The Tata Trusts boardroom controversy has rocked India’s corporate world, and the shockwaves have reached Delhi.
Tata Trusts is a charity that controls 66% of Tata Sons. Tata Sons is the holding company for 26 listed companies of the Tata Group, with a total market capitalization of $368 billion.
On Tuesday night, Indian television broadcast footage of Tata Trusts Chairman Noel Tata meeting Home Minister Amit Shah at his official residence.
According to local media reports, Finance Minister Nirmala Sitharaman, Tata Sons Chairman N. Chandrasekaran and board members Darius Khambatta and Venu Srinivasan also attended the meeting.
Although Tata Sons and Tata Trusts have not made any public statements about what happened at the minister’s residence, it is widely reported that a power struggle is brewing within one of India’s most powerful business empires.
Salt conglomerate Tata Group is more than just a business powerhouse, also owning iconic brands such as Taj Hotels, Jaguar Land Rover and Tetley Tea. It also actively supports a number of government investment directives, the most recent of which includes an $11 billion investment to establish India’s first semiconductor manufacturing unit.
In addition, India is an important part of many of India’s supply chains, such as manufacturing Apple iPhones in India and employing more than 1 million people.
Tata logo in Mumbai, India.
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So when Tata Trusts’ board meets late Friday for the first time since reports of internal power struggles first surfaced, many investors and the government will hope the boardroom dispute will be resolved.
“We hope the trustees understand that the underlying philosophy and glide path of Tata Trusts is to continue its philanthropic activities and to enable Tata Sons to contribute financially to these activities,” said Shriram Subramanian, founder of corporate governance research and proxy advisory firm InGovern Research Services.
CNBC has reached out to Tata Sons, Tata Trusts and India’s Ministry of Finance for comment, but has not yet received a response.
Directors “feel that their powers have been curtailed.”
At the heart of the current rift is the fact that Tata Sons is supposed to receive pre-approval from Tata Trusts for major financial investments, people familiar with the matter said. Officials said the approval was not sought.
“There is a provision that if Tata Sons makes an investment of more than 100 million rupees (about $11 million), it will require the approval of the Tata trustees,” said an industry source, requesting anonymity due to the sensitive nature of the topic. “This has not been the case for several years, and some trustees feel their powers are being curtailed.”
The simmering discontent reportedly came to a head last month when four Tata Trusts trustees, including Mehli Mistry, opposed the reappointment of trustee Vijay Singh to the Tata Sons board.
Tata Trusts holds three seats on Tata Sons’ board of directors.
After Singh’s ouster, two other Tata Sons directors opposed Mistry’s appointment to the third seat, industry sources said.
“As the controlling shareholder, Tata Trusts has the right to nominate directors to the Tata Sons board, but one seat is currently vacant,” Hetal Dalal, president of Mumbai-based Institutional Investor Advisory Services India, which monitors corporate governance and ESG issues, told CNBC.
It’s not the first time
Mr. Dalal said there were also concerns about the extent of influence the trust sought to exert over Tata Sons’ capital allocation decisions. “While such decisions are directly within the purview of the Tata Sons board, the disagreement between the board and the major shareholder (Tata Trusts) does not bode well.”
This is the second time in less than a decade that India’s oldest conglomerate is experiencing a power struggle related to Tata Trusts’ influence over Tata Sons.
The last time was in 2016 when Tata Sons Chairman Cyrus Mistry was unceremoniously removed from his post and replaced by Ratan Tata, then Tata Trusts Chairman, who also served as interim Chairman of Tata Sons.
Ratan Tata (center) and Cyrus Mistry (R) meet with then Commerce and Industry Minister Anand Sharma (left) in 2011.
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Days after his dismissal, Mistry released a five-page letter to the media alleging that Tata Trusts’ constant interference in Tata Sons’ management decisions had made him a “lame duck” chairman.
Tata Sons followed this up with a similarly detailed press release, accusing Mistry of mismanaging the business and even trying to seize control of the operating company.
Both sides of the argument denied the other’s claims.
It’s been a year since Ratan Tata’s death and three years since Cyrus Mistry’s death in a car accident, but the debate over the Tata Trusts’ influence on Tata Sons is far from over.
“Groups need to establish formal mechanisms to govern information sharing, board nominations and the role of the trust in influencing capital allocation,” Dalal said.
Exit
Another way this issue could be resolved is through the Reserve Bank of India’s order requiring Tata Sons to list under the size-based regulatory framework that will be introduced in 2022.
Tata Sons was required to list by September 30, but the company has been given a temporary reprieve by the central bank.
Industry sources told CNBC that the listing of Tata Sons will further deepen the red line between Tata Trusts and Tata Sons, adding that after the listing, Tata Sons’ board will have full control of the company and Tata Trusts will be downgraded to a “mere shareholder.”
Under the current structure, the chairman of Tata Sons serves as chairman of all Tata Group companies, while the chairman of Tata Trusts, which owns 66% of Tata Sons, has control over the management of Tata Sons, including the selection of the chairman, the people said.
“I don’t think the group wants to take Tata Sons public, but they will need to find a way to provide an exit to SP Group,” Dalal said.
Shapoorji Pallonji Group (SP Group) holds over 18% of Tata Sons, making it the company’s largest individual investor. The group is owned by the family of the late Cyrus Mistry and is chaired by his brother Shapoor Mistry.
The ties between the Shapoorji Pallonji Group and the Tatas are deep, not only in business terms but also in personal terms.
Mehli Mistry is Cyrus Mistry’s cousin and supported Ratan Tata when Cyrus was removed as chairman of the board of Tata Sons. Meanwhile, Noel Tata, the current chairman of Tata Trusts, is married to the Pallonji Mistry family, which owns SP Group.
SP Group is looking to exit Tata Sons, but has been unable to do so due to the illiquidity of its shares.
“They want to sell the Tata Sons stake to clear the debt,” said Ajay Lotti, founder of regulatory advisory firm Tax Compass, hinting at continuing debt concerns at SP Group.
The investment in Tata Sons is huge and could raise billions of dollars. Once listed, liquidity will increase, making it easier to find buyers.
SP Group’s exit will come as a relief to Tata Sons after Cyrus Mistry’s sudden sacking soured relations between the two companies.
But Tata’s concern is that selling its 18% stake could make Tata Sons vulnerable to takeover attempts and further reluctance to go public, Tax Compass’ Lotti said.
According to local media reports, Tata Trusts and Tata Sons are in talks for a partial exit to SP Group.
