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In Article 75, has Supreme Court handed the advantage to Tata Sons Vs Cyrus Mistry?

The Article hands Tata Sons the first right of refusal on the 18.37 percent stake that the Shapoorji Pallonji Group owns. The two sides differ widely on the valuation of this stake.

March 27, 2021 / 12:05 AM IST

The Supreme Court order comes as a fresh blow to attempts by the Shapoorji Pallonji Group to raise funds and get itself out of a financial quagmire.

The Group, which is in talks with its lenders for a debt recast, has been pushing to sell its 18.37 percent stake in Tata Sons, the holding company of the salt-to-software conglomerate.

Even as the apex court allowed Tata Sons to appeal against the National Company Law Appellate Tribunal (NCLAT) order reinstating Cyrus Mistry as chairman, it also stepped aside on the question of compensation.

"We leave it to Tata Sons, Mistry to take legal route to resolve issue of shares. Value of Tata Sons shares depends on equity," Chief Justice of India SA Bobde said. He further asked the two parties to take the 'route under Article 75,' to decide on the compensation.

"The order surely gives the Tatas an upper hand now, when it comes to deciding on the valuation of the stake. What needs to be seen is the route the two sides take now to come to an agreement. A legal, or an off-the-court settlement," a senior executive in the industry, tracking the development, said.


Pritha Jha, Partner, Pioneer Legal, added that "this has put an end to a long-standing battle between the two. The judgement will serve as an important precedent in matters of corporate governance."

At the same time, she added: "However, the Supreme Court has not settled the issue of shareholding and valuation. This will therefore possibly lead to further litigation since it is unlikely to be settled amicably."

Article 75

Article 75 of the Tata Sons Articles of Association says:

“The company may at any time by Special Resolution resolve that any holder of ordinary shares do transfer his ordinary shares. Such member would thereupon be deemed to have served the company with a sale notice in respect of his ordinary shares.”

It basically hands Tata Sons board the power of first right of refusal on the 18.37 percent stake that the SP Group owns. "The minority shareholder will have to approach the Tata Sons board with an offer. The board will then take a call," said a senior executive in the industry.

It is something that the Tatas will like to have a control on. Tata Sons could either buy the stake, or get an investor - of their choice  - to replace the Mistrys.

At the same time, Bombay House won't be in a hurry to come to a settlement. After all, the stake could be valued anywhere between Rs 70,000 crore (as the Tatas have put it) and Rs 1.75 lakh crore, the value demanded by the SP Group.

This is not good news for the Mistrys. Their counsel had earlier argued against the use of Article 75.  In January 2020, counsel Aryama Sundaram had argued that the provision ignores "constitutionally valid safeguards in company law," with respect to minority shareholders.

The financial trouble

The SP Group is in talks to lenders to defer interest and principal payments. Even as it works to recast debts of Rs 22,183 crore, it also plans to raise money by selling part or full stake in three of its companies.

These are Eureka Forbes, Sterling and Wilson Solar and Afcons Infrastructure. The Group hopes to raise about Rs 10,000 crore through the stake sale.
Prince Mathews Thomas heads the corporate bureau of Moneycontrol. He has been covering the business world for 16 years, having worked in The Hindu Business Line, Forbes India, Dow Jones Newswires, The Economic Times, Business Standard and The Week. A Chevening scholar, Prince has also authored The Consolidators, a book on second generation entrepreneurs.
first published: Mar 26, 2021 02:18 pm
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