There have been several important developments in the Tata group in recent days. First, Mehli Mistry, who was a member of a dissident group at Tata Trusts (by which I mean the two key trusts that control the Tata group, Sir Ratan Tata Trust and Dorabji Tata Trust), had his term as Trustee not being renewed.
Next, Mistry,
who had entered a caveat with the Charities Commissioner in Mumbai asking to be
heard in the matter, wrote a letter to Tata Trusts saying he was not inclined
to the pursue the matter.
Finally, at
the meeting of Tata Trusts last week, Noel Tata’s son, Neville, was inducted as
a member of the board along with a Tata confidante and former Titan MD, Bhaskar
Bhat.
Clearly,
Noel Tata is tightening his grip on Tata Trusts which has a 66 per cent stake
in Tata Sons, the holding company of the group through which the Tata family
has controlled the many companies in the conglomerate.
There has
been a lot of discussion about governance in the Tata group. Many ask how Tata
Trusts can control a whole group. Well, in most industrial groups, the family
directly owns a dominant stake- or the majority stake- in the group companies.
The head of the family and his members sit on the boards of the group companies
and chair those.
The Tatas
have a chosen a different mechanism of control. They parked their funds in Tata
Trusts and invested in group companies through Tata Sons. They hold very little
personal stakes in the companies. The dividends and other cash flows from group
companies go to Tata Trusts, which carries out philanthropic activities instead
of going into the personal accounts of the Tata family. While the mechanism of control
is different, the outcome is the same: the Tata family calls the shots by controlling
Tata Trusts.
That is
exactly what you would expect in a family managed business. So, it’s not clear
what commentators are unhappy about. In the battle between Ratan Tata and Cyrus
Mistry, former chairman of Tata Sons, a few years ago, several issues of legality
and governance were raised. The honourable Supreme Court dismissed Mistry’s
contentions. Critics of the Tata group may not like it but they must remember
that whatever norms the Tatas have put in place bear the stamp of legitimacy.
More in my column in BS, Tata storm blows over?
FINGER ON THE PULSE
Tata storm blows over?
The Tata group has been in the news
again for the wrong reasons. A fight has broken out between a Tata family scion, Noel Tata, and a
few individuals in positions of authority in the group.
The boards of two important trusts of the Tata family — the Sir Dorabji Tata Trust and Sir
Ratan Tata Trust (Tata Trusts) — are said to be riven by differences between a group led by Noel Tata and
another group in which Mehli Mistry, a relative of Noel Tata’s, is prominent.
Now, we learn that Mehli Mistry, until recently a member of the boards of the
Tata Trusts, will not pursue his fight with Mr Tata. In all likelihood, the
storm has blown over.
Mr Mistry had taken comfort in a board
resolution passed by Tata Trusts
in October 2024 that stated that all board members at the Trusts would be
renewed for life when their term came up for renewal. Accordingly, the term of
Venu Srinivasan, a trustee and Noel Tata confidant, was renewed in the third
week of October.
Alas, when Mr Mistry’s term came up for
renewal, the Noel Tata faction withheld its consent. Mr Srinivasan stayed on
but Mr Mistry was out. Mr Mistry subsequently
entered a caveat in the matter with the Charities Commissioner. He has since
written a letter that suggests he has thrown in the towel.
Many commentators were aghast at the
in-fighting and fretted about the grave implications for the fortunes of the
Tata companies. Had they closely watched the outcome of the earlier battle
between Ratan Tata and Cyrus Mistry, then executive chairman of Tata Sons, they
need not have worried.
The battle between Ratan Tata and Cyrus
Mistry lasted five years but did not come in the way of the performance of the
Tata group companies. Likewise, the Tata group performance is still less likely
to be disrupted by the present battle between Noel Tata and a few individuals.
The battle makes for great drama in the media, though.
There is much hand-wringing over the
functioning of the Tata Trusts, their relationship with Tata Sons, the role of
the board of Tata Sons, the role of the boards at the Tata group companies and
so on. Some commentators say that the Tata group today falls short of the
governance standards one would expect of such a highly respected group.
Critics of the Tata group need to read
the judgment of the honourable Supreme Court in 2021 in the dispute between
Tata group and Cyrus Mistry, who was ousted as executive chairman of Tata Sons.
The Court declared, in emphatic terms, that in the matters raised by Cyrus
Mistry, the Tata group was fully compliant with the law. Not only that, the
group had unilaterally met norms of governance that it was not legally required
to meet.
The Tata family exercises control over
the sprawling conglomerate through various trusts, notably the two mentioned
above. The Tata Trusts have two-thirds of the shares in Tata Sons, which is the
holding company for a large number of companies in the Tata fold, both listed
and unlisted.
The Tata Trusts nominees have
“affirmative voting rights” at Tata Sons, that is, no decision can be taken by
the board of Tata Sons without their approval. The other directors on the board
(at present said to be numbering five, including three independent directors)
cannot outvote the two Tata Trusts nominees. Critics see this contrary to the
spirit of corporate governance; on a board, should not the majority view
prevail?
Well, the Supreme Court didn’t think
so. It observed that affirmative voting rights are “a global norm” and that a
“shareholder or a group of shareholders who constitute a majority, can always
seek to be in the driving seat by reserving affirmative voting rights.” It also
noted that, by reason of having 66 per cent of shares in Tata Sons, the two
Trusts could have packed the board of Tata Sons with their own directors. They
chose to limit their nominees to one-third of the board strength.
The Tata Trusts also chose to appoint
independent directors at Tata Sons even though Tata Sons is not a listed
company and is not obliged to have any independent directors on its board.
Contrary to what the critics say, Tata Sons is, in technical terms, ahead of
the governance curve.
No doubt, the motivation for having independent directors at Tata Sons was to get the benefit of the views of experts independent of the
Tata group. But these views, it must be understood, are only advisory in
nature. As the Supreme Court noted, at any general meeting of Tata Sons, the
Tata Trusts would command the majority of votes. There is thus no question of
the board of Tata Sons taking a decision that the principal shareholders, Tata
Trusts, would not approve of. The Article that provides affirmative voting
rights to the nominees of Tata Trusts on the board of Tata Sons merely codifies
this reality.
In most family-managed industrial
groups, the head of the group or his family member typically chairs the boards
of the group companies. The industrial group would be the majority shareholder
or the dominant shareholder in the group companies. All decisions of the
group’s boards would require the family’s approval. In listed companies, only
one-third of the board would comprise independent directors. There is no
question of independent directors overriding the wishes of the family.
The Tatas have far too many companies
in their group and too few family members. They have thus adopted a structure
that gives the Tata family the final say in all matters without the members of
the Tata family having to chair the boards of group companies or even be a
director. The group companies are controlled by Tata Sons and Tata Sons is
controlled by Tata Trusts. It is delusional to suppose that matters have been
left to the various boards.
He who rules the Tata Trusts rules the
Tata group. And it is Noel Tata who, as chairman, today rules the Tata Trusts.
Mehli Mistry has been shown the door at Tata Trusts. One should not be
surprised if the same happens to other members of his group.
Over time, the boards of the Tata
Trusts will have members that Mr Tata is more comfortable with. Peace will
return. Many like to think the Tatas are different. Well, the Tatas are
different in the particular manner in which the family controls the group.
However, as in other family-managed businesses, it is the dominant shareholder
who calls the shots. And that, as the Supreme Court has averred, is legal.
