Shock court order risks legacy of Tata’s legendary dealmaker

For more than 150 years, the Tata Group has been synonymous with India’s nation-building project, venturing into everything from autos to airlines when the country needed them. And no executive better personified India’s emergence on the world stage than Ratan Tata, whose string of dazzling takeovers took a largely domestic firm global.

Now at 81, Tata’s legacy is under threat. An internecine war over the conglomerate’s future took a crippling turn on Wednesday, showing that even the famed Tatas aren’t immune to the corporate governance troubles that often plague the family businesses that still dominate India’s economy.

In a surprise ruling, an appeals court said Tata’s erstwhile successor, Cyrus Mistry, was improperly ousted as chairman of the group’s holding company three years ago, paving the way for his reinstatement. In a further blow to the elderly tycoon, the court found the group’s move to restrict Mistry’s family from selling out of the holding was unlawful and must be reversed.

Tata can appeal the ruling to India’s Supreme Court. And may even stand a chance, according to an analysis that shows how the top court reversed six of the eight big cases the lower court decided in 2019.

But the turmoil couldn’t come at a worse time for the $110 billion salt-to-software conglomerate. It comes just as the group contends with a crisis at its British unit, Jaguar Land Rover Automotive Plc — one of the crown jewels of Ratan Tata’s buying spree — and an economic slowdown at home that’s damped demand for wares from steel to Tetley teas.

Battle for Honour

“It is a battle for honour and prestige,” said Shriram Subramanian, founder of proxy advisory firm InGovern Research Services Pvt Ltd. “This ruling is a vindication of the position taken by Cyrus Mistry that his removal was illegal.”

On October 24, 2016, Mistry was informed that Ratan Tata would be joining the board meeting of Tata Sons, the holding company at the heart of Tata empire — an unusual event since Tata was not a director on the company’s board. The one-hour long meeting ended with Mistry being asked to resign even though his ouster was not part of the meeting’s agenda.

The court order on Wednesday found the manner of Mistry’s forced exit “oppressive” and has restrained Ratan Tata from taking any action that would require a majority decision by the Tata Sons board.

It also rejected Tata Sons’ argument that Mistry had been dismissed for poor performance, noting that just four months before his dismissal, some of the same board members who voted for his removal had praised his performance and given him a salary raise.

550 emails

At least 550 emails were exchanged between Ratan Tata and Mistry, according to the court order, outlining a pattern and “scale of interference” by the former. Ratan Tata used his perch running the philanthropic organisations — Tata Trusts — that owns 66 per cent of the holding company, to weigh in on everything from Tata Motors Ltd’s fund raising to the satellite TV subsidiary’s share sale or group’s application for a bank licence in India, the order said.

The ruling effectively paralyses the Tata leadership as it faces a string of urgent decisions, including an attempt to find a partner to turn around Jaguar Land Rover and job cuts at its European steel operations. With a question mark over leadership at the group, Tata has four weeks to appeal the decision before Mistry can technically resume his old job.

The group is putting on a brave face. Natarajan Chandrasekaran, who was named chairman of Tata Sons in 2017, told employees to stay focused on their work to restore the company’s financial position. The ruling will be appealed, he said in a letter to workers obtained by Bloomberg News, and confirmed by a Tata spokeswoman. The court order appears to have gone beyond even Mistry’s demands, Tata Sons said in a statement late Wednesday.

Ratan Tata was a surprise pick when he took over the reins of the Tata Group in 1991 from his mentor Jehangir Ratanji Dadabhoy Tata. He spent his early years fighting off entrenched chieftains who had a stronghold over the group’s steel, hotels, tea and chemicals businesses. Nearly three decades later, his authority to make decisions for the group is again being challenged.

Perfect successor

When Mistry took over in 2012 from Ratan Tata, who’s unmarried and has no children, he seemed like a perfect successor.

Mistry is the son of billionaire Pallonji Mistry, the largest shareholder of the Tata Group outside the family itself. The Tatas and the Mistrys have been doing business since 1927, and both hail from the same tiny Parsi religious community based in Mumbai. Almost 80 per cent of the Mistry family’s net worth comes from its stake in Tata Sons.

However, the two scions soon started to clash as Mistry’s efforts to turn around unprofitable businesses — which he claimed would otherwise face Rs1.18 trillion (Dh60.96 billion, $16 billion) in write downs — threatened to roll back some of the empire-building Ratan Tata had engineered.

Another bone of contention was Mistry’s reluctance to pay Japanese telecommunications firm NTT Docomo Inc $1.17 billion for failing to uphold a contract that had been signed under Ratan Tata. The 2016 coup was done at the instigation of the trusts Ratan Tata controls, with the board saying that Mistry’s tenure had been marked by “repeated departures” from the group’s culture and ethos.

Family dispute

Mistry’s status as a representative of a large shareholder of long standing gave Wednesday’s decision the added flavour of a family dispute. The court order said that more than four decades of a “healthy atmosphere and clear understanding” between the two clans had made any formal protections for minority shareholders at Tata Sons seem unnecessary, but that the “sudden and hasty removal” of Mistry showed this was no longer the case.

The overturning of his firing means the appointment of Chandrasekaran as Mistry’s replacement was illegal too, adding to the confusion over the group’s leadership.

Chandrasekaran wasn’t seen as a long-term successor to Ratan Tata who still has not said publicly who will succeed him as the head of Tata Trusts — the key seat of power that helped push out Mistry and unleashed one of India’s worst corporate feuds.