INDIA FILE-'Mutiny' at Tatas puts focus on shareholder rights
By Ira Dugal
Sept 22 (Reuters) - Nothing captures the collective attention in India like a corporate fight, especially if it is at one of the country's oldest and internationally best-known conglomerates.
A new power struggle erupted at the salt-to-software Tata group last week, between holding company Tata Sons and its controlling shareholder, Tata Trusts. While investors and others are watching the unfolding saga with a mix of concern and intrigue, the dispute itself is raising fundamental questions about shareholder rights and the way the group is structured.
That's our focus this week. Write to me at ira.dugal@thomsonreuters.com with your views on this extraordinary corporate battle.
And the IPO of the National Stock Exchange (NSE) draws over $10 billion in bids. Scroll down for more on that and how shares of India's biggest bourse are expected to perform upon listing later this week.
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TATA VS TATA
The Tata group, a 158-year-old conglomerate with about $265 billion in market capitalisation and a globally recognisable stable of companies including Jaguar Land Rover and Air India, is no stranger to boardroom tussles.
The last one played out publicly a decade ago, when then Tata Sons Chairman Cyrus Mistry was ousted by group patriarch Ratan Tata, who headed Tata Trusts at the time.
While the latest dispute pits the holding company against its majority shareholder, it also sets Tata Sons Executive Chairman N. Chandrasekaran against Tata Trusts Chairman Noel Tata and exposes divisions between Noel Tata and Venu Srinivasan, the two nominee directors of Tata Trusts on the board of Tata Sons.
Several key issues are at stake: the reappointment of Chandrasekaran as chairman of Tata Sons, whether the holding company should be listed, and how to provide an exit to its second-largest shareholder, Shapoorji Pallonji.
At its core, however, the dispute is about a company's board taking its largest shareholder head on, something virtually unprecedented in corporate India.
Despite Noel Tata's objections at the Tata Sons board meeting last week to Chandrasekaran's reappointment and a listing of the company, the board went ahead and voted for the proposals.
"Tata Sons' board has violated the basic governance principle of shareholder supremacy," proxy advisory firm IiAS said in a note on Friday. "The mutiny of the board against the controlling shareholder is possibly a first, and not the right precedent for corporate India."
The fight sets up a lose-lose stalemate, Shritama Bose of Reuters Breakingviews wrote. Read here.
IiAS said it was unclear how the board expected these decisions to survive a shareholder vote.
That vote is itself complicated by the fact that Tata Trusts is a collection of trusts. One of them, the Sir Ratan Tata Trust, has been unable to hold a board meeting because of a complaint pending before a state charity commissioner.
Read this explainer by Jayshree P. Upadhyay and Arpan Chaturvedi to learn more.
THE QUESTION OF LISTING
The second fundamental issue of the dispute is whether Tata Sons should be listed.
As a holding company, Tata Sons falls under the Reserve Bank of India's rules for core investment companies, which require non-bank finance companies with assets exceeding 1 trillion rupees ($10.44 billion) and public funds to list.
Over the past two years, Tata Sons has repaid its debt and sought deregistration as a non-bank finance company. Days before its board meeting last week, the RBI rejected that request without disclosing its rationale.
At the board meeting, Tata Sons said it would take steps to comply with the RBI's requirements. But Noel Tata, according to a Tata Trusts statement, argued that listing would alter the character of a group that supports extensive philanthropic activity.
Some analysts disagreed with that view.
"A holding company exercising influence over businesses of such scale cannot reasonably remain outside the governance and transparency expectations increasingly associated with systemically important financial and industrial conglomerates," governance advisory firm InGovern said in a note.
"A listing could also provide a more institutional framework for addressing differences among shareholders and trustees," InGovern said.
Tata Sons and Tata Trusts did not immediately respond to emailed requests for comment.
A listing would benefit the Shapoorji Pallonji Group (SP Group), Tata Sons' second-largest shareholder, which has long sought a path to cash out of some of its holdings. But while opposing a listing, Noel Tata also disclosed an alternative proposal from the SP Group that would provide the liquidity it needs to reduce its high-cost debt.
The disputes may well head to the courts before any resolution.
MARKET MATTERS
The NSE's $2.3 billion initial public offering was subscribed 5.7 times by the close on Monday.
Institutions bid for 12.7 times the shares on offer, while the retail investor portion was subscribed 1.4 times.
Shares of NSE will begin trading on Thursday, with the informal grey market suggesting the stock will see modest listing gains of 2% to 5%.
Read this report by Vivek Kumar M of Reuters for more.
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