an afterthought and not even maintainable. “Such leave ought to have been sought from the tribunal before filing the petition.”
It remains to be seen how the Mistry camp responds to this technical challenge to the maintainability of its petition and whether the tribunal allows waiver of this provision in the interest of settling this matter legally.
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Meanwhile, a detailed inspection of Tata Sons’ response to the petition and Cyrus Mistry’s affidavit submitted to the NCLT shows that the growing acrimony between Mistry and the directors of Tata Sons and trustees of Tata Trusts, including former chairman Ratan Tata, was a well-kept secret within the conglomerate.
Even after numerous allegations and counter-allegations have been levelled by both camps against each other publicly, new details have emerged through the written representations from both sides before the legal forum.
A new salvo fired by Tata Sons at Mistry, the 48-year-old son of SP Group chairman Pallonji Mistry, in its response to the petition states that the latter’s failure to appoint a group finance director or group chief financial officer even after four years of chairmanship demonstrated that he “didn’t fully value the importance of a strong professional team at Tata Sons.”
The principal holding company of the $103 billion-conglomerate has also alleged that Mistry was reluctant to accept and fully embrace the terms in the Articles of Association (AoA) that spelled out the governance structure of Tata Sons and certain rights of the Tata Trusts and the Trust-nominee directors. The statement said that these were “terms which he himself had participated in finalizing through extensive meetings and discussions with representatives of the Tata Trusts and external advisors.”
Mistry, in his affidavit, has said that while Tata Sons’ AoA were well-intentioned, it was its interpretation that made them “weapons of oppression in the hands of the trustees holding nearly 66 percent of the equity share capital” of Tata Sons.
Tata Sons has contended in its response that Mistry was well-aware of the provisions in the AoA of the company by virtue of his position as a director on the board of Tata Sons since 2006, and subsequently as chairman of the company since 2012. The company stated that it was with a view to seeking retribution for his sacking as chairman that Mistry was only now seeking to challenge these articles.
Mistry submitted before the tribunal that “interventions” from Ratan Tata, 79 – who passed on the baton as Tata group chairman to Mistry in December 2013 – were mostly about small matters initially, but grew in volume and significance over time.
He cites an instance where the need to infuse funds into Tata Motors was put into Tata Sons’ business plan that was approved in September 2013. Yet, in December 2013, Respondent No. 2 (Ratan Tata) and Respondent No. 14 (NA Soonawala) had argued that they had not been taken into confidence about the rights issue of Tata Motors, although according to Mistry, he had ensured that the senior management of Tata Motors secured a buy-in from Soonawala.
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The former Tata Sons chairman alleged that, progressively, Ratan Tata, who is back as the current interim chairman of the group, started asserting the need to see plans and proposals beforehand, failing which he would threaten and allege a breach of the AoA. “In short, without even being a director on the board of directors of Respondent No.1 (Tata Sons), he (Ratan Tata) wanted information to be shared with him and Respondent No. 14 (NA Soonawala),” Mistry alleged. “It also led to a demand from me that to avoid such misunderstandings in the future, there ought to be a clear framework designed for communication between the trustees of Tata Trusts on the one hand and the management and directors of (Tata Sons) on the other hand.”
Tata Sons has strongly refuted these charges in its response and stated that at no time have Ratan Tata and Soonawala sought such information from Mistry. “It is submitted that it is Mr. Cyrus Mistry who has been seeking guidance from Mr. Ratan N Tata and Mr. Soonawala from time to time given their vast experience in the management of the affairs of the Tata Group,” the group said.
The conglomerate also reacted to the various allegations of mismanagement and oppression of shareholders raised by the SP Group firms against Tata Sons on account of certain business decisions – including the decision to persist with struggling ventures like Tata Steel’s European operations and the Tata Nano.
“Just because in the petitioners’ opinion a handful of business decisions made by the Tata Group operating companies such as Tata Motors and Tata Steel have not borne the desired result, the same does not amount to either oppression of the petitioners or mismanagement in respect of Tata Sons,” the company said in its statement.
Tata Sons also used its opportunity to respond to the petition to highlight the Mistry family’s involvement with Tata Teleservices (TTSL). Among its allegations against Tata Sons and Ratan Tata, the petitioners had also stated that C Sivasankaran’s Siva Group had received undue benefits in a transaction involving TTSL shares, due to Sivasankaran’s alleged proximity to Ratan Tata.
The petitioners had claimed that the price of TTSL shares issued to Sterling Infotech, a Siva Group company, was “highly discounted” or at a “throwaway price.” Tata Sons clarified that a price band of Rs17 to Rs40 was decided for a proposed preferential allotment of TTSL’s in 2005. While Sterling Infotech was allotted shares at Rs17 apiece, private equity firm Temasek invested in TTSL at Rs40 per share. According to Tata Sons’ response the difference in price at which shares were allotted to different investors was a function of “commercial negotiations, which in turn are rooted in the nature of each investor, the nature of the investment made and the expectations of each investor from their respective investments. The company made out a case that since Temasek was given the right to nominate a director to the TTSL board and also participate in decision-making regarding certain critical matter and fundamental issues, shares were allotted to it at a premium. Sterling Infotech, on the other hand, enjoyed no such rights.
Tata Sons also pointed out that three months before the allotment of TTSL shares to Sivasankaran, SP Group entities had subscribed to TTSL shares (pursuant to a renunciation of rights by Tata Sons) and acquired these shares from Tata Industries at Rs15 per share. These SP Group entities, along with Sterling, sold these shares to Japanese telecom firm, DoCoMo, which invested in TTSL in 2008, at Rs116.09 per share.
“It is indeed unfortunate that the Petitioners have sought to highlight the ‘advantage’ taken by Sterling in selling shares to DoCoMo and the ‘amassing [of] a huge profit…in less than three years’ by Sterling, without mentioning the fact that the same ‘advantage’ was also taken by persons and entities closely related to the Petitioners,” Tata Sons said.
A lot of the issues raised by Mistry against Tata Sons, the Tata Trusts and Ratan Tata date back to the period in which he was chairman and even before that. Tribunal judge BSV Prakash Kumar who is hearing the matter had indicated on December 22 that he was looking for a credible explanation as to why the petitioners was raising these at a legal forum only now, post his ouster from the group.
Mistry’s affidavit seeks to answer that by stating that since he was the person at the helm of affairs at Tata Sons, taking action to “put an end to past oppressive conduct and to end mismanagement, it would not at all have been logical or feasible for the petitioners (controlled by Mistry’s family) to approach a judicial or quasi-judicial forum for remedy.”
Whether the tribunal buys Mistry’s argument and continues hearing the case is likely to be evident by February 1.