Tata-Mistry: Next legal battle on ‘fair’ valuation

There is nothing that impedes Natarajan Chandrasekaran anymore. The chairman of Tata Sons—since February 21, 2017—has unambiguously retained his priceless crown. On the morning of March 26, 2021, the curtains came down on one of the ugliest corporate spats India has ever seen, with the Supreme Court setting aside a National Company Law Appellate Tribunal (NCLAT) order that had reinstated Cyrus Mistry as the chairman of Tata Sons.

For Chandra, as he is fondly called by everyone, the verdict may have opened up a new vista for a fresh legal fight.

While it ruled in favour of the Tatas and set aside the NCLAT order, the apex court has refused to rule on the separation of ownership, and asked the parties to explore the legal options available to them. It did not rule on the plea by Mistry and the Shapoorji Pallonji Group (SP Group) praying for alternate relief directing Tata Sons to cause the separation of their ownership interest in Tata Sons by extinguishing the shares held by the group in lieu of fair compensation. The next round in court, say legal luminaries, could be on the `fair valuation’ of the Tata group that is meant to fix the compensation for the SP Group. The apex court verdict upholding the Tatas’ claims will undoubtedly dilute Mistry’s bargaining power.

“The valuation of shares of SP Group depends on the value of stake of Tata Sons in listed equities, unlisted equities, immovable assets, etc. and also perhaps the funds raised by SP Group on the security pledge of the shares. Therefore, at this stage and in this court, we cannot adjudicate on the fair compensation. We will leave it to the parties to take the Article 75 (of the Companies Act) route or any other legally available route in this regard,” said the judgment.

For the quintessential Tamilian from Namakkal, who took the reins of the Tata group after a successful stint at Tata Consultancy Services (TCS), it’s a much smoother road ahead now as he steers the group out of the corner-room crisis. Chandra can now leave everything behind and focus on the growth of the group, which has a current market capitalisation of a little over ₹17 lakh crore.

In the past four years, the combined market capitalisation of the listed entities of the Tata group (29 listed companies) has risen at a compound annual rate of growth (CAGR) of 20%, despite some companies facing turbulence in 2020. It is surely a matter of pride for Chandra. But on the flip side, a dozen companies of the group continue to account for around 98% of the group’s market capitalisation, with four giants—TCS, Tata Motors, Tata Steel, and Titan—contributing nearly 85%. While companies like Indian Hotels, Tata Metaliks, Tata Consumer and Tata Elxsi reported significant gains, the two legacy behemoths —Tata Motors and Tata Steel—have continued to face headwinds.

The four-year-old court battle saw fortunes move up and down. The NCLAT, in its December 2019 order, had held that the proceedings of the board meeting of Tata Sons held on October 24, 2016, removing Cyrus Mistry as chairperson was illegal. It had also directed that chairman emeritus Ratan Tata should not take any decision in advance which requires a majority decision of the Tata Sons board or a majority in the annual general meeting.

The tightly-fought legal battle saw several twists and turns, and towards the end of 2020, the debt-laden SP Group sought separation as a matter of right, claiming oppression of minority shareholder rights. However, the apex court has comprehensively dismissed every charge of oppression and mismanagement against Tata Sons. “Though the complainant companies padded up their actual grievance with various historical facts to make a deceptive appearance, the causa proxima for the complaint was the removal of Cyrus Mistry from the office of executive chairman.” The order further said that the removal of a chairman, or even the director of a company, wasn't ground enough to determine oppression or prejudicial behaviour.

“As a minority shareholder of Tata Sons, I am personally disappointed by the outcome of the judgment with respect to our case. Although I will no longer be able to influence the direction of governance of the Tata group directly, I hope that the issues I have raised, will cause deeper reflection and influence individuals concerned to catalyse change,” said Mistry in a statement on March 30, 2021. Mistry also thanked his family, friends, colleagues, and the legal team for their unwavering support.

As the Tata group latches on to a steady growth path, the question of `fair compensation’ assumes importance. When the SP Group sought to part ways in September 2020 by selling its 18.38% stake in Tata Sons, as “mutual co-existence of both groups at Tata Sons would be infeasible”, it had suggested a valuation of ₹1.78 lakh crore for its stake. For the cash-strapped SP Group, encashing its holding in Tata Sons and ending the 70-year partnership was the only available exit route after the Tatas legally blocked the minority stakeholder from selling/mortgaging its stake in September 2020.

The Mistrys were planning to raise ₹11,000 crore from various funds and had signed a deal with Brookfield Asset Management for ₹3,750 crore in the first tranche against a portion of its stake in Tata Sons. After the apex court barred the SP Group firms from pledging or selling their shares in Tata Sons, the Tatas had offered to buy out the stake to help the former raise funds to pay its debt.

In 2016, Yezdi H. Malegam, a well-known chartered accountant who has been a regular valuer of the group, had valued Tata Sons at ₹3.8 lakh crore-₹4.3 lakh crore, which put the SP Group’s stake valuation at ₹70,000 crore to ₹80,000 crore. This estimate is way below what the SP Group has claimed as the true worth of its stake: ₹1.78 lakh crore.

While the `fair valuation’ issues are yet to be sorted out, the Tata group has a long, winding road ahead.

The boardroom on the fourth floor of the Tata group’s headquarters, Bombay House, continues to face corporate challenges of a different hue. The legacy giants among the group companies are still not out of the woods. In the last few years, Chandra’s efforts have clearly helped Tata Steel and Tata Motors reduce the large debt overhang left by the foreign acquisition strategy pursued by the group in the past. But the deteriorating financial performance and higher debt levels in Tata Power are still making the market vary of the stock. Tata Motors needs a constant infusion of capital to overhaul its product portfolio as key markets switch to cleaner fuel. A rapid transition into electric vehicles, especially at Jaguar Land Rover (JLR), has brought cheer to the company’s stocks, which remained a laggard for long. On the other side, Tata Sons has managed to get Bamnipal Steel and Tata Steel BSL (formerly Bhushan Steel) merged into Tata Steel. The promising spurt in steel demand both in the domestic and overseas markets is good news for the company which faced severe headwinds in the past.

Chandra, the famous marathoner, is proud of his former baby, TCS. India’s largest software services company, TCS became the first IT services company to announce an increment for 2021-22, making it a second salary increment within six months. The group’s crown jewel is the second most valuable company in the stock market, with a market cap of ₹11.6 lakh crore. It has grown much faster during the pandemic year as the work-from-home concept brought cheer to the company.

Bombay House is warming up to a new season. The 97-year-old George Wittet-designed structure is now ready to take on the future.