Tata Sons’ conversion and its article of association
Much has been written about the National Companies Law Appellate Tribunal (NCLAT) order dated 18 December, reinstating Cyrus Mistry as executive chairman of Tata Sons. There are several questions being raised about this purchase. This opinion piece does not actually seek to counter views or analyze the order that is NCLAT in detail. However, it seems at two intriguing and in our view possibly intertwined issues that have emerged from the NCLAT order which will have an effect on corporate governance issues in this case.
Indeed, the discussion so far hasn’t focused adequately on companies, whichever way the Supreme Court decides on these two’s effect.
Let us first examine the way Tata Sons attempted to change its status from a public to a private company. Needless to say, it’s required some’creative interpretation’, something that is not new to the Tata Group (remember how the interpretation of a comma in India’s foreign direct investment policy helped the same group set up an aviation industry ).
Two things are critical here: the timing of a conversion attempt, and the manner in. In terms of the timing, the conversion was attempted hurriedly at a stage Mistry had filed an appeal before the NCLAT, a fact highlighted by the order. As for the fashion, the rush supposed that instead of following Section 14 of the Companies Act of 2013, which sets out the procedure of conversion of a public company to a private company (and vice versa), requiring approval of the authorities, Tata Sons sought to rely not on provisions of the Companies Act, or Rules made thereunder, but on a general circular dated 13 September 2013, arguing that it allows a business that satisfies the definition of’private company’ to alter its standing with direct permission of the Registrar of Companies.
What Tata Sons (and indeed even the NCLAT order) doesn’t emphasize is the fact that the stated general circular was issued in the time of a transition from the previous Companies Act of 1956 to the current Companies Act of 2013, which to facilitate appropriate administration, it enabled the Registrar of Companies to”register those Memorandum and Article of Association received till 11.9.2013″ according to the definition of a’private company’ under the old Act of 1956. This’interpretation’ overruled by the NCLAT order, restoring Tata Sons’ company status. It remains to be seen how the Supreme Court views this when the NCLAT arrangement is challenged before it. It seems that the order has held such an attempted conversion to be illegal and reversed it.
A company has a higher standard of corporate governance to reply to, as compared to a private company. Perhaps that is why the Tata Group was in a hurry to change the status of its holding company, though I am not sure how such an attempted change long after the removal of Mistry would really have helped the group on the issue pending before courts regarding the legality of his removal, which would have to be determined on the basis of this fact matrix at that point of time.
It appears that there could have been another reason for such a attempt at conversion, which brings us to Article 75 of Tata Sons’ AoA. This guide is a potent provision that has not yet been invoked so far, but allows the company to ask any shareholder to sell his shares. Invoking such a provision could render any finding of the courts redundant. It is here that the issue of Tata Sons’ standing as a private or public company might become important. This is because one perspective is that such a provision can’t be legitimate for a company, which could not impose restrictions to the extent that a company can do under the law.
Interestingly, as of today, the NCLAT order has only asked Tata Sons not to invoke such a provision, stating that it may be”exercised only in exceptional circumstances and in the interest of the company.” It would be interesting to see how the Supreme Court views Article 75 of its AoA. What it determines would impact how articles of association are drafted in the long run for all companies, public or private.