'Hostile Takeover Of Tata Sons Would Be Extremely Difficult'

'The issue appears to be less about Chandrasekaran personally and more about the direction Tata Sons should take.'

The Tata Group is once again at the centre of a significant corporate governance battle -- this time involving the future of Tata Sons, the role of Tata Trusts, the position of Chairman N Chandrasekaran, and the regulatory authority of the Reserve Bank of India.

At the heart of the dispute are some fundamental questions of corporate governance: Can a majority shareholder effectively determine the decisions of a company's board?

How far can directors exercise independent judgement when their shareholders have a clearly stated position?

And what happens when the interests of a company's board, its largest shareholder and its regulator appear to diverge?

The immediate trigger is the question of whether Tata Sons must comply with the RBI's regulatory framework for an upper-layer NBFC, including the requirement to list.

That issue has brought Tata Trusts, which hold roughly 66 percent of Tata Sons, and the Tata Sons board into a difficult and potentially consequential disagreement.

The situation has also acquired another dimension with the interests of the Shapoorji Pallonji Group, which holds around 18.6% of Tata Sons, as well as questions surrounding the governance of Tata Trusts themselves.

Shriram Subramanian, founder and MD, InGovern Research Services, spoke to Syed Firdaus Ashraf/Rediff on what led to the uncertainty over Chandrasekaran's continuation, why Tata Trusts are opposed to a listing, what rights a majority shareholder actually has, where the RBI fits into this equation, and why the Articles of Association of Tata Sons could become central to the dispute.

Why did N Chandrasekaran initially decide to step down as chairman of Tata Sons and later withdraw his resignation?

On August 12, N Chandrasekaran, on his own volition, indicated that he would not seek a renewal of his term as chairman of Tata Sons after February 2027, when his current term ends.

However, it appears that other members of the Tata Sons board, including Venu Srinivasan and Harish Manwani, persuaded him to continue.

What changed between August 12 and now that led to this U-turn?

One factor appears to have been a communication from the Reserve Bank of India stating that Tata Sons would have to comply with the regulatory requirements applicable to an upper-layer NBFC, including the requirement to list.

This may have led some members of the Tata Sons board to feel that continuity in leadership was necessary, and that Chandrasekaran should therefore continue as chairman.

The Role of Tata Trusts and Noel Tata

Why is Noel Tata opposed to Chandrasekaran?

The issue appears to be less about Chandrasekaran personally and more about the direction Tata Sons should take.

Noel Tata, as chairman of Tata Trusts, represents the interests of the Trusts, which hold around 66% of Tata Sons.

Tata Trusts have been opposed to the listing of Tata Sons, while Chandrasekaran has supported complying with the RBI's regulatory requirements for listing.

The position being taken by Tata Trusts is that their concerns should be heard before Tata Sons proceeds with the listing.

Harish Salve, representing Chandrasekaran and Tata Sons, has reportedly questioned why Tata Trusts should oppose a listing when it is required by a regulatory framework.

Why doesn't Noel Tata have the power to make Tata Sons listen to him when Tata Trusts own around 66% of Tata Sons?

This is essentially a question of the distinction between shareholder rights and the fiduciary duties of directors.

Venu Srinivasan, for example, has maintained that he has to act independently as a director of Tata Sons and cannot simply act as a nominee of Tata Trusts.

Therefore, even if Tata Trusts have instructed their nominees to oppose the listing, a director may take the position that he must exercise his own independent judgement as a director.

The central question is whether Tata Trusts, despite their 66% shareholding, can direct the decisions of the Tata Sons board, or whether the directors are required to exercise independent judgement within the framework of the Articles of Association and company law.

RBI's Mandate and Shapoorji Pallonji's Interests

Why is the RBI insisting that Tata Sons be listed?

The issue dates back to the RBI's regulatory framework introduced in 2021, when Ratan Tata was still alive.

Tata Sons has been classified as an upper-layer NBFC, and the RBI framework requires entities in that category to be listed, subject to the applicable regulations.

The debate is over why Tata Sons has to be listed and whether the RBI has adequately explained the rationale for applying this requirement to Tata Sons.

What is Shapoorji Pallonji's role in this corporate battle?

The Shapoorji Pallonji Group owns approximately 18.6% of Tata Sons.

The group has significant financial obligations and requires liquidity.

It has reportedly raised substantial debt at a high interest cost.

Its Tata Sons stake is therefore an important potential source of liquidity.

A listing of Tata Sons could provide the SP Group with an opportunity to monetise at least part of its holding, subject to regulatory and other restrictions.

Is it true that Noel Tata has proposed giving the Shapoorji Pallonji Group money to repay its debt in return for Tata Sons not being listed? Is that possible?

In principle, a transaction that provides liquidity to the SP Group could be explored.

If a way were found to provide the SP Group with sufficient liquidity or to refinance part of its debt without Tata Sons being listed, that could potentially address one of the pressures surrounding the issue.

However, such an arrangement would still have to comply with the applicable regulatory, corporate and shareholder requirements.

Legal Implications and Future Outlook

What is the likely way forward?

One possibility is that the dispute could eventually reach the courts.

Another issue concerns the charity commissioner of Maharashtra, Amogh Shyamkant Kaloti, and the functioning of Sir Ratan Tata Trust.

The charity commissioner has reportedly taken action following a complaint by Venu Srinivasan, a senior trustee of Tata Trusts, concerning the appointment of perpetual trustees.

The complaint relates to the provision under Section 30A(2), which limits perpetual appointments to 25% of the total number of trustees.

With a six-member board, this would effectively permit only one perpetual trustee.

The Trust currently has three perpetual trustees -- Noel Tata, Jimmy N Tata and Jehangir HC Jehangir.

Tata Trusts may therefore first have to resolve the charity commissioner's issue.

As far as Tata Sons is concerned, the board may wait to see what position Tata Trusts ultimately takes.

What position is lawyer Abhishek Singhvi taking in defending Tata Trusts?

Singhvi's argument is based substantially on the Articles of Association of Tata Sons and the rights of Tata Trusts as shareholders.

He had argued in the Cyrus Mistry litigation that Tata Trusts possess significant rights under the Articles of Association of Tata Sons.

The argument is that Tata Trusts are shareholders of Tata Sons and are therefore entitled to exercise their shareholder rights.

Since the Trusts hold around 66% of Tata Sons, their position cannot simply be disregarded by the board.

The counterargument from Harish Salve is that Tata Trusts are not ordinary shareholders.

Given their institutional and charitable character, the relationship between Tata Trusts and Tata Sons has a broader governance dimension.

The Supreme Court settled the Tata Trusts-Tata Sons dispute in 2021. Does that mean the present matter is likely to go in Noel Tata's favour?

The 2021 Supreme Court judgment is certainly relevant, but the precise legal issues in the current dispute may be different.

The arguments will depend on the Articles of Association, the Companies Act, the RBI regulations and the specific rights and obligations of the parties.

For a layperson, the basic principle is that shareholders have significant powers over a company, including the ability, subject to the law and the Articles, to appoint or remove directors.

But that does not necessarily mean that a majority shareholder can direct every decision taken by the board.

Directors also have statutory and fiduciary duties and are expected to exercise independent judgment.

The precise balance between these two principles is likely to be at the heart of any legal dispute.

What could happen at the Tata Sons AGM? Will Noel Tata, as chairman of Tata Trusts, be able to exercise his influence because the Trusts hold 66% of Tata Sons?

A lot may depend on the position taken by the charity commissioner and on the status of the Trusts' own governance issues.

If Sir Ratan Tata Trust remains restricted from functioning, that could complicate the ability of Tata Trusts to take certain decisions.

The question at the AGM will ultimately be what resolutions are placed before shareholders and what voting rights the Trusts can validly exercise.

There are rumours on social media that the Tata Group could be taken over through a hostile move by another corporate group. Is that a possibility?

A hostile takeover of Tata Sons would be extremely difficult given its existing shareholding structure.

Tata Trusts hold approximately 66% of Tata Sons, while Tata Group companies hold another significant block.

Any outside party seeking control would therefore have to overcome a very substantial existing shareholder base, apart from the financial cost and regulatory requirements involved.

A hostile takeover is consequently a very different proposition from acquiring a conventional widely held listed company.

What is Tata Trusts' concern about listing Tata Sons?

The central concern appears to be that Tata Trusts do not want Tata Sons to be listed unless there is a compelling regulatory reason to do so.

Their position is reportedly that the RBI has not adequately explained why Tata Sons must be listed.

At the same time, if the RBI's regulatory requirement is ultimately upheld and there is no successful legal challenge or alternative arrangement, Tata Trusts may have little practical choice but to accept the listing.

The present dispute, therefore, appears to be less about whether Tata Sons can ultimately avoid regulation and more about who has the authority to determine how Tata Sons responds to that regulatory requirement -- the RBI, the Tata Sons board or Tata Trusts as its majority shareholder.