16 December 2016

the CornerOffice

Tata-Mistry boardroom battle A compilation of key developments

The Tata Group, India’s largest conglomerate group, has recently witnessed several differences of opinion among its top management. On October 24, 2016, Tata Sons announced the ouster of Mr Cyrus Mistry as its Chairman (though he remains a director on the board). Non- performance, attempting to gain control, and taking critical decisions without keeping Tata

Sons’ board informed were cited as the reasons. On requisition from Tata Sons, various Tata Group companies have called for an EGM to evict Mr Mistry as a director. Institutional investors’ votes are likely to play a decisive role in the outcome of this resolution in some of the companies. We summarize the series of events /relevant information that investors might

find handy for their decision making.

Tata trusts have significant say in India’s largest group SHP of Tata Sons Ltd.  The Tata Group, which includes among others, 26 listed entities accounting for ~7% of the BSE’s total market capitalization, is India’s largest conglomerate group. Tata Sons is the Group’s unlisted holding company. About 66% of Tata Sons’ equity capital is held by philanthropic trusts endowed by members of the Tata family. Tata trusts have the power to appoint one-third of Tata Sons’ directors. Any item that requires approval of Tata Sons’ board needs to be ratified by a majority of its trust- nominated directors. Further, Tata trusts have the power to nominate majority of members on the committee constituted for appointment/removal of the Chairman.

Tata Sons ousts Mr Mistry from Chairmanship

 On October 24, 2016, Tata Sons’ board ousted Mr Cyrus Mistry from Chairmanship, citing non-performance, attempting to gain control, and taking critical decisions without keeping the board informed. Since then, Mr Mistry has made counter- Market cap of 26 listed Tata grp Cos (INR b) representations citing legacy issues, lack of freedom, and other issues relating to the Group’s functioning.

Institutional investors to play decisive role at EGMs  Mr Mistry was the Chairman of seven listed Tata Group companies before being ousted as Chairman of Tata Sons. Since then, he has lost three of these chairmanships. Further, six listed Tata Group entities have called EGMs to evict Mr Mistry from directorship. Such a resolution requires a simple majority approval of shareholders voting. We note that institutional ownership (Refer Exhibit 2) is Source: Capitalline significantly high in all the companies (except TCS); institutional investors, will therefore, play a critical role.

Sandeep Gupta ([email protected]); +9122 3982 5544 Mehul Parikh ([email protected]); +91226129 1558 / Somil Shah ([email protected]); 9122 3312 4975

Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. the Corner Office Timeline of significant events at Tata Group Below is the timeline of events relating to Mr Mistry’s ouster.

Exhibit 1: Timeline of events concerning Tata group Date Event 8-Aug . Mr Ratan Tata, Chairman of Tata Trusts, nominates Mr Venu Srinivasan and Mr Ajay Piramal as additonal directors on Tata Sons’ board. 25-Aug . At the AGM of Tata Sons, Mr Srinivasan and Mr Piramal are confirmed as directors by shareholders. 26-Aug . Mr Amit Chandra is nominated as a director in Tata Sons by Tata Trusts, which have the power to recommend one-third of the board of directors in the holding company. 24-Oct . Mr Cyrus Mistry is ousted as Chairman of Tata Sons and replaced by Mr Ratan Tata as Interim Chairman. A search committee is constituted to find a replacement. . The group executive council (GEC), which advised the Chairman, is disbanded. Mr Nirmalya Kumar, Mr Madhu Kannan and Mr NS Rajan are asked to leave, while Mr Mukund Rajan and Mr Harish Bhat are retained. 25-Oct . Mr Mistry writes an email to the board of Tata Sons, which gets leaked. In his email, Mr Mistry warns of a potential USD18 billion write-down faced by the Group. . Mr Ratan Tata calls for a meeting of Tata Group CEOs. Also meets investors to assure them that it is “business as usual.” . The Tata Group files caveats in the courts seeking advance notice from Mr Mistry if in case Mr Mistry were to initiate legal action. 1-Nov . Mr Mistry’s office releases a statement rebutting allegations that he kept the Tata trustees in the dark on transactions such as Tata Power Company’s purchase of Welspun Renewable Energy and his handling of a spat with NTT DoCoMo Inc. . Mr Ratan Tata writes a letter to the staff of Tata Group companies saying that the removal of Mr Mistry was “absolutely necessary for the future success of the Tata group”. . Indian Hotels says that Mr NS Rajan has resigned from its board. Tata Chemicals informs bourses that Mr Nirmalya Kumar has stepped down from its board. 4-Nov . Independent directors of Indian Hotels unanimously back Mr Mistry as Chairman of the company. 5-Nov . Tata Motors defends and clarifies credit and accounting practices related to the Nano car and Tata Motors Finance, its vehicle finance arm. 10-Nov . Tata Sons replaces Mr Mistry as Chairman of Tata Consultancy Services with Mr Ishaat Hussain as Interim Chairman. Separately, it calls for a shareholders’ meeting of Indian Hotels to pass a resolution for the removal of Mr Mistry as director. Tata Sons releases a nine-page statement detailing reasons why Mr Mistry was ousted. . It accuses Mr Mistry of betraying the trust reposed in him and seeking to control the main operating companies of the Tata Group “to the exclusion of Tata Sons and other Tata representatives”. . Independent directors of Tata Chemicals, including Mr Nusli Wadia, back Mr Mistry as Chairman, citing their evaluation of his performance for the past couple of years. 11-Nov . Tata Sons moves resolutions to eject Mr Mistry and Mr Wadia as directors of Tata Steel, Tata Chemicals and Tata Motors. . Mr Bhaskar Bhat, a non-independent director on the board of Tata Chemicals, resigns, saying the content in the statement by independent directors ‘dilutes’ his views expressed in the board meeting. 13-Nov . Mr Mistry’s office rebuts charges that he was trying to gain control of Tata firms; says a new structure was created with an eye on improving transparency and reflects “generational change”. . Tata Sons says it will do whatever is necessary to deal with the fallout of Mr Mistry’s ouster; asks independent directors to ensure future of Tata companies and interest of all stakeholders is protected. 14-Nov . Independent directors at Tata Motors refuse to take sides, saying the auto maker’s board was collectively responsible for all decisions relating to strategy and operations. 15-Nov . Mr Cyrus Mistry questions Tata Son’s investments in certain companies, high public relations (PR) costs, the compensation of Ratan Tata and the practice of directors drawing commissions from operating companies. . Seven out of ten directors at Tata Global Beverages board meeting vote for removal of Mr Cyrus Mistry as Chairman. 17-Nov . TCS board meets and fixes December 13 as the date for the extraordinary general meeting to remove Mr Mistry as director.

16 December 2016 2 the Corner Office Date Event 21-Nov . TCS issues EGM notice; says company board agrees with Tata Sons’ explanation seeking Mr Mistry’s removal. Mr Mistry’s conduct, upon his removal as Executive Chairman of Tata Sons, has caused enormous harm to Tata Group, company and stakeholders, including employees and shareholders, says the filing to BSE. . Mr Nusli Wadia writes a letter to Tata Sons directors saying that the move to seek his expulsion is “false, defamatory, baseless and libelous”, pointing out that the allegations have been made with intent to harm his reputation; gives Tata two days’ notice to withdraw resolution. 22-Nov . Mr Cyrus Mistry claims Mr Ratan Tata once tried to sell TCS to IBM. 23-Nov . Mr FC Kohli clarifies that Tata Group had no intentions to sell TCS. . Mr B Muthuram says “surprised and very sad” about Corus allegations; Tata Steel’s long-term strategy was to grow inorganically. 25-Nov . Tata Steel passes a circular resolution to remove Mr Mistry and replaces him with Mr O P Bhatt as Interim Chairman. . Tata Global Beverages passes circular resolution to remove Mr Cyrus Mistry as Chairman. 5-Dec . Mr Cyrus Mistry makes a representation to shareholders of several Tata Group companies; urges them to support him. Further, says Tata Group is nobody's personal fiefdom. . Requests for government intervention in the functioning of Tata Trusts. 7-Dec . Mr Ratan Tata appeals to shareholders to support the EGM resolution, removing Mr Mistry as director of Tata Group companies. . Further, says Mr Mistry's presence on the boards of Tata Group companies is a serious disruptive influence, which can make them dysfunctional, given his open hostility towards Tata Sons. 12-Dec . Mr Cyrus Mistry removed as director of Tata Industries Ltd. (an unlisted entity) 13-Dec . In TCS’ EGM, the majority shareholders vote to remove Mr Mistry as director of the company. 14-Dec . Mr Cyrus Mistry removed as director of Tata Teleservices (unlisted entity). Source: Press releases, Company, MOSL

Exhibit 2: Shareholding pattern of concerned Tata Group companies (%) Tata Global Particulars Tata Motors Beverages Tata Power Indian Hotels Tata Steel Tata Chemicals TCS* EGM date 22-Dec-16 - 26-Dec-16 20-Dec-16 21-Dec-16 23-Dec-16 13-Dec-16 Promoters 33 36 33 39 31 31 73 Institutions 41 35 51 39 42 48 22 Central Government 0 0 0 - 0 1 0 Non-institutions 26 30 16 22 27 21 4 Total 100 100 100 100 100 100 100

Note: SHP as on 30th Sep 2016. Source: Company, MOSL *Resolution for removal of Mr Mistry as director has been approved in the EGM

16 December 2016 3 the Corner Office Tata Group – the largest conglomerate in India  The Tata Group is India’s largest conglomerate groups. The 26 listed Tata Group entities account for ~7% of BSE’s total market capitalization. Any significant events in the Group are likely to impact its ~4m shareholders.

Exhibit 3: Tata Group – the largest conglomerate in India

~7% of BSE's total market capitalization

INR7,831b market captialization of 27 listed Tata group companies

~4m Shareholders across all companies

*Market cap as on 15th December 2016 Source: Company, Capital Line, MOSL

Exhibit 4: Market capitalization and SHP of listed Tata group companies Market Cap Institutional Company Promoter Others Total (INR b) Investors TCS 4,452 73% 22% 4% 100% Tata Motors 1,489 33% 41% 26% 100% Tata Motors-DVR 151 0% 85% 15% 100% Tata Steel 407 31% 42% 27% 100% Titan Company 280 53% 27% 20% 100% Tata Power Co. 212 33% 51% 16% 100% Tata Comm 180 75% 20% 5% 100% Tata Chemicals 122 31% 48% 21% 100% Voltas 107 30% 50% 20% 100% Indian Hotels 98 39% 39% 22% 100% Tata Global 79 34% 37% 29% 100% Trent 66 33% 43% 25% 100% Tata Elxsi 45 45% 15% 41% 100% Rallis India 38 50% 19% 31% 100% Tata Inv.Corpn. 31 73% 6% 21% 100% Tata Coffee 21 57% 6% 36% 100% Tata Tele. Mah. 12 75% 1% 24% 100% Tata Sponge Iron 9 55% 4% 42% 100% Tata Metaliks 9 50% 4% 46% 100% Tinplate Co. 8 75% 2% 23% 100% Oriental Hotels 4 62% 17% 21% 100% Auto. Corp.of Goa 4 54% 1% 46% 100% TRF 2 34% 8% 58% 100% NELCO 2 50% 5% 45% 100% Benares Hotels 1 63% 0% 37% 100% Automotive Stamp 1 75% 3% 22% 100% Tayo Rolls 1 73% 0% 27% 100% Total market capital 7,831

Note: SHP as on 30th Sep 2016, Market cap as on 15th December 2016 Source: Capital Line, MOSL

16 December 2016 4 the Corner Office

Tata Sons – unlisted, yet highly influential  Tata Sons is the promoter of the Tata Group and holds significant stake in group companies. It is not listed on stock exchanges.  It also owns the Tata brand and several other Tata trademarks registered in India and around the world. These are used by various Tata companies under a license from Tata Sons.

Tata Trusts – primary promoters of Tata Sons…  About 66% of Tata Sons’ equity capital is held by philanthropic trusts endowed by members of the Tata family. The largest of these trusts are the Sir Dorabji Tata Trust and the Sir Ratan Tata Trust.

Exhibit 5: Shareholding pattern of Tata Sons Equity shareholders of Tata Sons Holdings Sir Dorabji Tata Trust 28.0% Sir Ratan Tata Trust 23.6% 65.9% Other allied Tata Trusts 14.4% Shapoorji Paloonji group 18.4% Others (Primarily Investment arm, Tata group companies 15.7% and family members of Tata Group) Total 100%

Source: ROC, MOSL

Exhibit 6: Tata Trusts that own majority of Tata Sons

• Sir Ratan Tata Trust • Tata Education and Development Trust Sir Ratan Tata Trust & Allied • Navajbai Rata Tata Trust Trusts • Sarvajanik Seva Trust • Bai Hirabai J.N. Tata Navsari Charitable institution

•Sir Dorabji Tata Trust • JRD Tata Trust • Jamsethji Tata Trust • RD Tata Trust Sir Dorabji Tata Trust & • Lady Tata Memorial Trust Allied Trusts • Tata Social Welfare Trust • Tata Education Trust • The JRD & Thehma J Tata • JN Tata Endownment

Source: Company, MOSL

16 December 2016 5 the Corner Office

…have significant control  Tata Trusts have powers to appoint one-third of the directors of Tata Sons, as long as the Trusts have at least 40% shareholding in Tata Sons.  Further, the committee for appointment/removal of Chairman of the Board of Tata Sons has majority representation of Tata Trusts (3 out of 5 committee members to be nominated by Tata Trusts).  The majority of the nominated directors of the trust have to approve any item that requires approval of the Tata Sons board (like an annual plan, five-year strategic plan, proposed investments exceeding INR1b if not approved by annual plan, proposed debt if it exceeds twice the net worth of Tata Sons, matters affecting shareholding of Tata Trusts, exercise of voting rights by Tata Sons in any Tata company, appointment of a representative of Tata Sons).  While these powers help protect the interests of the Trusts, they also makes the Chairman not just answerable to the Tata Sons board, but also to the board of Tata Trusts.  The Tata Sons board currently comprises of 12 members; of these, 5 members have been appointed during FY17. We note that of the new appointees, two members have been inducted after October 24, 2016 (post ouster of Mr Cyrus Mistry as Chairman).

Exhibit 7: Composition of Tata Sons board New appointees Old appointees (Before ouster of Mr Cyrus Mistry) (After ouster of Mr Cyrus Mistry) Mr Ratan Tata (Interim Chairman) Mr Ajay Piramal # Mr N Chandrasekaran * Mr Cyrus Mistry (Nominated by Shapoorji Paloonji Group) Mr Venu Shrinivasan # Mr Ralf Speth * Mr Ishaat Hussain Mr Amit Chandra ^ Mr Vijay Singh Mr Nitin Nohria Mr Ronen Sen

Ms Farida Khambata Note- #: appointed on August 25, 2016; ^: appointed on August 26, 2016; *: appointed on October 25, 2016 Source: Company, MOSL

Mr Mistry appointed as Chairman in 2012  A committee comprising of Mr R K Krishna Kumar, Mr N A Soonawala, Ms Shirin Bharucha, and Lord Kumar Bhattacharya had unanimously decided that Mr Cyrus Mistry be appointed as the Chairman of Tata Sons after the retirement of Mr Ratan Tata in December 2012.  On his appointment, Mr Mistry had stated, “I am aware that an enormous responsibility, with a great legacy, has been entrusted to me. I look forward to Mr Tata’s guidance in the year ahead in meeting the expectations of the group.”  Mr Ratan Tata had at that time praised Mr Mistry for his leadership qualities, saying that he was impressed with Mr Mistry’s "astute observations and humility" and that the "quality and caliber" of Mr Mistry's participation had impressed him.

16 December 2016 6 the Corner Office Tata Sons ousts Mr Mistry from Chairmanship in Oct-16

 On October 24, 2016, Tata Sons’ board ousted Mr Cyrus Mistry from Chairmanship, citing non-performance, attempting to gain control, and taking critical decisions without keeping the board informed.  Following are the highlights from various press releases and media articles citing reasons for Mr Mistry’s ouster:

 Non-performance  Dividends received from all the 40 Tata Group companies (ex TCS) have continuously declined from INR10b in FY13 to INR7.8b in FY16.  Tata Sons would have reported operating losses for the last three years, but for dividend received from TCS.  Over FY12-15, expenses on staff increased from INR0.8b to INR1.8b, while other expenses have increased from INR2.2b to INR2.9b.  Impairment provisions increased from INR2b in FY13 to INR24b in FY16.  No significant divestments from Tata Sons’ portfolio, despite a planned list of divestments.  No major improvement in the performance of three major problem companies – Tata Steel Europe, Tata Teleservices / DoCoMo, and the Indian operations of Tata Motors.  Group indebtedness has increased by INR699b to INR2,257b over the last four years.  Despite huge investments by companies, the returns are not visible in increased profits.

 Attempting to gain control  Mr Mistry remained the only Tata Sons representative on the board of Indian Hotels (IHCL), limiting Tata Sons’ ability to exercise influence and control on IHCL.

 Taking critical investment decisions without keeping Tata Sons board informed  Critical investment decisions such as Tata Power’s purchase of Welspun Renewable Energy were made without keeping Tata Sons board in the loop.  Unimpressive handling of the spat with NTT Docomo Inc.

Mr Mistry’s representation on the issue  Since his ouster as the Chairman of Tata Sons, Mr Mistry has made several representations to counter the above, citing problems from the past, lack of freedom, and other issues relating to the Group’s functioning. He has also requested the government to intervene in the functioning of Tata Trusts.  We have summarized below extracts from several letters (to Tata Sons board and shareholders of certain Tata companies), press releases and media statements by Mr Mistry:

16 December 2016 7 the Corner Office  Lack of freedom  Mr Mistry says he was pushed into the position of a 'Lame Duck' Chairman.  “Nano” has consistently lost money. Emotional reasons have kept the Group from closing down the Tata Nano Project.  Mr Mistry had made his objections known on the airline venture with AirAsia. Was promised Tata Sons’ investments in Air Asia India would be capped at 30% of equity. However, the stake was later increased to 49%.

 Problems from the past  Original Tata Docomo deal structure raises many questions about its prudence.  Tata Power aggressively bid for the Mundra Project. Today, it carries risk of considerable impairment.  Tata's decision to acquire steelmaker Corus for more than USD12 billion, when a year earlier it was available at half the price, went against the reservations of some board members and senior executives.  Others  A realistic assessment of five Tata companies – IHCL, Tata Motors, Tata Steel Europe, Mundra and Tata Tele – can lead to ~USD18b write-down.  Mr Ratan Tata had pitched for selling TCS to IBM, a ‘near death experience’ for the Group’s crown jewel.  Mr Mistry questioned Tata Sons (a) investments in certain companies, (b) high public relations expense, (c) Mr Ratan Tata’s compensation, and (d) the practice of directors drawing commissions from operating companies.  Nano project supplies equipment to a company that Mr Ratan Tata has a stake in.

Seven listed companies directly impacted  Of the 27 listed Tata group companies, seven companies had Mr Cyrus Mistry on their board before he was ousted from the Chairmanship of Tata Sons.

Exhibit 8: Companies having/had Mr Cyrus Mistry as Chairman/Director

Tata Tata Global Indian Tata Power Motors Beverages Hotels

Tata Tata TCS Steel Chemicals

Source: Company, MOSL

16 December 2016 8 the Corner Office Corporate actions at Tata Group companies  These seven listed entities have witnessed several corporate actions recently. Further, many of the Tata Group companies having Mr Mistry on their board have been given notice to call for an EGM for removal of Mr Mistry from directorship.  Below is a highlight of events that have happened in the immediate past as well as those on the agenda of upcoming EGMs.

Exhibit 9: Events at listed Tata Group entities involving Mr Cyrus Mistry Sr. Company Present Outcome of board meeting / resolutions adopted / Upcoming events No. Chairman special events 1 TCS Mr Ishaat Hussain (a) Tata Sons nominates Mr Ishaat Hussain as the Chairman of the Board of Directors of the Company in place of Mr Cyrus P Mistry on November 10, 2016. (b) Shareholders’ EGM on December 13, 2016 passes resolution to remove Mr. Mistry as a director. 2 Tata Motors Mr Cyrus Mistry Independent directors at Tata Motors refuse to take EGM to be convened on December 22, sides, saying the board was collectively responsible 2016 for removal of Mr Cyrus Mistry for all decisions relating to strategy, operations and and Mr Nusli Wadia as Directors. business, which were unanimous and executed by the Chairman and management accordingly. 3 Tata Chemicals Mr Cyrus Mistry (a) Mr Bhaskar Bhat, Non-Executive, Non Independent EGM to be convened on December 23, Director resigns from the Board with effect from 2016 for deliberating removal of Mr November 10, 2016. Cites reason as ignorance of Cyrus Mistry as Director. concerns raised by him by the board. Nirmalya Kumar resigns as Director on November 1, 2016. (b) Independent directors unanimously back Mr Cyrus Mistry as Chairman. 4 Tata Global Mr Harish Bhat (a) 7 out of 10 directors vote for removal of Mr Cyrus Beverages Mistry as Chairman. (b) Mr Harish Bhatt, Non-Executive Director, appointed as Chairman. 5 Indian Hotels Mr Cyrus Mistry Independent directors unanimously express full EGM to be convened on December 20, confidence in Chairman, Mr Cyrus Mistry and praise the 2016 for deliberating removal of Mr steps taken by him in providing strategic direction and Cyrus Mistry as Director. leadership to the company. N S Rajan resigns as Director (wef October 28, 2016). 6 Tata Steel Mr O P Bhatt Mr O P Bhatt replaces Mr Cyrus Mistry as EGM to be convened on December 21, Chairman on November 25, 2016. 2016 for deliberating removal of Mr Cyrus Mistry and Mr Nusli Wadia as Directors. 7 Tata Power Mr Cyrus Mistry Mr Cyrus Mistry remains Chairman post the board EGM to be convened on December 26, meeting on November 29, 2016, as no resolution 2016 for deliberating removal of Mr

brought by any director concerning his removal. Cyrus Mistry as Director. Source: Company, MOSL

Institutional investors to play decisive role at EGMs  To evict Mr Cyrus Mistry as a director (nominee of Tata Sons), EGMs have been called for in various Tata Group companies. We highlight that institutional investors will play a critical role in the decision making in few of the companies.  Following is the process to be followed for removal of a director.  A special notice has to be given to the company to convene an extra- ordinary general meeting of its shareholders to consider the removal of the concerned director by shareholder/s holding not less than 1% of voting rights or shares with paid-up capital being not less than INR0.5m.  An ordinary resolution is required to be passed with simple majority (implying 51% of votes in favor by voting shareholders).

16 December 2016 9 the Corner Office

 All the shareholders including the ones giving the special notice to convene the meeting are eligible to vote.  In TCS’s EGM held on December 13th, 2016 the majority shareholders voted to remove Mr. Mistry as director of the company.  We note that in several of these companies, institutional ownership is quite high. Institutional investors will play a critical role in the outcome of the resolution.

16 December 2016 10 the Corner Office N O T E S

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