Tata Son’s controversy from public (and hybrid) to private

After a huge setback at the NCLT, Cyrus Mistry has got some relief from the NCLAT. At the least, he gets to keep his shares in Tata Sons till the time NCLAT passes further directions.

What started as an oppression and mismanagement suit for sacking Mistry from Tata Sons as the chairperson, was escalated when team Tata decided to convert Tata Sons into a private company. But Tata Sons was actually born as a private company, and now its decision of moving back to one has now become an allegedly oppressive act.

Tata Sons was incorporated as a private company in 1917 under Companies Act, 1913 and continued to remain so under 1956 enactment. Particularly, three elements of Tata’s Articles of Association (AoA) made it a private company: restriction on transfer of shares, limiting the number of members to 50 and prohibition on public subscription. Through an amendment passed in 1960, this private company was compulsorily converted into a public company due to the crossing of turnover thresholds, and had become a ‘deemed public company’. It had become a deemed public company while it continued to contain the restrictions of a private company under its AoA – making it a ‘hybrid company’.

Under the current law, the 2013 enactment, an application under Section 14 needs to be filed with the NCLT for altering the AoA, to switch a public company to a private one. What is found in the NCLAT order is that the NCLT in its order wrongly noted that this application has been filed. But the Registrar has gone ahead and changed the name of the company, to a private one. From the order, it is clear that this Section 14 application was not filed, as Tatas argued that since it continues to fulfill all the criteria of a private company, it need not follow the Section 14 route.

Why does Tata want to go private? Article 75 of the AoA is one which can be invoked only upon conversion into a private company. This Article can cause Mistry to sell shares in Tata Sons. So long as Tata Sons remains public, Article 75 cannot be invoked.

Mistry camp, at the NCLT, sought to invalidate this Article as being oppressive and sought protection under Section 6 of the 2013 law, which gives the law precedence over other conflicting provisions in the company’s governing documents. The NCLT, however, did not find merit in their argument and ruled that by agreeing to subscribe to shares of Tata Sons, they also agreed to the AoA as they existed.

Among the larger question(s) of oppression and mismanagement for various allegations, the immediate question pending before the NCLAT bench is whether the act of converting the company to private without making an application under section 14, was oppressive/ prejudicial.

While this question is one which is yet to be determined, the NCLAT has offered temporary relief from the application of Article 75 of the AoA and has prevented the transfer of Mistry’s shares. Until further directions, Mistry’s shares in Tata Sons are safe.