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Ratan Tata

Tata Empire Split in Two as Mistry Stays Chairman of Group Units

Nov. 1, 2016
Evicting Cyrus Mistry from the boards of about a dozen companies in the Tata group won’t be so easy.

Ratan Tata replaced Cyrus Mistry atop the holding company of India’s biggest conglomerate in a single board meeting. Evicting Mistry from the boards of about a dozen companies in the group won’t be so easy.

A week after the coup at Tata Sons Ltd., Mistry is still chairman and non-executive director of Tata Motors Ltd., owner of Jaguar Land Rover; Tata Power Ltd. and Indian Hotels Co., which runs the Pierre in New York, the companies said in stock exchange filings Tuesday. Tata Sons doesn’t hold a majority of the stock in those and other group units, making the task of evicting Mistry more difficult.

The directors of key listed companies are likely to meet in the next fortnight to discuss earnings for the July-September quarter, giving investors an early indicator of how the dual power structure will affect the businesses. The anomaly could also put off potential candidates for the top job at Bombay House -- the south Mumbai headquarters of the Tata Group for nearly a century. There are 29 publicly traded companies under Tata Sons, with a combined market value of about $120 billion.

“The long drawn-out battle will slowly and gradually erode the ’Tata premium’ that group companies traditionally enjoyed,” said A. K. Prabhakar, head of research at IDBI Capital Market Services Ltd. In Mumbai. “No major decisions will be taken until Mistry’s successor is in place.”

Since Mistry’s removal as group chairman, Tata’s listed companies have lost a combined $3.5 billion in market value.

Debasis Ray, a spokesman for Tata Sons, did not immediately respond to an e-mail seeking comment. Mistry’s office declined to comment on the matter.

So far, there’s little sign that Ratan Tata, 78, and Mistry, 48, will find an amicable solution. Mistry was "shocked beyond words" at the decision to remove him, calling it "unique in the annals of corporate history," according to an e-mail he sent to the board that was seen by Bloomberg News. Since then both sides have issued a volley of acrimonious public statements, slamming the other side.

Tata Sons said on Oct. 27 that Mistry’s leaked e-mail “makes unsubstantiated claims and malicious allegations” and that records to disprove them will be disclosed to “appropriate forums, if and when necessary.” A release from Mistry’s office on Tuesday accused Tata’s side of making insinuations that were “false” and “mischievous.”

Investors Braced for Confusion

With Mistry giving no indication as yet whether he intends to resign from the individual boards, investors are bracing for confusion due to the new structure, said Mahendra Patil, a managing partner at Mumbai-based financial services company XMPUS Financial Services LLP. For Mistry to be removed from the boards of individual companies, the directors and shareholders would have to vote, he said.

“Decision-making of critical issues pertaining to the operations of the companies might be deferred till there is a clarity on who’s really in charge,” Patil said in a telephone interview. “There is a possibility of a long-drawn boardroom as well as courtroom battle.”

While Tata Sons typically owns around 25% to 30% of the stock in the group’s major units, it probably has enough persuasive power to get other minority shareholders to side with them, said Shriram Subramanian, founder of proxy-advisory firm InGovern Research Services.

Mistry is also chairman of software services firm Tata Consultancy Services Ltd., the most valuable asset in the group, but Tata Sons holds 73% of that unit.

Under Section 169 of India’s Companies Act, Tata Sons, as a shareholder, can propose a resolution to remove Mistry as a director, he said. The board then puts the resolution up for vote to all shareholders after giving the director an opportunity to be heard. In the event, he refuses to do so, the board can vote for his removal.

But Tata doesn’t need to strip Mistry of his directorship to stop him running the individual units. Instead, it can persuade the board to vote for his removal as chairman in the same way the holding company did. Tata Sons itself hasn’t removed Mistry as a director, only as chairman, Subramanian said.

“If the idea is to only remove Mistry as a chairman, then the board can express no confidence in him and ask him to step down," he said.

In the meantime, the distraction of a divided management will weigh on earnings and hurt the shares, said Linus Lim, who oversees $1.4 billion as co-chief investment officer at Phillip Capital Management in Singapore.

“You want the management focused on directing the firm,” he said. “Imagine the staff as well -- they will start playing politics instead. It will be like a palace intrigue. Everyone will play favorites.”

By Siddharth Philip and P R Sanjai

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Licensed content from Bloomberg, copyright 2016.

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