The proposed move by Shapoorji Pallonji Group on September 22, 2020, to exit from Tata Sons may bring curtains down on a four-year long acrimonious corporate battle waged by the two giants. The proposal comes nearly four years after the unceremonious exit of Cyrus Mistry - the grandson of SP Group founder Shapoorji Mistry - who was ousted as chairman of Tata Group on October 24, 2016, and a protracted legal battle since then.
The SP Group in a statement clarified that it is willing to exit Tatas after selling their 18.4% stake. The SP Group was trying to mortgage its holding in Tatas, raise funds and rescue itself from a severe cash-crunch precipitated by the pandemic. But Tatas raised an objection. The Supreme Court was of a tentative view that "pledging is a limited transfer," and ordered status quo on transferring/pledging and any further action with regard to transfer/pledge already made till the next hearing by October 28.
Who are the Tatas and when did Tata Sons come into existence?
History of the Tata Group dates back to 1868, when a 29-year-old Jamsetji Nusserwanji Tata started a trading company with a capital of Rs 21,000. He built the foundation for what turned out to be one of India's largest corporate houses later. Its growth is interwoven with that of India's economy as the group played a pivotal role in the upliftment of the society.
From setting up Tata Memorial Hospital in 1941 and National Centre for the Performing Arts (NCPA) in 1969, and higher educational institutions such as Tata Institute of Social Sciences (TISS), Indian Institute of Science (1909), Tata Institute for Fundamental Research (TIFR) and sponsoring India's first Olympic team (1920), Tatas' contribution to the society is unparalleled. It was at the forefront of making forays into the international markets by acquiring an iconic hotel St James Court in London (in 1982), British Tetley group (2000), the heavy vehicles unit of Daewoo Motors (2004), UK-based steel giant Corus Group Plc (2006) and British car maker Jaguar Land Rover (2008).
Around 66% of Tata Sons, the principal investment holding company and promoter of Tata companies, was held by various philanthropic trusts, which supported education, health, livelihood generation and art and culture. Recently, it was converted to a privately-held company -- Tata Sons Private Limited. The SP Group held 18.4% in Tata Sons.
As per group website, the revenue of Tata companies, taken together, was nearly Rs 8 lakh crore ($113 billion) in 2018-19. These companies collectively employ over seven lakh people. There are 28 publicly-listed Tata enterprises with a combined market capitalisation of over Rs 11 lakh crore ($160 billion) as on March 31, 2019. Brand Finance names Tata as India's most valuable brand for 2019, with its brand value growing by 37% to around $20 billion.
Who are the Mistrys and how and when did they invest in Tatas?
The Shapoorji Pallonji Group (SP Group) is a Mumbai-based $2 billion construction conglomerate also with other interests in real estate, home appliances and shipping. The group is currently headed by Shapoor Mistry, elder son of Pallonji Mistry, who stepped down in 2012.
The first lot of 12.5% stake in Tata Sons came to Shapoorji Pallonji-led group when the group founder acquired a finance company F.E. Dinshaw and Co in 1936 after the death of its promoter. The finance company used to arrange loans for Tata group companies.
Thereafter, Shapoorji's son Pallonji Mistry was known as the 'Phantom' at Bombay House, the headquarters of Tatas. The reclusive Mistry was enormously influential. He picked more stake from other minority shareholders to consolidate his position in Tata Sons.
Interestingly, Tata's counsel argued once in the Supreme Court that Mistrys didn't hold any shares until 1965 and they bought it later from the siblings of JRD Tata.
Shapoorji Pallonji is credited with building some of Mumbai's iconic structures including the Taj Mahal Hotel, the Brabourne Stadium and the Reserve Bank of India building. also built a massive stone palace for the Sultan of Oman in 1971, Jumeirah Lake Towers in Dubai and Ebene Cyber City in Mauritius.
In 2007, Pallonji Mistry gave up his Indian citizenship in favour of an Irish one, leaving the group reins to his sons, Shapoor and Cyrus.
The marriage connection of Mistry-Noel Tata
The marriage between Noel Naval Tata, Ratan Tata's half brother, and Aloo Mistry, Pallonji's daughter, brought the two business empires closer. Noel, the son of Naval Tata and Simone Tata, is on the board of several Tata companies, and chairman of Trent and Tata Investment Corporation, the managing director of Tata International, and the vice chairman of Titan Company.
He has always been a reluctant and unassuming heir who kept a low profile. He was not interested in the top job at the Tata Group when Ratan Tata retired and let his brother-in-law Cyrus Mistry, nearly 10 years younger to him, walk away with the coveted post.
The fight between Mistry and Tata and key contentious issues
Cyrus Mistry, chairman of Tata Sons for nearly 4 years, was abruptly removed in October 2016 when Ratan Tata took over as the chairman of the group for four months until February 2017.
The once blue-eyed boy of Ratan Tata and a member on Tata Sons board since 2006, Cyrus ran into a mess with the Tata satraps with his style of management and quick decision making, which, many believed, strayed from the group's culture.
Tata cited the performance issues of Cyrus as the reason for his ouster, Cyrus alleged legacy problems in the group and the differences of opinion with the board and Tata. His proposals to exit loss-making businesses such as Nano car project, telecom business and Tata Steel's European business were viewed with extreme cynicism.
"A generation of Tata leaders were retiring with implications on the future governance of the Group. Several of these leaders who were retiring from the Board of Tata Sons also served as Trustees of the majority shareholders - Tata Trusts. It is in this context that Mr. Mistry set about trying to establish a governance structure that would institutionalise accountability, and create the right checks and balances, without contravening the new SEBI Insider Trading law that regulated the flow of information across all stakeholders," said the SP Group statement.
Soon after his ouster from the chairman's post, Cyrus was also removed from all the boards of group companies. In January 2017, veteran Tata insider and the then CEO of TCS, N Chandrasekaran took over as the first non-Parsi chairman of the salt-to-software Indian conglomerate.
The bonding between two Parsi business families suddenly turned into a vicious legal fight. The fortunes had swung between the warring groups as the case was dragged to various courts. Tata Sons moved Supreme Court in January 2020 after National Company Law Appellate Tribunal (NCLAT) reinstated Cyrus as executive chairman of Tata Sons. In March, the apex court stayed the NCLAT order.
Tata's move to convert Tata Sons into a private limited company from a public firm, crippled the Mistrys as they were kept in the dark regarding the group's journey.
In the latest statement, SP Group claimed that the current leadership of Tata Sons has continued to take "value destructive business decisions". It cited several issues identified years earlier that continue to plague the group. "Be it the operations of Tata Steel UK, where over the last three years alone the operational losses have increased by an additional Rs11,000 crore, or the group's aviation businesses. These actions, or lack thereof, have meant that the total debt in the major Tata group companies has increased by around Rs 1 lakh crore in the last three years. Excluding TCS, the last quarters losses of all the listed group companies of around Rs 14,000 crore causes great concern."
What next?
As per the Tata Sons Articles of Association, if any shareholder of Tata Sons wants to sell shares, then it has to be first offered to Tata Sons. Tata Sons will arrive at a fair market value and pay to the shareholder. This may get into another legal tangle as SP Group has estimated their stake value at Rs1.8 lakh crore based on the total market capitalisation of 17 listed entities of the Tata Group amounting to Rs 10 lakh crore. If Tatas do not agree on this valuation, SP Group may be forced to settle it at what Tatas offered or take it back to the court.
"It is crucial that an early resolution be reached to arrive at a fair and equitable solution reflecting the value of the underlying tangible and intangible assets," the statement by the SP group said.
"This move was undertaken to protect the livelihoods of its 60,000 employees and over 100,000 migrant workers. The action by Tata Sons to block this crucial fund raise, without any heed for the collateral consequences is the latest demonstration of their vindictive mind-set," it added.
Experts do not discount a possibility of an outside court settlement with the help of a mediator. For the SP Group, it is important to wrap up the deal quickly so that it can infuse cash into its crumbling businesses and rescue it from the deepening debt crisis. For Tatas, it would mean total control over Tata Sons.