Why the Cyrus Mistry-Ratan Tata break-up is going to be a difficult one

For an association that goes back nearly a century, the much-hyped separation between the Mistrys and Tatas, wont be easy. Theres still a lot at stake

Shapoorji and Cyrus Mistry's SP Group issued a statement: "Time to separate." In the wake of earlier reports of Tata Sons offering to buy out its largest private shareholder, Mistry's assertion has been termed the "divorce" that would end a four-year-long acrimony between the sparring partners. Pundits have given deep thought on how this separation can be executed. However, it will be difficult if not impossible to shake off the century-long association of the SP Group and
Tata Group. This latest declaration still feels more like a break, not yet a divorce.

The reason is simple. SP Group still does not want to sell its 18.4 per cent stake in Tata Sons and the Tata Group will find it as challenging to buy the shares now, as it did four years ago when Cyrus Mistry was fired from his chairmanship of Tata Sons. The new turn comes because the SP Group needs fund infusion for its businesses and its biggest parcel of wealth—Tata Sons shares—is locked in legal battle. The Supreme Court recently gave orders that the shares could not be pledged. So, the group has no means to leverage it, but sell. The SP Group's statement can thus be interpreted as a notice for sale.

This in turn triggers a long-drawn process and chain reactions laid down in the founding principles or Articles of Association of Tata Sons. The end of most scenarios that play out from here finish with Mistrys not needing to sell at all and the Tatas surrendering more rights if they do. The prospect of selling brings some bargaining power and short-term relief for Mistry's with lenders.

The Mistry Group's engagement with the Tatas dates back to the 1920s when Cyrus Mistry's grandfather undertook a project to build the Tata headquarters. The family did not come into possession of shares till 1965. Then, as it is now, inducting a new shareholder required the blessing of the company board. The Mistrys got it from JRD Tata, who at the time, was Tata Sons' chairman. However, JRD Tata never meant for the Mistrys to become the company's largest private shareholder. Once a shareholder, the SP Group was free to acquire more shares and the last transaction was concluded without JRD Tata's knowledge. The founding principles, or Articles of Association, were subsequently modified so that no trade in Tata Sons shares could be concluded without ascent from the board.

The Tata Group was founded on philanthropic ideals that far exceeded the thinking of their time. Its principal promoters donated all their shares, nearly 80 per cent to the Tata Trusts with a design that the group should promote science, industry, and equanimity in India. Profit and returns have sometimes taken a backseat in these businesses. As Independent India emerged post the 1950s, rules for the Trusts changed and they came to be headed by government appointees. They did not interfere with business affairs at Tata Sons. Then came another set of changes that put Ratan Tata at the helm of the Trusts in the year 2000.

For decades, trust in the Tata brand was synonymous with one individual. First JRD Tata, then Ratan Tata. So, when Articles of Association of Tata Sons were changed again in 2014 during Mistry's tenure as chairman, to increase Tata Sons' accountability to the Trusts, it raised no alarms. Today, a decision worth more than R100 crore in any Tata company has to be voted on by Tata Sons, which in turn needs the approval of Trust appointed directors. Even as the current chairman navigates new waters, for investors the lingering presence of Ratan Tata remains. The question rekindled: Will the Tata institution survive the individual?

If the shares are bought by Tata Sons, the Trusts stand more empowered than ever before. Then for anyone investing even in group companies, who heads the Tata Trusts next, becomes an important factor. Will shareholders and partners repose the same faith in the new leadership as they have in Ratan Tata? The Income Tax Department has already questioned remuneration for Trust executives, so will talent be hard to find? What if the rules change again and an appointed government officer comes to head the Trusts? Would this person's business understanding fall in line with group objectives?

If Mistry's shares are bought by group companies, that already hold around 13 per cent, does Tata Sons become answerable to public shareholders of companies like Tata Steel and Tata Motors? Perhaps, a new, professional investor like a pension or sovereign fund could buy into Tata Sons. Apparently, some preliminary feelers to this effect were sent out a while back, but there is no suggestion of serious engagement. If the Tatas don't try this, the Mistrys certainly might. As per current rules, if the Tata fail to make a satisfactory bid for the shares or match the price of the highest bidder over a period of around a year, Mistrys would be entitled to sell outside the existing shareholder pool of Tata Sons.

It is undeniable that the SP Group has been a silent partner to Tata's philanthropic approach to business. Whether it is listed entities or an external investor that buys, focus would need to shift to higher return on investment. Tata Sons will need to yield more minority shareholder rights. The very changes to enable a purchase will unlock financing options for the SP Group, and perhaps abort the impending need to sell.

Deepali Gupta is the author of Tata Vs Mistry: The Battle for India's Greatest Business Empire. You can reach her at: tatavsmistry@gmail.com

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