AGENCY PROBLEM – TATA MISTRY CASE

INTRODUCTION
The issue of the Agency is a conflict of interest inherent in any partnership where it is
assumed that one party will behave in the best interest of another. Without the relationship
between a principal and the agent, the agency issue would not occur. Agent problems may be
between stockholders vs. management, creditors or other stakeholders. Tata- Mistry case is
considered to be one of Corporate India's most dramatic and consequential battles in the
recent history. It is a principal agent conflict. Cyrus Pallonji Mistry is a business of an Indian
origin and Irish citizenship. He was the chairman of the Tata group from 2012 to 2016. The
Pallonji family have been active in the business for over a century and it was in the 1930’s
that Mistry’s grandfather, Shapoorji Mistry, first acquired a stake in the Tata sons. The stake
now stands at 18.5%, is presently held by Mistry’s father and comprises the largest block of
shares held by a single party.

AGENCY PROBLEM
The main issue for the conflict was because of the difference in the opinion by the Top level
management and Mistry. In between, Ratan Tata also took dim views on the suggestions of
Mistry and his aides on piloting the offer for a prestigious defence contract and approach to

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the Tata Power-Welspun agreement, including the wording of the minutes of a meeting of the
board. According to the Tata sons, Cyrus Mistry caused huge financial losses to the group
firms. In October 2016, the board of the Tata group voted and decided to remove Mistry from
the post of chairman after giving him a chance to resign voluntarily. The major issues are:

● The Rs 10 Crores Battle -  

One of the earliest concerns that Ratan Tata shared his frustration with Mistry and his
team was electoral financing, a hot button topic for any large business party. In
mid-2014, a near Mistry advisor suggested financing of RFs 10 crores for Odisha
assembly elections. The reason given was that Tata had large deposits of iron ore in
the state.
● The 60,000 Crores Battle
Aboard member said that when the Tata group made two tenders for a prestigious
military contract earlier this year - the 60,000 crores contract for 2,600 Future Infantry
Combat Vehicles - Ratan Tata was "dismayed".
● Dispute Over the Tata - Welspun
The disputes over the Tata-Welspun agreement were based on a little-known fine print
battle. The contention of Ratan Tata was that the refusal of Cyrus Mistry to put the
Tata Power-Welspun deal before the board of Tata's sons led to a violation of the
association papers, since the scale of the deal was significant enough to warrant the
approval of the holding company. "The Tata Power board meeting on the deal saw the
representatives of Tata son arguing that it should be recorded "the reality of a
violation of the articles of association. Reportedly, Mistry said the term
"infringement" had legal connotations and should not be used. "Ratan Tata was
consulted by the members of Tata Sons and "infringement" was replaced with not in
compliance with". However, said the board member quoted earlier, no reference to
this was made in the final minutes. Ratan Tata was angry, said the board member, and
the company secretary changed the minutes again.
● The Food Fight 
The Tata-Mistry fight was really spiced up by a plan for a fast food tie-up. A plan for
a tie-up with the US pizza chain Little Caesars was submitted to the Tata Sons Board.
He was disappointed that anything like that was being placed before the board of the
son of Tata. There were other agencies from Tata who could deal with this sort of

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 material. He thought like this was just dragging the community picture down. "A
member of the board told ET."
● Japanese and workers
The member of the board said that all these problems added to a "worrying picture"
and that Ratan Tata also felt disrupted by the approach of Mistry to widely varying
subjects, the management of Tata factory workers and the management of ties with
Japan Inc.

DETAILED ANALYSIS AND EXPLANATION OF THE CASE

On 24th October, 2016, Mr Cyrus Mistry, the chairperson of Tata Sons was removed from his
position. Mr Ratan Tata and one other Tata Sons’ director met with Mr Cyrus Mistry to ask
him to resign from his position. When he refused, they held a board meeting. In that board
meeting, there were 9 directors, 7 of whom voted in favour of removal of Mr Mistry. One
director remained neutral and only one voted against the notion and that was Mr Mistry
himself. Thus, it was a unanimous decision to remove Mr Mistry from his position.
Mr Mistry’s investment firms, Cyrus Mistry Investment Private Limited and Sterling
Investment Private Limited went to the National Company Law Tribunal (NCLT) to
challenge the removal. Mr Mistry accused Tata Sons in front of the NCLT of discriminating
against the minority shareholders. They also alleged that there was some mismanagement that
was also going on and the way in which Mr Mistry was removed from his position was also
not fair.
In 2018, NCLT judged that there was no mismanagement in Tata Sons. After NCLT’s
decision, Mr Mistry’s firm went to the National Company Law Appellate Tribunal (NCLAT).
On 18th December, 2018 NCLAT judged that Tata Sons will have to reinstate CM in 4 weeks.
But Tata Sons appealed this decision in the Supreme Court. The Supreme Court put a hold on
NCLAT’s order. The Supreme Court said that there were gaps and errors in the order of
NCLAT and thus they will have to understand the matter in detail. There will be more
hearings held on this and the decision made by the Supreme Court would be final and would
not be challenged further.
The Mistry family bought Tata Sons’ shares from Mr JRD Tata’s brothers in 1960. The
relationship between the Tata-Mistry families was always good. Currently, the Mistry family
has 18% shares of the Tata Sons. Thus, they are the biggest individual shareholder of Tata
Sons. 66% of the shares of the Tata Sons are held by Tata charitable trusts and not family

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owned. Tata Sons is the Tata Group’s companies’ holding company. They do not conduct any
business on their own. They just hold the shares of other Tata companies. Currently, it holds
the shares of different companies as follows:

Company Percentage of Shares held by Tata Sons

TCS 72%

Tata Motors 35%

Tata Steel 33%

Voltas 30%

Titan 25%

Tata Power 33%

Indian Hotels 39%

Company

66% of the shares in Tata Sons are held by different charitable trusts. Mr Ratan Tata holds
only 0.83% of the shares. If all these shares had been held by RT himself, then he would have
been the richest person in India and also would have been in the Top 10 Richest people in the

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 world. There are many charitable trusts run by the Tata Group such as Sir Dorabji Tata Trust
which has 28% stake in the Tata Sons, Sir Ratan Tata Trust which has 23% Stake in the Tata
Sons, Tata Education Trust, Tata Wealth fare Trust, JRD Tata Trust etc. These trusts help
marginalized children pursue higher education, hospital expenses etc.

The Tata’s always wanted that the profits generated from their business should be used for
social work so that India could develop. This is a value that the company strongly follows. 

There are three main reasons as to why the differences between Mr Cyrus Mistry and Mr
Ratan Tata arose:

1) Deal between Welspun and Tata Power:

In 2016, Tata Power bought Welspun Renewable energy for Rs 9249 crores. This was a very
huge deal. If Tata Power’s market capitalization is considered, it was around Rs.
18000-20000 crores at that time. But Tata Sons’ board members were not informed about this
deal. Tata Power was also not performing well during the last few years. In such a critical
situation, the fact that they were not told about such a huge deal did not sit right with them
since they were the holding company of Tata Power. Because Tata Sons are the main
shareholders, the board members are made aware of all the details regarding important
decisions of all companies, especially in the case of acquisitions and fund raisings. Then, a
collective decision is taken. This is the company’s traditional way of working. Some other
such situations happened due to which the board members started feeling that they were
being separated from the decision-making process. This also went against the norms of the
company.

2) Tata and DoCoMo:

In 2009, Japan’s biggest telecom company NTT DOCOMO invested 2.7 billion dollars in
Tata Telecom Services and bought 26.5% of the shares. There were some agreements and
conditions in this deal which were as follows:

● If the company operates well and certain targets are reached then after 5 years, the
company will increase its stakes to 51%.
● If the company’s performance is bad and the decided parameters and targets are not
fulfilled, then Tata will have to buy back NTT DOCOMO’s share at half-price or find
another willing buyer to buy back the shares.

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 Unfortunately, Tata Teleservices (TTS) failed in achieving targets. Since the company was
making huge losses, they could not find any willing buyers. Hence their only option was to
buy back their shares at half-price i.e. 1.3 billion dollars. A few days back, the Reserve Bank
of India (RBI) changed the rules regarding buy back share prices. As per RBI’s new Foreign
Equity Rules, any foreign investor would not be able to sell shares on pre-decided prices. If
the pre decided price was more than the current market share price then they cannot sell the
shares at that price.

The accounting firm Price Waterhouse and Coopers (PWC) valuated Tata Sons’ stocks using
discounted cash flow (DCF) and concluded that their stock price was much less than $1.3
billion. Hence, if the RBI rules were followed, the agreement with DOCOMO would not be
fulfilled. DOCOMO did not agree to this new deal. DOCOMO went to the International
Arbitration Court (IAC). The IAC decided that DOCOMO was right and asked TTS to pay
up. Afterwards, NTT went to Delhi High Court to get their payment and TTS had to pay. It
was later revealed that DOCOMO had suggested different ways of honouring the agreement
without flouting the rules made by RBI. But TTS had rejected the new deal. Mr. Ratan Tata
did not like this. According to him, the company should never have been taken to the court as
it would have been a blow to the reputation of the company in the international market. Tata
has a reputation of trust and reliability. Whenever a foreign company looks to invest in India
or partner up with a firm in India, the first preference has always been Tata. Mr Ratan Tata
was of the opinion that Mr Mistry should have interfered earlier and the matter should not
have reached the court.

3) Conflict of Interest:

When Mr Mistry became the chairperson of Tata Sons, there was a condition that their family
business, the Shapoorji Pallonji Group should be kept separate from Tata Sons’ business so
that no conflict of interest arises. Mr Ratan Tata clarified this message numerous times. In
October 2013, Mr Cyrus Mistry wrote to all the companies under the Tata Group that the Tata
Sons will not do any business with Shapoorji Pallonji Group. But Mr Ratan Tata alleged that
some contracts meant for Tata Group went to the Shapoorji Pallonji Group. Mr Mistry denied
all such allegations. Mr JRD Tata said, “It is the ethics and values of Tata Group that should
remain constant throughout.” Mr Mistry violated this very ethics and values and hence the
unanimous decision of his removal was made.

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AFTERMATH OF TATA – MISTRY CASE
The Tata-Mistry case has given rise to some engrossing questions regarding the rights of the
minority, corporate governance and the degree of independence of directors. And the answers
to these still remains unclear as a final verdict or judgement between the battle of the
Tata-Mistry case has not been provided by the Top Court.
From the above case analysis we can identify that initially when the removal of Cyrus Mistry
was proposed by the board of directors in the year 2016 as they were losing confidence in
him the reason being mismanagement of Tata operations as it is seen in the Welspun and Tata
power case, Tata and DoCoMo case and conflict of interest between Tata and the Shapoorji
Pallonji Mistry (SP Group) case- all these being a principle-agent problem during his tenure
compelled Mistry-SP Group also to file a case against Ratan Tata and the Tata Trusts stating
that he was merely treated as a Lame Duck in the operations of Tata Group as Ratan Tata and
Tata Trusts being the majority shareholders used their authority to control and take major
decisions at the board level that were prejudicial to the minority shareholders including Cyrus
Mistry and that was projected in the Corus acquisition deal and the Air Asia deal.
1. In the judgement that was proposed by the National Company Law Tribunal in the
year 2016 it stated that a principal-agent problem (between the CEO and the
Shareholders) was projected as a principal- principal problem between the majority
and minority shareholders by Mistry and that the remedy for him lies in the civil court
and his removal as the Executive Chairman cannot be construed or interpreted as
grievance of the minority shareholders.
2. The NCLT also proposed that the interference of the majority shareholders in the
corporate decision making cannot be reversed under the statute unless the decisions
made are unjustly prejudicial to the minority shareholders. And the NCLT concluded
without interfering into the Articles of Association of the Tata Sons that it did not find
anything wrong in the majority shareholders taking part in the corporate decision
making.
3. After this judgement was passed by the NCLT, Ratan Tata returned as the interim
chairman and later Natarajan Chandrasekaran was designated as the new chairman on
October 24th 2016 and Mistry was removed as the Executive Director from Tata Sons
on February 6th 2017.
4. Later the NCLT had rejected the plea given by the SP Group regarding the oppression
and mismanagement caused by Tata Sons and also removal of Mistry because of

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 maintainability issue stating that in order to file a case of oppression of minority
shareholders as per the Companies Act a company should have 10% ownership or
stake in the other company but the Mistry family holding 18.4% stake in the Tata
Sons holds less than 3 % of stakes if the preference shares are eliminated and found
no ground for allegations for oppression and mismanagement against Tata Sons and
therefore Mistry had to move the case to NCLAT against the orders of NCLT and
NCLAT allowed the SP Group to file a case of oppression and mismanagement
against Ratan Tata dismissing the maintainability issue.
5. Later in December 2019, the National Company Law Appellate Tribunal (NCLAT)
stated that the appointment of Natarajan Chandrasekaran as the Executive Chairman
was found to be illegal and passed orders to restore Mistry.
6. But the Supreme Court on 10 Jan 2020 put a stay on the order that was passed by
NCLAT and this has led to Mistry filing a cross appeal in the Supreme Court for
seeking clarification for anomalies in the National Company Law Appellate Tribunal.
7. As per the latest news dated 8th December 2020 Senior advocate Harish Salve
appearing for the Tata’s told that the according to the cross appeal filed by Mistry the
Shapoorji Pallonji (SP) group claimed that the value of their 18.37% share currently
stood at ₹1.75 lakh crores which a few months ago was 1.5 lakh crores but the Tata’s
said the value of the SP group shares stood somewhere between ₹70000 crores and
₹80000 crores. And he said that if one goes by what the SP group claims then it shows
how a strange management which had mismanaged the company but still took the
value of their shares from ₹58000 crores in 2016 to ₹1.75 crores in 2020. He then
concluded that the NCLAT did not look into the probity aspect and thereby could not
justify or provide a basis for the judgement it passed earlier regarding the restoration
of Mistry and also winding up of Tata Sons.

The case still remains unresolved.

LEARNINGS
Some of our learnings include:
1. The importance of principle-agent relationship in an organization. It is very important
that the agent (CEO) acts in the interests of the principal (shareholders/owners)
because if the agent acts in his/her own interest it leads to agency problem as here we

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 can see Mistry going against the interests of the shareholders by signing the Welspun
and Tata power deal without letting the board members know of such a deal and some
of the contract that was meant for Tata Group were send to the SP Group and this in
turn has affected the management and reputation of Tata sons.
2. Tata is known for trust. That is one of the attributes that distinguishes them from its
competitors. But with Cyrus Mistry taking the CEO position of Tata Sons has
somewhere shaken its trust that they had built over the years. Especially by
undertaking the Tata Docomo deal which led to huge losses and involvement of
courts, Ratan Tata could not accept this failure as Tata was a highly reputed and
trusted company globally.
3. If Cyrus Mistry succeeds the case then it would an irreversible damage that Ratan
Tata is going to face who is a legendry of the corporate world in India. Mistry filed a
case against Ratan stating that his act as a shadow director was to an extend that a
member of the board would take a break during a crucial corporate decision making in
order to call up Ratan Tata – which Mistry felt was against the rules of insider trading.

CONCLUSION
Agency problem is a result of the mismatch of opinions/interests between the company’s
management, creditors or the other stakeholders with the stockholders. The problem arises
when the party that is the agent which is supposed to serve the principle acts on his
self-interest. A 70- year old corporate marriage may be coming to an end. That is longer than
most collaborations last, as one lawyer pointed out. Besides, four years ago, this one soured,
producing quite a stink. The attorneys were the only ones not holding their noses. They now
have one more major payday left, from the looks of it. In this case, it is clearly evident that
Mistry dint act upon the interest of the shareholders and that caused a rift in the opinions
between the Tata sons and Mistry. As a result, Tata sons incurred huge losses.

From this report we can conclude that how an agency problem can turn out very threatening
for any organisation. As we know a final judgement has not been passed on who prevails the
case but from the various readings and analysis, we have done we have identified how
Mistry’s mismanagement by acting on his own interests without considering the interests of
the other board members led to various project failures and losses for Tata thereby affecting
the interests and reputation of Tata’s members and the company. But there are also comments
that reveals that some of the decisions taken by Mistry were more appropriate though other

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board members did not agree to his terms. Few examples to illustrate this is firstly in the
Jaguar Land Rover Acquisition, Mistry had warned there would be impairments of nearly $10
billion and this had come true when Tata had incurred $3.9 billion non cash asset impairment
and this was a loss of value. Secondly in the Tata Docomo case Mistry wanted to challenge
and fight the battle against the Japanese Telecom Company but when Mistry called the other
members of the board, they just wanted to exit the battle and settle the conflict. But Mistry
predicted that exiting the business would cost around $4-5 billion and few years after Mistry
was removed the Tata Group had incurred a cost of $6 billion as a result of its error of giving
rise to price war in the telecom sector. There are many other instances too. This shows how
difference of opinion can become a barrier for any business and therefore there is a need for
businesses to consider various opinions and look at matters from all perspectives and come to
a best possible conclusion.

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