Why the Tata-Mistry row may make boards of group firms ‘dysfunctional’

The public row that has erupted ever since the Tata Group sacked Cyrus Mistry as its chairman and brought former boss Ratan Tata back at the helm could make boards of group companies in India “dysfunctional,” says a leading proxy advisory firm.

Mumbai based Institutional Investor Advisory Services (IiAS), which advises minority shareholders, says that the manner in which boards of Tata Group companies are divided in their support for Mistry or his predecessor Tata, could leave them dysfunctional. This, IiAS says, in a report released late on Monday, could have “operational implications for the companies”.

IiAS further says that in the imbroglio that has erupted, the Tata group “has left itself with no option but to push for his (Mistry’s) removal from the boards of group companies”.

The report says that “there is now a real possibility that boards of listed companies may choose to ignore Tata Sons (the group holding company).” 

“This is likely to make lenders nervous, and they may show restraint in extending any further credit, until there is clarity regarding the evolving relationship between Tata Sons and the operating businesses,” it goes on to say. 

“The reasoning behind Tata Sons’ decision to remove Cyrus Mistry as Chairperson and Executive Directors is yet unknown publicly: Tata Sons’ board is asking investors to blindly trust them,” the report, which has been scathingly critical in the manner in which Mistry was removed, says. 

This comes even as news reports say that Mistry is likely to dig his heels in and not resign from the boards of listed Tata companies including TCS, Tata Motors, Tata Steel, Indian Hotels, Tata Power, and Tata Chemicals. Moreover, Mistry’s stance has been bolstered after six independent directors on the board of Indian Hotels publicly espoused support for him. “Stakeholders are baffled by this discord, not knowing which side to believe – the independent directors of listed Tata company boards, or Tata Sons,” IiAS notes.

As of 31 March 2016, the Tata group of companies had outstanding debt aggregating around Rs 2.5 trillion, of which about 24% is due within twelve months, the IiAS report notes. “Consequently, it has implications for India’s banking system,” it says. 

IiAS further says that in the event that Cyrus Mistry were to continue as the chairman on the boards of companies despite the Tatas wanting him out, “Tata Sons’ control over the listed companies may diminish and the question will be: are these then Tata companies?”

“At the extreme, this may create an alternate power structure raising fear of a throwback to when Ratan Tata took control after battling satraps including Russi Modi, Ajit Kerkar, and Darbari Seth,” it says. 

The proxy advisory says that apart from all the media speculation, Tata Sons’ silence on the real reasons behind Mistry’s ouster “is possibly haemorrhaging the current chain of command within the group”. 

“With public perception veering towards Cyrus Mistry, the Tata Group needs to provide factual and cohesive information supporting its decision to balance the discourse. Else it must back down,” IiAS says. 

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