Indian Hotels board backs Cyrus Mistry

Independent directors give thumbs-up to his chairmanship

In a snub to the board of Tata Sons, independent directors of Indian Hotels, the operators of the Taj hotel chain, have backed Cyrus Mistry as the chairman of the company and supported his move to turn around the company.

Mistry was removed as the chairman of Tata Sons, the holding company of the $103-billion revenues group, last week citing "underperformance" and was replaced by 78-year Ratan Tata as interim chairman. But with Friday's support from independent directors, the mood is jubilant in the Mistry family. "This is a big victory for corporate governance in this country," said a source close to the Mistry camp.

  Tata Sons, which does not have a majority representation in the Indian Hotels board (besides Cyrus Mistry and his brother Shapoor, the 10-member board has six independent directors and two professional directors: Rakesh Sarna, MD & CEO and Mehernosh Kapadia, executive director), is planning to call an extraordinary general meeting (EGM) to remove Mistry as director. However, corporate lawyers said this could lead to a long-drawn legal battle.

Tata Sons refused to comment on the issue.

Tata Sons has 39 per cent equity stake in Indian Hotels, while domestic and overseas investors hold another 41 per cent.

The independent directors, who met separately after IHCL's September quarter results at Bombay House, included HDFC Chairman Deepak Parekh, Nadir Godrej, Keki Dadiseth, Irena Vittal, Gautam Banerjee and Vibha Paul Rishi. The directors backed all the steps taken by Mistry in providing strategic direction to the company. Rakesh Sarna is the MD and CEO and Mehernosh Kapadia is an executive director. "After deliberations, the independent directors are of the view that IHCL being a listed company, it was imperative for the independent directors to state their views to the investors and public at large, such that those who trade in the securities of the company make informed decision," independent directors stated to the stock exchanges. "The mood at the board room was sombre and directors lauded Mistry for his work in the last four years," said a director asking not to be quoted. "The independent directors showed what independence and corporate governance is all about," said the director.

Shapoor Mistry, Cyrus's elder brother, walked into Bombay House together with Shapoor showing his full solidarity with his younger brother by shaking his hands in full view of media before entering Tata headquarters. This led to a commotion among photographers that led to Bombay House security beating up photographers who had assembled to take pictures of Mistry brothers. Shapoor Mistry did not vote at the proposal on Cyrus. All eyes are now on Tata Chemicals board that is meeting on November 10. Independent directors of Tata Chemicals are expected to take note of the charges made by Mistry, said a director on Tata Chemicals board. After his ouster last week, Mistry had warned that even after sale of its fertilizer business, Tata Chemicals still needs tough decisions about its UK and Kenya operations.

Similarly, Tata Steel board is meeting on November 11 and a similar action by independent directors can be expected, said a member of TSL board. Mistry has warned of $10 billion worth of potential write down in Tata Steel due to its failed 2007 acquisition of Corus Steel. An independent director on Tata Steel board said Rs 70,000-Rs 80,000 crore has already gone down the drain in Tata Steel's European operations and it's wrong to hang Mistry's head for the acquisition. As per a letter written by Mistry to Tata Sons directors and Tata trustees, the Tata group would need potential write downs worth $18 billion across all group companies, including in three problem childs: Tata Steel, Tata Motors India operations and Tata Teleservices.

Soon after his exit from Tata Sons, Mistry had said Indian Hotels had acquired the SeaRock property in Mumbai at a highly inflated price and housed it in an off-balance sheet structure. "In the process of unraveling this legacy, IHCL has had to write down nearly its entire net worth over the past three years. This impairs its ability to pay dividends," Mistry had written in a letter to Tata Sons directors and trustees a day after he was removed.

"Many foreign properties of IHCL and holdings in Orient Hotels have been sold at a loss. The onerous terms of the lease for Pierre in New York are such that it would make it a challenge to exit," Mistry said. In his letter to employees, Ratan Tata said the removal of Mistry from Tata Sons was absolutely necessary for the future success of the Tata group. On October 24, in a dramatic turn of events, Tata Sons board had removed Mistry as the Chairman of the company citing "underperformance" and had scrapped his group executive council (GEC).

Tata Sons board then appointed former Chairman Ratan Tata as the Interim Chairman of the group who, in a letter to employees had said that it was important to remove Mistry for the future success of the group. Since October 24, jittery investors have sold IHCL shares as it shed 13 per cent of its market value, or Rs 1,700 crore. The entire group has lost Rs 50,000 crore of combined market value since Mistry was ousted. The Shapoorji Pallonji family owns 18.5 per cent in the Tata group holding company, Tata Sons. Tata Sons, in turn, holds 39 per cent stake in Indian Hotels.

How Mistry can be removed

• A simple board majority can replace the chairman. However, since six independent directors have supported Cyrus, this will not be possible
   
• The Tatas can remove him as a director, which will mean that he will cease being chairman. For this Tata Sons has to ask for an EGM, and requires support of a simple majority of shareholders
   
• Lawyers say this could lead to a long-drawn court battle