Cyrus P Mistry did not follow the requisite protocol on matters of critical interests to Tata Trusts, the majority shareholder of Tata Sons, the Mumbai Bench of the National Company Law Tribunal (NCLT) said in its order.
Mistry did not call for a board meeting of Tata Sons prior to Tata Power’s Rs 90-billion deal with Welspun, even as he sent the papers to the directors. This was in contravention of Article 121 A of Tata Sons’ Articles of Association. Tata Power had announced on June 12, 2016 that it would acquire Welspun in a Rs 92.49-billion deal and completed the process in September. JM Financial acted as the exclusive transaction adviser to Tata Power on the deal.
According to the Article, any matter affecting the shareholding of Tata Trusts in the holding company needs to be discussed by the board before any of the group companies decides in favour of making an investment exceeding Rs 1 billion. This is particularly applicable to those decisions that are not part of the annual business plan.
“Such issue should have come before the board of Tata Sons prior to Tata Power Company taking a decision to acquire such a project, because it is Tata Sons that has to provide debt to finance acquisition,” the order said. It pointed out that though the papers were sent to the nominee of Tata Trusts on Tata Son’s board, Mistry did not hold any board meeting before Tata Power Company signed the documents in respect to Welspun transaction on June 12, 2016 itself.
In his petition to the NCLT, Mistry had alleged excessive interference of Tata Trusts. In his shareholder missive, Mistry had accused Ratan Tata and Noshir Soonawala of taking the veto rights of the trust-nominated directors as their entitlement to dictate to these directors how Tata Sons should conduct itself.
“On looking at this transaction, it is evident that Tata Sons did not hold the board meeting before Tata Power Co proceeded with the transaction on 12.6.16. Let alone exercising the powers under Article 121-A, when substantial investment to such acquisition was to be made by Tata Sons,” according to the order. It was evident that the approval was really a “fait accompli as stated by the answering respondents because they could not express anything except approving the acquisition, since TPCL had already signed papers over the acquisition of Welspun on 12.6.16 itself.”
The order also justifies Tata Trusts’ nominee directors Nitin Nohria and Vijay Singh speaking to Ratan Tata before giving their go-ahead on the resolution. “Can giving such direction to the Trusts’ nominee directors to proceed with resolution amounts to interference with the affairs of the company?” said the order. It added that since Mistry went ahead with the proposal without seeking consent of the Trusts or its nominee directors, his action was “prejudicial to the interest of the company.”
“Sequencing (of events) was less critical as long as the decision taken was a right one,” said Amit Tandon, founder and managing director at Institutional Investment Advisory Services (IiAS).
For all the controversy over the deal within the boardroom, the Welspun buyout has been a big booster for Tata Power’s renewable business. The after-tax profit of Tata Power’s renewable portfolio jumped to Rs 720 million in the January-March quarter of 2017-18 against Rs 140 million a year ago, mainly due to refinancing of loans in acquired assets of Welspun Renewables.
The company said the after-tax profit of its renewable portfolio was affected by lower fixed cost absorption in newly commissioned projects under stabilisation.