Mumbai:Â Tata Sons Ltdâs proposal to convert itself into a private limited company from a public limited one will effectively restrict the Mistry familyâs ability to sell its stake in the Tata group holding company to external entities.
It also has the potential to escalate a feud between the 149-year-old group and its largest minority shareholder which was triggered by the October 2016 ouster of Cyrus Mistry as Tata Sons chairman.
In a letter to the board of Tata Sons, Cyrus Investments Pvt. Ltd, an investment firm of the Mistry family, has objected to the proposal, calling it âyet another weaponâ to oppress minority shareholders.
Tata Sons shareholders will vote on this proposal at the annual general meeting (AGM) on 21 September, theÂ Business StandardÂ newspaper first reported on Friday. The Mistry family firmsâCyrus Investments and Sterling Investments Pvt. Ltdâjointly own 18.4% in Tata Sons. The proposal would need the assent of at least 75% shareholders to pass.
âThe 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 norm applicable to public companies,â said the letter from Cyrus Investments. âWe urge you to withdraw the AGM notice and the proposal.â
MintÂ has reviewed a copy of the letter.
According to the Companies Act, 2013, a private firm can restrict shares changing hands, giving promoters greater control.
A Tata Sons spokesperson said, âTata Sons as a private company was considered by the board to be in its best interest.â
To be sure, currently, Tata Sonsâs Articles of Association have a clause restricting share transfer. This was âunenforceableâ under the current law, the letter said. It added that the clause should have never been included in the Articles of Association of a public company in the first place.
If Tata Sons is able to become a private company, âit would indeed dilute rights of the minority shareholders,â said Shriram Subramanian, managing director and co- founder of proxy advisory InGovern Research. âIt is a regressive step.â
The move comes nearly a year after the board of Tata Sons ousted Mistry as chairman. Subsequently, the Mistry family firms filed a suit against Tata Sons at the National Company Law Tribunal (NCLT) alleging mismanagement and oppression of minority shareholders. NCLT dismissed the suit saying that the firms did not have the 10% minimum shareholding required to file such a suit, if preference shares are taken into account. The Mistry firms then moved the appellate tribunal, which is yet to pass an order on the case.
The letter from Cyrus Investments said that given the nature of the grievances already raised in the petition, the timing of the annual general meeting notice âis a subversion of the judicial processâ.
It added that it sought to âgive such restrictions (of transferring shares) the cloak of enforceability and legality by converting Tata Sons to a private limited companyâ.
Converting a public company to a private company requires the assent of a tribunal, according to the Companies Act, 2013. The Mistry family firms will take their objections to the NCLT, a person aware of the matter said.
The stakes for the Mistry family are ârather high and they are bound to be unhappyâ, said Amit Tandon, managing director at Institutional Investor Advisory Services, a proxy advisory firm.