Tata and Mistry to part ways: A 70-year old partnership set to end

The partnership, which survived post-independence upheaval in the country and economic liberalisation in 1991, is set to end now

The Tata family and the Pallonji Mistry family are set to end their partnership built over 70 year ago. The relationship had not only survived the post-Independence upheaval in the country but also the liberalisation of the Indian economy which shut down several prominent business houses of India.

The partnership between the two groups started when the Mistrys owned SP group (earlier known as F.E Dinshaw Private Limited) had a share in the managing agency commission (when the managing agency system was in vogue) received by Tata Sons from Tata Group companies in the 1920s. FE Dinshaw received the consideration for lending financial support to the Tata Group at a critical juncture in its history.

The Shapoorji Pallonji (SP) Group later became shareholders of Tata Sons in 1965 --with the approval of the then Board of Tata Sons then led by legendary JRD Tata.  Within a few years, the SP Group became the single largest non-Tata shareholder in Tata Sons and that too at a time when the voting rights on the Tata Trusts were exercised by a public trustee.

There were a lot of business ventures between the two groups with several Tata group's construction contracts going to the SP group. In November 1965, the same year that the SP Group acquired shares in Tata Sons, the SP Group also entered into a partnership with Periyar Trading Company, a company promoted by members of the Tata family to develop and operate a theatre complex -- Sterling Cinema – an iconic building in South Mumbai. Naval H Tata, father of Tata group’s patriarch, Ratan Tata was the personal guarantor for the business transactions of the partnership firm.

In May 1966, at the request of the late JRD Tata, the SP Group entered into an agreement to invest into the construction and sale of residential buildings in Pune on land provided by JRD Tata and share half of the profits arising from the sale proceeds with him.

In 1984, TISCO (now Tata Steel) acquired Special Steels Ltd, an entity that was in the business of making special steels, from the SP group. Special Steels was later renamed Tata SSL Ltd and merged with Tata Steel.

In June 1980, Pallonji Mistry, father of 52-year old Cyrus Mistry, was appointed as a nominee director of the SP Group on the board of Tata Sons. He served as a director for 25 years till December 15, 2004. Subsequently, a young Cyrus Mistry became a director on Tata Sons board and was well known as a "quiet and well mannered boy" by the old timers.

The Mistry family has been associated with other Tata Group Companies, even prior to being inducted on the Board of Tata Sons, and have been on the Boards of over 20 different Tata group companies from 1950 till 2017 and on some of these companies, they were directors for substantially long time.

Old-timers recall that in the early 1990s, after Indian securities markets were opened up for foreign investment -- a critical juncture in Tata Sons history since Tata Sons had very low promoter stakes in listed Tata Group Companies - Tata Sons needed funds to bolster its stake. The majority shareholders of Tata Sons – the Tata Trusts -- were handicapped by the fact that they were prohibited by law from investing in shares.

It was the SP Group which then came to the rescue of the Tatas and invested a substantial stake of Rs 70 crores in a rights issue that was undertaken, after detailed discussion between Ratan Tata group and Pallonji Mistry.

Soon Tata placed on record his appreciation for Pallonji Mistry's "understanding and support of this very crucial need of Tata Sons".

After Ratan Tata took charge of the group in the early 90s, his initial years were well known for Tata taking on the satraps of Tata group -- the old guard who were chairing various Tata group companies. The Mistry family chose to keep quiet when several of these professionals were removed unceremoniously. Nusli Wadia, who was on the board of three group companies, even backed Ratan Tata in removing the old guard. Both Wadia and Tata fell out over Mistry's sacking in 2016 with Wadia removed from all the three boards.

In September 2000, a controversy broke out when Tata Sons led by Chairman Ratan Tata demanded brand fees from its subsidiaries. The Articles of Association of Tata Sons were replaced and Article 77 was inserted which said any person (not being an existing shareholder as on September 13, 2000) acquiring 5% or more of the equity shares of Tata Sons would be required to pay an additional amount for the "TATA" brand and goodwill associated with the same.

Such payment is required to be made to all shareholders of Tata Sons, which includes the SP Group. This was yet another acknowledgement that the SP Group, the largest non-Tata shareholder, was integral to the Tata brand and the goodwill associated with it.

When Pallonji Mistry was to retire from the board of Tata Sons in June 2004 on reaching the retirement age of 75, Tata wrote to Pallonji Mistry and requested him to continue as a director on the Board of Tata Sons.

In other words, an exception was made to the retirement policy in view of the personal relationship and in order to enable Pallonji Mistry to continue as a director in view of the impending IPO of Tata Consultancy Services Limited - a critical time at which Ratan Tata turned to Pallonji Mistry, nominee of the SP Group, for guidance and counsel.

Tata made the personal request and termed Pallonji Mistry "as a large shareholder and active director and requested him to continue which Tata said would be "of great value to him personally".

Pallonji Mistry acceded to Tata's request and continued to serve on the board and retired in December 2004 having been a director for twenty-five years. When Pallonji Mistry retired, Tata wrote to Mistry in January 2005 and acknowledged that Pallonji Mistry's association with the Tata Group preceded his own association with the Tata Group.

"Even though you are stepping down at this time, I will continue to keep you informed of the events in Tata Sons, and I hope you will permit me from time to time, to seek your counsel. It would also be my endeavour to keep both Shapoor and Cyrus informed of the affairs of Tata Sons in their capacity as shareholders,” Tata wrote. “I have valued their respective contributions in the companies where they serve as Directors, and look forward to their continued involvement with the firm in the future.

Just before Ratan Tata retired in 2012, the group started a global search for his successor but turned to Cyrus Mistry to lead the group. After Mistry took charge, he realised that there are several businesses which are struggling and leading to huge losses. This included Tata Steel Europe, Tata Nano car project, Tata Power’s Mundra project, Tata Teleservices, Indian Hotels Searock hotel project.

Ratan Tata remained the chairman of Tata Trusts which controls 66 percent of shares in Tata Sons while Mistry family owned 18.37 per cent stake.

Soon Mistry and Tata fell out as Mistry wanted to run the Tata group without Tata's interference. In October 2016, the Tata Sons board sacked Mistry leading to a four year-long legal battle between the two groups. The matter is currently pending in the Supreme Court.

“At a meeting of CEOs when Tata was asked why I was removed as Executive Chairman. Tata is reported to have replied that “the answer will probably go with me to my grave”,” Mistry wrote in a letter to Tata Sons board members soon after he was sacked.

“Therefore, an impression sought to be created was that there was something unspeakable underlying his inexplicable and unreasonable conduct. More importantly, the signal was that Tata had an absolute right to do as he willed without having to explain himself to anyone,” Mistry said.

The legal battle and the media mud-slining ensured that there was no turning back for both groups and it's now time to separate.