Tata Sons looks to shed its ‘public ltd’ tag for ‘pvt ltd’

In a move which would intensify the battle between Tata Sons and its former chairman Cyrus Mistry, the holding company of the Tata Group has initiated a proposal to turn itself into a ‘private limited company’ from a ‘deemed public company’. The most significant implication of this step will be that it places restrictions on Tata Sons’ shareholders from selling their stake to external investors.

The Mistry family, which holds an 18.4% stake in Tata Sons, has objected to the proposal and may move court. Tata Sons has called a shareholders’ meeting on September 21, seeking approval to amend its Articles of Association to become a private limited company and alter its Memorandum of Association to change its name from Tata Sons Ltd to Tata Sons Pvt Ltd.

The change in Tata Sons’ legal structure requires 75% of the company’s shareholders to approve these special resolutions. The proposals will also have to be cleared by the National Company Law Tribunal. The Mistrys intend to vote against the resolutions. In a statement, Tata Sons said that the reinstatement of Tata Sons as a private company was considered by the board to be in the best interests of the company.

The Mistrys have termed the Tata Sons move as “yet another act of oppression of the minority shareholders of the company at the hands of the majority shareholders”.

In a September 14 letter to the holding company’s board of directors, the Mistrys investment arm Cyrus Investments said, “The real motive for conveying the proposed AGM (annual general meeting) is mala fide and with ulterior purposes.”

“The true effect of converting the status of Tata Sons into a private company is to introduce/reintroduce restrictions on transferability of shares which otherwise today are void and unenforceable under law and norms applicable to public companies,” Cyrus Investments said in the six-page letter. Besides Mistrys’ 18.4%, seven Tata charitable trusts hold 41.73% in Tata Sons, nine Tata Group companies have 9.81% and Tata family members and others own 30.06%.

When the Mistrys acquired the stake in Tata Sons in 1965, it was a private limited company. Tata Sons, incorporated in 1917, converted itself into a public limited company in 1975 following changes in the companies law by the government.

The change in legal structure means that the Mistrys, who are in the midst of a legal battle with Tata Sons and Tata Trusts over minority shareholder oppression and mismanagement at the holding company, will not be able to sell their shares to persons of their choice. In other words, Tata Trusts will have the power to negotiate the share transfer price. Cyrus Investments said that it has the right to take legal recourse to challenge the AGM notice.

Besides restriction on transferability, a private limited company has fewer rules and disclosures to comply with. “The move means less accountability, less transparency and less disclosures,” said Shriram Subramanian, founder & MD, InGovern Research Services.

Going by Tata Sons’ ownership structure, the requirement of 75% shareholder votes for the proposal to be passed won’t be a hurdle for the company.

Link: Times of India – 16 Sep 2017