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Who will be Ratan Tata’s next ‘Rattan’?

An insider-insider, insider-outsider, or an outsider-outsider! Will Noel Tata take over? Will RatanTata continue to wield control through a proxy? Will we see the entry of another mystery man, a.k.a Cyrus Mistry? These questions assume importance for two reasons, both of which seem speculative now but may turn into realities. The first relates to media stories that strongly hinted that Tata Sons may appoint a new CEO, along with the existing Chairman, to create two separate posts. This was violently denied by the company, Ratan, and N. Chandrasekaran (Chairman). However, it is inevitable that at some stage, sooner rather than later, Ratan Tata will need to anoint his successor, who will also head the main trusts that own Tata Sons. The other relates to another set of media articles that talked about the possibility that Cyrus Mistry may mortgage Tata Sons’ shares to raise money to pay off his group’s debt. Earlier, Mistry said that he would like to sell these shares to Ratan, or whoever Tata Sons deems fit. However, his demand for compensation was much higher than what the Tata Group wished to pay. The mortgage deal may be Mistry’s google to force Ratan’s hands to take a quick decision. Such a transaction may tell us more about who Ratan’s hand-picked man for the future can be. Alam Srinivas
Enter Vol.


Ratan Tata

He is at that piquant, intriguing, and frustrating crossroad. Although being stranded at a similar, but complex, corporate crossing is common for a business owner in the West, it is a rarity in India. In the developed world, the founders or next generation give up management control, either voluntarily or forcibly, to professionals and watch the corporate proceedings as owner-investors. It almost never happens in India. In this country, owners or their families invariably latch on to power.

For Ratan Tata, the patriarch of the steel-to-software Tata Group, it is time, yet again, to anoint a successor. He can choose not to do so, as he did in 2016, and continue to run the show through a proxy. Ratan can pass on the reins to an insider, a family member like half-brother, Noel Tata, which he refused to do so in 2012. He can re-ignite the grand plan to divorce ownership from management, and professionalise the latter, as he did when he mysteriously chose Cyrus Mistry as his heir.

After the recent Supreme Court judgment, Ratan Tata can pursue any of these options – and more. The apex court decided that the Tata Trusts, which together own two-thirds of Tata Sons, the group’s holding company, can influence the latter’s board decisions. In effect, whosoever manages the Tata Trusts, which operate under the umbrella of Sir Ratan Tata Trust and Sir Dorabji Tata Trust, owns, and controls the Tata Group through Tata Sons. At present, this person is Ratan Tata.

So, he can do whatever he wishes to, for the trusts now call the shots. The mist has cleared, the deadly dust has settled down, and the air is clean. This is because the Supreme Court gave several clarifications that allows the Tata Trusts and, hence, Ratan as their head, to do almost whatever they please. More importantly, the Tata Sons’ board can indirectly appoint, and directly remove its Executive Chairman, as it did with Mistry in 2012 and 2016, respectively.

Off with the post

On the latter issue, the Court maintained that the National Company Law Tribunal (NCLT) and its appellate body cannot “question whether the removal of a Director (or Executive Chairman, who is a Director too) was legally valid and/or justified or not”. Even if it was either or both – invalid by law and unjustified by facts – the two bodies can stall the removal only if the act is “oppressive or prejudicial” to the interests of the company, shareholders, and community.

Cyrus Mistry

After his exit from Tata Sons, and other group companies, Mistry hurled financial allegations against Ratan. In an ingenious manner, the Supreme Court gave a clean chit to the latter. It argued that the NCLT, the lower judicial body, absolved the Tata Group of any wrongdoings in these matters. None of its findings were overturned by the higher appellate body. Since Mistry did not raise them again in the Supreme Court, the latter assumed that the charges were untrue.

One of the allegations was that Ratan favoured C. Sivasankaran in the Tata Teleservices case. NCLT found nothing and stated that Mistry made more profits than Siva in these deals. On the bungling in Air Asia, the NCLT felt that Mistry was a “consenting party” and raised the issue after his removal in 2016. Tata Group was accused of a deal with Hamid Reza Malakotipour, a global terrorist. NCLT stated, “It would be preposterous to allege that RNT (Ratan) funded a terrorist through hawala”.

NCLT rejected Mistry’s claim that Tata Steel overpaid for Corus, and the final price was approved by Mistry as Tata Steel’s Director. Tata Power’s takeover of Wellspun“ did not tantamount to interference by the (Tata) Trusts”, as it was presented as a fait accompli to Tata Sons’ board, which had the right to question it. Tata Power’s deals with Mehli Mistry, Ratan’s friend, were above board. The dredging and shipping contracts were inked when Mistry was Tata Power’s Director.

With financial irregularities out the legal window, the apex court also did not agree that Mistry’s removal from Tata Sons was “pre-meditated”, and “carried out at the behest of Tata Trusts and RNT (Ratan)”. In 2016, Mistry exited as the Executive Chairman, which is “not statutorily recognised or regulated” post. He was removed as a Director only after he “declared an all-out war” against Ratan, Tata Trusts and Tata Sons, and leaked documents to the income tax authority.

Moreover, the action against Mistry was in accordance with Tata Sons’ articles of association. Article 118 states that a Selection Committee has to recommend a Chairman’s name, which may be accepted by the board. However, this first paragraph of the article is followed by another line, “The same process shall be followed for the removal of the incumbent Chairman.” Mistry’s lawyer felt that this implied that only another Selection Committee could take this decision.

However, the Court disagreed. Its order states that the line that follows the first paragraph of the article “actually goes along with the last limb of the portion immediately preceding this line”. In essence, the implication was that the standalone line about the “same process” was a remnant, like a tail, which was linked to the first paragraph, and did not have an independent identity. Hence, it had no locus standi on its own. It merely indicated the voting process to be followed by the board.

As the apex court order states, “It is absurd to interpret Article 118 to mean that Selection Committee is to be constituted for the removal of an incumbent Chairman.” In addition, Article 122(b) of Tata Sons states that its board can take any decision, which does not require a go-ahead at the company’s annual or other general meeting. “The designation of a person as Executive Chairman is not one of the functions to be performed in a general meeting,” the order specifically states.

In trusts we trust

The crux of the public spat between Ratan Tata,  and Cyrus Mistry lies in the roles, rights, and powers of Tata Sons’ majority shareholders, the Tata Trusts. With a two-thirds holding, and several clauses in the company’s articles of association, the trusts have overriding powers over the board and its decisions. They can sway, swing, and subtly shift almost every action of Tata Sons, and through it, those of the large operational behemoths such as TCS, Tata Steel, Tata Motors, and Tata Power.

Before we investigate Mistry’s claims, let us explore the corporate clout of the trusts. Under Article 86, there is no quorum at a general meeting of Tata Sons unless one trusts-nominated representative is present. Article 114(B) allows Sir Ratan Tata Trust and Sir Dorabji Tata Trust to jointly appoint one-third of directors on Tata Sons’ board. Under Article 121, several crucial board decisions require “the affirmative vote of a majority of Directors” nominated by the two trusts.

Article 121(A) lists out the decisions that the trusts can meddle in, and which require the affirmative vote of the majority of their Directors. These include five-year strategic plan, annual business plan, borrowings, investment in shares, bonds, and immovable property exceeding Rs one billion, increase in share capital, matters that affect the company’s shareholding, and the exercise of voting rights by Tata Group companies, which are shareholders, at general meetings.

Mistry felt that these allowed the trusts, through their Directors, to wield too much influence on Tata Sons. Its board was a puppet that moved according to the whims and fancies of Ratan, the head of the two trusts. This was wrong as the corporate world, as per the new Companies Act, witnessed a paradigm shift, as it moved from “corporate majority / democracy” (rule of majority) to corporate governance. Thus, the board members had to break their links with those who nominated them.

In other words, the trusts-appointed Directors had to be fair to the company and all its shareholders, not just the majority ones that appointed them. They owed their allegiance to Tata Sons, and not to their nominators, Tata Trusts. The directors could not outsource their fiduciary responsibilities to the shareholders. They could not, and should not, take directions from outsiders, even if they owed their existence to someone else. They were the company’s directors only.

The apex court decimated such contentions. “At first blush, these arguments, almost bordering on romantic idealism, appear very attractive. But on a deeper scrutiny, they are bound to get grounded,” states its judgment. Although it agreed that the 2013 Companies Act had drastic changes related to the composition of corporate boards, most of them were for listed firms, and did not apply to unlisted, private ones like Tata Sons. Yet Tata Sons complied with a few of them.

Over decades, without any legal requirements, the Tata Group adhered to the highest principles of corporate governance on its own accord. This is reflected in how the Tata Sons’ board is packed with Directors, who were rank outsiders. “Today, nobody wants to step down from any office, except if inflicted by brain stroke or sun stroke,” states the apex court. Still, Ratan gave up Tata Sons’ chairmanship, and that of the group, in 2012. His place was taken by Mistry, another rank outsider.

Of the six Tata Group chairmen since 1868, five, including Ratan, belonged to the same family, and one, Mistry, was an outsider. It proved “a large industrial house whose origin and creation was familial was willing to handover the mantle of heading the entire empire to a person like Mistry”. It is ironic that Mistry’s “identification as successor (to Ratan) was done by the very same nominees of the two Tata Trusts, who are now accused of interference” in the working of the board.

About the fiduciary responsibility of a Director, the Court maintains that “it is a paradox to claim that… every Director of a Company is duty-bound to act in good faith in order to promote the objects of the Company”, and “in the best interests of all the stakeholders”. If every Director has to exercise independent judgment, which is divorced from her nominator, it doesn’t make sense to have clauses in the Companies Act for mandatory appointment of separate independent directors.

What is crucial is that Tata Sons is a “Principal Investment Holding Company”, which isn’t engaged in manufacturing or trading and owns stakes in Tata Group’s operational arms. In addition, philanthropic trusts, which sponsor welfare projects in education, health, livelihood, and art and culture from the dividends they earn, own a majority in Tata Sons. Thus, the Directors appointed by such public charitable trusts are “not like any other directors” in other companies.

In every company, a Director is responsible for both the shareholder she represents, and the company whose board she is on. It is a combination of private and public interests. But the duty of a trust-nominated Director is also “towards the nameless, faceless beneficiaries of those trusts”. “What is required of (such) a director… is pure, unadulterated public interest,” states the apex court order. It is right for trusts, and their Directors, to have additional powers over corporate boards.

It is not pocket money

By default, the Supreme Court gave more flexibility to Ratan to re-choose his successor. Apart from the rights of Tata Sons’ board to appoint and sack a Chairman, and the trusts’ entitlement to influence Tata Sons’ board, the order limits Mistry’s future choices. Mistry urged the Court to separate his “ownership interests” in Tata Sons. He wanted a solution to extinguish his 18.4% stake and receive compensation in the form of shares in Tata Group’s listed and unlisted firms, and cash.

In 2016, Mistry’s holding was valued at almost Rs 600 billion, or $8 billion (today’s exchange rate). Mistry claims that it is worth three times more now, but the Tata Group says that it is $10 billion. While this will prove contentious, what goes in Ratan’s favour is the apex court’s refusal to fix a fair price for the stake. The order states that the valuation depends on a number of factors – “value of the stake of Tata Sons in listed equities, unlisted equities, immovable assets, etc”.

Therefore, the Court asked Mistry to either use Article 75 of Tata Sons’ articles of association or “any other legally available route” to decide the fair compensation for his stake. In fact, it seems weird that Mistry attacked this article before the NCLT, and then asked the Supreme Court to show him an exit route. As per the apex court order, Article 75 itself is “nothing but a provision for an exit option (for an existing shareholder) – although one may think of it as an expulsion option”.

Article 75 states that Tata Sons can ask any shareholder to transfer his shares through a special board resolution. Once this is done, the owner of the shares is deemed to have served a “sale notice” to Tata Sons, which can buy them or urge another shareholder to do so. If this is used as a mechanism to deal with Mistry’s stake, Tata Sons and, hence, Ratan can, at least at this stage, delay or hasten the process. The valuation too can be massaged and manipulated by Tata Sons.

This is crucial for two reasons. First, whether Mistry’s holding is sold or extinguished, the Tata Group’s operational arms will enter the picture. Either they will be buyers, or their shares will become an important component of Mistry’s compensation. The former entails a hit on the cash flows of listed firms. The latter allows Mistry to get out of Tata Sons, but gain a better toehold in the listed firms, where he can use the clauses of the Companies Act to keep Ratan or his successor on his toes.

Second, how the Tata Group listed firms deal with Mistry’s stake is critical because the Tata Trusts too may need to sell a part of their holdings in Tata Sons to raise money for their additional philanthropic activities. Over the past few years, the trusts’ kitty has shrunk, and they had to use money from their reserves. This situation cannot last, and they will need to raise money – the only asset they have is Tata Sons’ shares (see accompanying story on Tata Trusts).

Clearly, the apex court’s order arms Ratan with corporate ammunition to choose his heir. In addition, the judgment gives him time to do so as Mistry will not be an immediate threat, and through Tata trusts he can still control Tata Sons and Tata Group. But as that song goes, you got to know when to hold, when to fold, when to walk away, and when to run. Succession planning cannot be played with a poker face.

Successor # 1: An Insider-Insider

All in the family


At present, Noel Tata, Ratan’s half-brother, is ahead in the succession race. But knowing Ratan’s mind, and past experiences, Noel may have miles to go before he breasts the tape. The best indication that he is the most promising candidate is his induction as one of the trustees of Sir Ratan Tata Trust, the most important trust along with Sir Dorabji Tata Trust. In the past, the Chairman of Tata Sons and Tata Group, except for Cyrus Mistry, was a trustee in one of the two trusts.

Since one of the main clashes between Ratan and Mistry was over the influence of the trusts as majority owners of Tata Sons, Noel’s entry in the Trust may be a precursor for bigger things. The fact that Mistry, a key personal confidante, and part of the extended family – his sister, Aloo, is married to Noel – and Nusli Wadia, a personal friend, recently rebelled against Ratan may force the latter to opt for a safer insider-insider choice, yet another family member.

Just less than a decade ago, Noel was side-lined by Ratan, who felt that the former didn’t have the traits to manage a conglomerate. This may change in the light of the events in the past few years. Noel, 63, has a dozen years before he hangs his boots, and currently looks after the affairs of Trent, Tata Investment, Tata International, and Titan Company. Media reports indicate that the “equation between Ratan and Noel has improved, especially after the latter backed the former against Mistry”.

When it comes to the family, don’t discount the possible role that Jimmy Naval Tata, another half-brother of Ratan and Noel, can play in the future. Although he is just two years younger to Ratan and believed to be a recluse who lives in Mumbai’s Colaba area, he is a trustee in Sir Ratan Tata Trust, and shareholder in several group companies. Media reports indicate that he kept a close watch on the Tata-Mistry war, and had six enormous files, which included letters to Tata Sons’ board.

Successor # 2: An Insider-Outsider

Seven: The magic number

Since Mistry entered the fray, Ratan kept a leash on him through the seven trusts, which include Sir Dorabji Tata Trust, and Sir Ratan Tata Trust. The role of these trusts, which hold 66% in Tata Sons, became debatable and litigious, when Mistry complained that they had no right to remove him, and interfere in the internal board actions of the parent company. The board nominees of the two main trusts, which are headed by Ratan, have virtual veto powers in Tata Sons.

Instead of making Noel Tata, his half-brother, the Chairman of Tata Sons, Ratan can continue with the existing arrangement. As is the case now, the trusts can nominate a professional loyalist, an insider-outsider, to head Tata Sons. This person may not act as Tata Group Chairman, for those reins will remain with Ratan, other family members, or the trusts. With veto powers, and the right to remove the Chairman of Tata Sons, the trusts can later inculcate Noel, if there is a pressing need to do so.

Yet another wrinkle in the ownership weave relates to the money to buy the 18.4% stake that Mistry’s family owns in Tata Sons. If Mistry sells, as he has told the apex court, Tata Sons, under Article 75 of its articles of association, can find a solution to either extinguish the shares, or enable Tata Group’s listed firms to buy it. The trusts, being public charitable ones, cannot buy these shares. Thus, the operational arms, which own 13% collectively in Tata Sons now, will need to pitch in.

Successor # 3: An Outsider-Outsider

Enter the professional

The ideal option, which is what Ratan initiated in 2012, is to disassociate management and ownership. So, while the trusts continue to remain the largest shareholders in Tata Sons, and Tata’s operational arms buy up or compensate for Cyrus’ stake, the chairmanship of Tata Sons is offered to a rank outsider, a global manager. This will enable the group to become like L&T, ITC and Infosys are to some extent today, and what Azim Premji’s Wipro may become in the near future.

Natarajan Chandrasekaran

In such a situation, Ratan can set a new example for Indian business families, especially those that tried to professionalise management in the late 1990s, and early 2000s, and backtracked within a few years. The latter couldn’t become mere spectators, rather investors, and felt that they needed to exert effective and direct control. This is possibly why many of them lost both ownership and management over their companies after the new insolvency laws were enacted.

Succession planning among business families is a tricky art, and not science. First, the patriarch or matriarch finds it tough to give in. Second, they are unable to legitimise succession, as they wish to be fair to all their children, even if one of them has superior management skills. Finally, they unjustly think that their children will be unlike the others, and not squabble and fight among themselves. In all these respects, they are wrong, and that’s detrimental to business.

Of public trusts and public’s trusts

In the future, Ratan Tata will need to juggle several financial balls to retain control over his group, and energise his new philanthropy strategy

For almost 130 years, the Tata Group was engaged in charity. In 1892, Jamsetji Tata, the empire’s founder, set up the first project, JN Tata Endowment Fund, to finance higher education for Indians. His motto: while “patchwork philanthropy which clothes the ragged, feeds the poor, and heals the sick” indicates the noble spirit among us, “what advances a nation or community” is to “lift up the best and the most gifted, so as to make them of the greatest service to the nation”.

Today, the Tata trusts, headed by Sir Ratan Tata Trust (1919) and Sir Dorabji Tata Trust (1932), spend millions of dollars on philanthropy. In 2018-19, Sir Ratan Tata Trust coughed up more than $50 million and the latter an even higher $76.6 million. The expenditure by the Tata Education & Development Trust was more than $160 million. The amounts funded projects in a dozen areas, apart from individual grants and money to annually manage premier Tata institutions.

Healthcare was the top priority for the group’s charity. In 2018-19, Sir Ratan Trust pumped in almost two-thirds, and Sir Dorabji Tata Trust almost 40% of the annual spends in this sector. Rural upliftment (19% of the total) and direct transfers to institutions (15%) were the other two major areas for Sir Dorabji Tata Trust. Ratan Tata, the chairman of the trusts, said that they “continue to transition from a traditional grant-giver to a national catalyst of social change”.

Tata Trusts, the collective name for them, prove the group’s commitment to social responsibility, way before CSR became the norm. At the Empress Mill that Jamsetji set up in 1874, he introduced crèches and primary classes for the children of women employees, and free medical help to every worker. Over the years, the group’s policies included provident fund and pension, as well as compensation for accidents and maternal allowances. These were ahead of their times.

Outside the corporate structure, the group established itself as one of the leading philanthropists. Apart from educational institutes and hospitals, it invested in empowering people, and improving lives and livelihoods in a meaningful manner. The Tatas were known not just for their best employees’ practices, but for what they did for the poor communities. In 2018, their projects were spread across almost 650 districts, or more than 85% of the total districts in the country.

At present, the income of the trusts comes from dividends on shares, interest on investments, and donations and earmarked funds. In 2018-19, the expenditures of the three main trusts – Sir Ratan Tata Trust, Sir Dorabji Tata Trust, and Tata Education & Development Trust – were much higher than their incomes.  Taken together, the differences in their profit and loss accounts were almost $100 million. This implied that the trusts had to arrange for additional funds.

Sir Ratan Tata Trust depleted its reserves by more than $30 million in 2018-19; they fell from $42.5 million to $12 million within a year. Apart from reserves, Tata Education & Development Trust dipped into investments, which tumbled from almost $740 million in 2017-18 to just over $650 million in the next year. Although the figures for 2019-2020 are not available for the two trusts, it is evident that the group has to scout for funds or scale down its philanthropic activities.

The second option is likely to be unacceptable to Ratan Tata. After he retired in December 2012, he handed over the charge of Tata Sons, the group’s parent company, to Cyrus Mistry. Within a few years, as he focussed largely on charitable projects, Ratan decided to change the way the trusts operated. He felt that it was more important to make them proactive and positive, rather than passive. It meant that they had to be energetic and effective participants.

In 2015, as per, the trusts “repurposed and recalibrated their strategy and approach”. The website adds, “Apart from being a conventional grant-giving foundation, in order to maximise the impact of their work, they also chose to directly implement their interventional programme, harness affordable and innovative technology, and forge collaborative partnerships with governments, international and local NGOs, and private welfare organisations while presenting a single unified interface to beneficiaries.”

Hence, the scope and expanse of the trusts’ work increased. In financial terms too, they began to spend more than they earned. As we saw in the case of 2018-19, the trusts dug deeper into their reserves and investments, from which they earned healthy interest incomes, to support and initiate new projects. Many of these were implemented, either directly or indirectly through partnerships, by the trusts. Suddenly, there was hunger and a need for more money.

This is why Tata Sons, and the trusts’ 66% in it, becomes critical. In the future, the trusts will need more money. These can come either through higher dividends paid by Tata Sons, more donations and grants, or partial sale of Tata Sons’ shares. There are limits to the first two options. Dividends accounted for only 21% and 17%, respectively, of the annual incomes of Sir Ratan Tata Trust and Sir Dorabji Tata Trust in 2018-19. The shares of donations and earmarked grants were lower.

One of the best choices for the trusts may be to partially sell their shares in Tata Sons. While it has the potential to raise huge sums – 1% of the shares are valued between $500 million and $1.3 billion – it has no attached ownership risks.  Recent changes in Tata Sons’ articles of association allow the trusts veto power overboard decisions, even if the latter’s combined stake is down to 40%. This means that the trusts can sell more than a third of their 66% stake without loss of control.

Finally, the Tata companies may have to buy the shares that are possibly sold by the trusts. In effect, the former will need huge amounts to get hold of the shares sold by Cyrus and the trusts. This may impact their expansion and other plans. Clearly, Ratan will need to walk on eggshells, and carefully chalk out the future plan. It is not going to be easy. It is a toss-up between gaining the public’s trust and enabling the public trusts to both control the Tata Empire and pursue philanthropy.

Tata Sons

Ratan N Tata

Chairman, Tata Trusts

Mr Ratan N Tata is the Chairman of the Tata Trusts (comprising Sir Ratan Tata Trust and Allied Trusts, and the Sir Dorabji Tata Trust and Allied Trusts).

Sir Dorabji Tata Trust & Allied Trusts

  • Sir Dorabji Tata Trust
    • Vijay Singh, Vice-chairman
    • Venu Srinivasan, Vice-chairman
    • RK Krishna Kumar
    • Pramit Jhaveri
  • Lady Tata Memorial Trust
    • FK Kavarana
    • Dr PB Desai
    • Dr M Chandy
  • JRD Tata Trust
    • Vijay Singh, Vice-chairman
    • Venu Srinivasan, Vice-chairman
  • Jamsetji Tata Trust
    • RK Krishna Kumar
    • Vijay Singh
    • Venu Srinivasan
  • Tata Social Welfare Trust
    • Vijay Singh, Vice-chairman
    • Venu Srinivasan, Vice-chairman
    • RK Krishna Kumar
  • JN Tata Endowment
    • Jehangir H C Jehangir
  • Tata Education Trust
    • Vijay Singh, Vice-chairman
    • Venu Srinivasan, Vice-chairman
    • RK Krishna Kumar

 RD Tata Trust

    • Vijay Singh, Vice-chairman
    • Venu Srinivasan, Vice-chairman
    • RK Krishna Kumar
  • The JRD and Thelma J Tata Trust
    • Dr Suma Chitnis
    • Dr Armaity Desai
    • FN Petit
    • Vijay Singh



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