Ever since he was removed as the chairman of Tata Sons in October, speculation has been rife on whether Cyrus Mistry will manage to continue on the boards of several group companies that he sits on. Even as Tata Sons has publicly sought his ouster from the boards of group companies, Mistry is digging his heels in. He has said he wouldn’t quit on his own.
The fight isn’t going to be easy for either party as the group companies have a diverse set of shareholders whose they will need to woo.
A VCCircle story earlier this week noted that government-owned financial institutions, such as the Life Insurance Corporation (LIC) of India, have, in the past, played a key role in boardroom battles. N M Desai, the former chairman of engineering giant Larsen & Toubro lost his job in 1989 when the then Rajiv Gandhi-led Congress government chose to back Reliance Industries promoter Dhirubhai Ambani against him. In another much publicised case from the 1980s, the government asked its financial institutions to back NRI businessman Swaraj Paul to launch a hostile bid to take control of H P Nanda-backed Escorts Ltd. The government intervention has also prevented hostile bids to succeed in the past.
Little wonder then that both the Tata group and Mistry have reportedly been trying to lobby the government for its support, ever since the controversy broke.
How can Mistry be removed as director from company boards?
Mistry is on the boards of seven listed Tata group companies. Mumbai based shareholder advisory firm Stakeholders Empowerment Services (SES) says that to remove him, an ordinary resolution must be placed before shareholders “pursuant to the special notice given by shareholder(s) as per provisions of Companies Act 2013 (Section 169 read together with section 115 and 100)”.
SES says that going forward, all the seven companies, where Mistry is a director on the board, might see an extraordinary general meeting (EGM) being called for his removal, effectively giving all shareholders a chance to vote on the issue. An ordinary resolution will need to be passed with a simple majority of those voting, and hence, Mistry may not be able to continue on the boards of companies like TCS, which are tightly held by the promoter or promoter group.
So, who owns how much in these companies?
TCS, the largest company in the Tata group is also the most tightly held listed company, with the promoters holding more than 73% shares. While foreign portfolio investors (FPIs) make up for a little over 17% of its shareholding, the rest of its ownership is almost equally divided between insurance companies and retail investors.
In the other six companies, the shareholding is more spread out, with the promoters holding between 30.8% and 38.6% share and public shareholding being divided among the aforementioned categories.
Where exactly do government owned insurers enter the game?
While just over 4% of TCS shares is held by LIC and other insurance companies, the insurers hold substantial stakes in the other six companies of the Tata Group. For instance, insurers collectively hold around 20% each in Tata Steel and Tata Power while they hold between 10.3% and 13.3% in the others.
The only companies in which private insurers, most notably ICICI Prudential, hold more than 1% share are Tata Motors and Tata Chemicals. This effectively means that a bulk of these shares are held by government insurers like LIC, General Insurance Corp, National Insurance Corp and others.
Unlike other shareholders, who are disparate, government owned shareholders typically vote as a block. This could be the single biggest deciding factor in determining whether Mistry gets to keep his position on the boards of these companies.
What are the scenarios that could play out?
The key to passing or defeating a resolution, says SES, rests in the “unity index” of non-promoter shareholders. Unless all non-promoter shareholders unite and vote against the resolution, it is unlikely to be defeated, more so because the participation of retail investors in the voting process is insignificant.
The advisory says that although it appears that retail participation in Tata Motors is high, “it is not the case as it reflects mainly outstanding ADRs (American Depository Receipts).” However, ADR holders do not have any voting rights, although the underlying equity shares that they represent, do. Effectively, the depository they represent has the voting rights, and whether the ADR holders can vote or not depends on the agreement between the company issuing the depository and the depository itself.
SES says that the following scenarios are possible when shareholders vote.
Scenario 1: All non-promoters vote against the resolution. In this scenario, a resolution to remove Mistry can be defeated in the case of Tata Steel, Tata Motors, Tata Power and Tata Chemicals, unless retail investors vote en-masse in its favour. If that happens, Mistry remains on the board.
Scenario 2: Where LIC and other insurance companies vote in favour of the resolution to oust Mistry. In such a scenario, only in Tata Motors, there could be a serious chance of the resolution being defeated, especially if the participation of other investors against the resolution goes up. As the resolution for removal will be an important one, participation is likely to be more. So, except for Tata Motors, in this scenario, Mistry will have to go.
Scenario 3: Where LIC and other government insurers abstain. In that case, if all shareholders oppose the resolution, it may be defeated in all companies other than TCS. Effectively, Mistry gets to stay on the boards of all the companies, where the resolution is defeated.
Scenario 4: Where LIC and other government insurers vote against the resolution in all companies. In such an eventuality, says SES, the resolution may face defeat across all the companies except TCS, securing Mistry’s position.
The key to victory for either side, therefore, is in the hands of shareholders, especially the institutions such as LIC.
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