New bylaws ended Tata-Mistry bonhomie

New Delhi/Mumbai: When Ratan Tata retired as chairman of Tata Sons Ltd in 2012, he proposed a change in the laws governing the relationship between India’s largest conglomerate and its key shareholder, according to sources familiar with the situation.

Until then, the Tata Trusts — public charities owning two-thirds of the company — had easily protected its investment. A Tata family member had for decades held the chairmanship at both the Trusts and the company, whose businesses include cars, software and steel.

But an outsider, Cyrus Mistry, had just taken the top job at Tata Sons. Mr Tata wanted to make sure the Trusts, that rely on Tata Sons for dividends to fund their charitable work, could keep having a major say in company decisions, the sources said.

Mr Mistry agreed, and in doing so sowed the seeds of his ouster from the company last October, according to interviews with more than half-a-dozen current and former Tata executives and advisors, and a review of meeting minutes, emails and a court petition that Mr Mistry has filed against Tata Sons.

Mr Mistry’s departure — and the reinstatement of the 78-year-old Tata as interim chairman — has triggered a bitter, public spat that has contributed to nearly a $10 billion decline in the market value of Tata’s many listed companies.

Even if the conflict is resolved, Tata Sons could face future governance issues as the structure remains unchanged, which means it could weigh on any new chairman. “It is going to be very difficult for an external person to take the role,” said Shriram Subramanian, founder of proxy advisory firm InGovern Research.

Mr Mistry wrote in a letter to the Tata Sons board on October 26 that Mr Tata improperly used the change in bylaws to interfere in the affairs of the company and created an alternate power center at the group, which made it hard for him to do his job.

The changes in bylaws, which were finalised in 2014 after more than a year of discussions, increased the accountability of the chairman of Tata Sons to the directors nominated by the Trusts. The Trusts can nominate one-third of Tata Sons’ directors. The new bylaws require major decisions, such as deals and changes to the company’s capital structure, be approved by a majority of the Trusts’ nominees.

Tata Sons spokesman Debasis Ray said Mr Tata asked Mr Mistry to do only what was in the bylaws and got involved in the company’s affairs when he was asked.

Interviews with sources on both sides and the review of documents show that the changes in bylaws helped create the conditions that caused friction between Mr Mistry and Tata and increasingly hindered smooth functioning of the group.

The chairman, though, was not directly accountable to any of the trustees, including Mr Tata. The Trusts’ nominees were expected to represent their interests on the Tata Sons board, sources familiar with the rules on both sides of the conflict said.

Mr Mistry said in his letter that the family’s patriarch nevertheless continued to directly interfere in the conglomerate’s affairs and called the nominees “postmen” who did Mr Tata’s bidding.

Mr Mistry claimed that Mr Tata’s interference “constrained” his ability to make the necessary chan-ges to turn around many companies.