Aryama Sundaram, AM Singhvi in Tata v Mistry before National Company Law Tribunal

Cyrus Mistry has finally put to rest the speculation, with a petition filed in the National Companies Law Tribunal (NCLT). The petition has been filed under Section 241 of the Companies Act, 2013 (Act) by Cyrus Investments Pvt. Ltd. and Sterling Investment Corporation Pvt. Ltd. As per the petition the two companies collectively hold approximately 18.37% equity in Tata Sons, thus qualifying the criteria stipulated in Section 241 read with Section 244 of the Act.

The petition was listed before the NCLT, with senior counsel Aryama Sundaram (for the petitioners) and Abhishek Manu Singhvi (for the respondents) appearing in a hearing that lasted more than ninety minutes today.

The petition, filed by Deswai & Diwanji,  states at the very outset that,

 “It would be just and equitable to wind up Respondent No.1 under Section 241 since the grounds stated herein fully and completely make out such a case but such winding up would unfairly prejudice the interest of Petitioners.

The petition ends with a reference to two landmark judgments of the Supreme Court of India, which clearly lay down the grounds for winding up in case of oppression and mismanagement.

Who are the parties

The list of respondents includes, Tata Sons, Ratan Tata, Cyrus Mistry himself, and most of the directors on the board of Tata Sons, who are nominated by the Trustees of the Sir Ratan Tata Trust, a public charitable trust. And, among others, the major points iterated in the petition include the damage caused to the public at large due to the allegedly oppressive practices adopted at the board level by these very directors, which is essentially a breach of the fiduciary duty they owe to the trust and its beneficiaries.

The petition is an extensive document which is not only retaliatory in nature, but also seeks to dent the Tata reputation of holding the ‘highest standards of good governance’. It narrates a number of instances, one by one, which may have a huge impact on the reputation of one of the country’s biggest conglomerates.

What did the NCLT say?

What was interesting was, judicial member B.S.V Prakash Kumar’s inclination to keep challenging the ‘maintainability of the petition’. And this was very briefly pointed out by Abhishek Manu Singhvi during his 10-minute appearance on behalf of the respondents (apart from Mistry), where he pointed out that Section 244 of the Act speaks of members holding not less than one-tenth of the ‘issued share capital’, and by that standard, the petitioners in fact, hold a very small percentage. Prakash also told Singhvi to keep ‘maintainability’ as the first issue during the course of his arguments.

So what does the petition allege?

Some of the contentious issues, as alleged in the petition, that came up before the NCLT were as follows:

Violation (and misuse) if the Articles of Association

One of the points which was discussed at length,

The AoA used as an instrument of oppression

The very ouster of Mistry from his position as the Chairman is, allegedly, tainted with illegality. While the Articles of Association (AoA) required the constitution of a Selection Committee for such an action to be taken, no such committee was constituted. Further, Mistry’s petition claims that, no reasons whatsoever were provided for such ouster. Senior counsel Aryama Sundaram, took every chance he could at the hearing, to point out this violation

One of the primary points of contention is the abuse of the provisions of the AoA. The said provisions, which although prima facie sought to create an enabling governance framework for securing interests of the trusts, (by means of including trustee-nominated directors on board) were ultimately used, Mistry’s petition says, as a tool by Ratan Tata to control these ‘shadow directors’ who acted as mere puppets.

The nominee directors’ loyalty lies with the Trustees of the Tata Trusts and not with Respondent no. 1 [Tata Sons]

The provisions of the AoA, as stated by Sundaram, have been “misused to give powers to the majority shareholders to subvert the interests of the minority shareholders and interests of the company

To that extent, it has been prayed before the NCLT to conduct an investigation into the role of the Trustees, and a subsequent striking down of those provisions of the AoA which have enabled the Trustees and Ratan Tata to interfere with the functioning of Tata Sons.

Forensic Audit – Tata Teleservices and C. Sivsankaran

The petition alleges that Ratan Tata’s relationship with C. Sivasankaran and his companies, provided them ‘ex-gratia favours’ without there being any ‘quid pro quo’ for the shareholders of Tata or any other group company. This relationship between the both provided Sterling Infotech Ltd., shares in Tata Teleservices at throw away prices of ₹17 per share (compared to ₹26 which was what was charged to Temasek Holdings immediately after the transaction) thereby giving an undue benefit of ₹468 crores to Sterling.

This also resulted in financial benefits to Sterling when DoCoMo’s 2008 offer to purchase resulted in Sterling selling it’s shares at ₹117.81 per share, thereby enriching Sterling with a profit of ₹209 crores in less than three years.

It has, therefore, been prayed before the NCLT that a forensic audit be conducted into the financial dealings with the parties mentioned above, to recover losses suffered to the real stakeholders and, refer such audit to the Serious Fraud Investigation Office of the Ministry of Corporate Affairs (MCA).

Alleged violation of Insider Trading Regulations

The petition alleges that Ratan Tata, Lord Kumar Bhattacharya, and several other Trustees of the Tata Trusts were regularly reviewing the operations of various companies in the Tata Group despite not being directors of any of the companies forming a part of the Tata Group. The petition further states that they have procured commercially sensitive information including unpublished price sensitive information.

The petition states that this is a violation of the SEBI (Prohibition of Insider Trading) Regulations of 2015, and hence, an investigation into such instances has been asked for.

Mehli Mistry & Tata Power

Mistry’s petition has also raised questions over Tata’s transactions with Mehli Mistry, who also happens to be a close friend of Ratan Tata. The petition alleges that these transactions were not on arms length basis, resulting in an unjust enrichment of these entities at the expense of Tata Power.

It has therefore, been prayed for a forensic audit between all financial dealings between Tata Power and Mehli Mistry, which is to be further referred to the MCA’s Serious Fraud Investigation Office.

Air Asia “fraud”

The petition states that negotiations for partnering with Air Asia had taken place before Mistry’s appointment as Executive Chairman. A forensic audit conducted by Deloitte Haskins and Co. had revealed fraudulent transactions to the tune of ₹22 crores entered into by Air Asia India with non-existent parties in India and Singapore

Mr. Venkatraman, the managing trustee of the Sir Ratan Tata Trust and Respondent No.20, allegedly played a primary role in these transactions, something that the Enforcement Directorate has been aware of. The petition has been prayed to conduct another forensic audit to reinvestigate these transactions.

And as pointed out during the hearings, Mistry’s pursuit to “investigate these serious acts of financial impropriety and frauds”, was allegedly the main reason for his removal, without assignment of any reasons.

The Interim Relief

Three interim relief measures  laid out in the petition, included

  • Tata to not issue any further securities which will result in dilution of present paid-up equity capital held by petitioners;
  • An order restraining all respondents (apart from Mistry) from removing Mistry from his position of directorship and;
  • Making any changes to the AoA without the consent of the NCLT.

It was decided, by consent, that these interim reliefs (or any applications) be foregone, and the respondents were granted fifteen days for filing their reply. Cyrus Mistry, who is also a respondent, may file his reply within one week’s time.

The final hearings for this matter are scheduled for 31 January and 1 February, 2017.

A press statement issued by Tata Sons claimed that the petition was non-maintainable.