Ever since, Cyrus Mistry was removed from the chairmanship of Tata Sons in a nasty coup engineered by the 11 directors of Tata Sons (two abstained from voting), corporate watchers are wondering what could Mr Mistry have done to completely lose the faith of the Board? Tata Sons has so far not been able to come up with any explanation. Mr Mistry is tight-lipped. However, sources close to the group speculate that Mr Mistry may have stumbled upon a hot button issue with Rata Tata: the relationship with C Sivasankaran, promoter of Sterling Infotech, with whom Mr Tata seems to have had a very cosy financial relationship for more than a decade.
Documents reviewed by Moneylife show that Mr Mistry had raised the issue of Tata Sons’ dealings with Mr Sivasankaran, which seem to have resulted in large financial benefits to Mr Sivasankaran (often referred to as Siva). Mr Mistry had raised the issue of initiating legal action against Mr Sivasankaran in the last Board meeting that he attended, to force him to settle his liabilities to Tata Group, mainly on account of the money to be paid to DoCoMo. Soon after, it was Mr Sivasankaran, who sent a legal notice to Tata Sons, while the much revered corporate group has not yet initiated any legal action. Sources close to the group wonder if this had precipitated events leading to Mr Mistry’s hasty, inexplicably and crude removal from chairmanship. Here is what was at stake.
The Siva-Tata Telecom Deal
According to the documents seen by Moneylife, Siva invested Rs884 crore to get a preferential allotment of 520 million shares of Tata Teleservices Ltd (TTSL) through Sterling Infotech Ltd (now known as Siva Industries & Holdings Ltd). Siva had paid Rs102 crore on 23 December 2005 and brought in Rs782 crore by 28 February 2006. He got 520 million shares of TTSL, with a face value of Rs10 for a price of Rs17 per share.
A section of the Tatas’ directors believe that this allotment was priced at a huge discount to the fair value of the TTSL shares. This is based on the fact that eight days later (on 8 March 2006) Temasek Holdings, an investment company owned by the Government of Singapore, was allotted Tata Teleservices shares at a price of Rs26 per share. Siva, they believe, received a huge benefit of Rs468 crore instantly.
On the other hand, documents, we have seen, indicate that Siva believes he was supposed to get shares at par but settled for Rs17. He is understood to have argued that his investment in Tata Teleservices was made because the Tatas were in dire need of funds. However, in 2013 Ratan Tata seems to have expressed a view that completely contradicts. He said that Siva wanted to invest in TTSL because he believed that telecom was a fast growing sector and he could sell his stake at a sizeable profit. However, Mr Tata confirmed that Siva was offered shares at par and the price was hiked to Rs17 per share in order to avoid any awkwardness with Temasek, which was paying Rs26 per share.
How did Siva get the Rs782 crore he paid in 28 February 2006? That too is an interesting story. He obtained a loan of Rs650 crore from Standard Chartered Bank against a virtual guarantee by Tata Sons Ltd (If Siva were to default, Tata Sons would have had to buy the Tata Teleservices shares and extinguish the loan). Further, Kalimati Investments, a subsidiary of Tata Steel, was made to advance Rs132 crore to Siva as an inter-corporate loan. All this was based on the closeness that Siva and Ratan Tata seem to have shared, although Mr Tata subsequently appeared to have distanced himself by saying that it was Arun Gandhi and Ishaat Hussain who handled the transaction.
In July 2007, Tata Teleservices made a rights issue at Rs25.80 per share, which established the value of the TTSL shares. In November 2008, Japanese DoCoMo made an investment of 26% in Tata Teleservices. Of this, 20% was in the form of an issue of new shares and 6% came from existing shareholders. Siva, was among the existing shareholders who sold 20.74 million of his shares to DoCoMo at Rs117.81 per share. This gave Siva a hefty profit of Rs209 crore or a return of 594% in less than three years, by selling 40% of his original stake of 520 million shares.
However, the deal with DoCoMo had a put option clause. Through this, DoCoMo had the option to sell its TTSL shares under certain conditions. This put option became active in April 2014. All those who had sold shares (6%) to DoCoMo got claims from DoCoMo in proportion to the shares sold. Siva was to bear the burden of DoCoMo’s claim in proportion to the 20.74 million shares he sold.
As is well known, DoCoMo’s claim under the put option has led to an international arbitration, resulting in an award of Rs8,450 crore. Information in the public domain shows that Tata Sons wanted to pay up, but the Reserve Bank of India (RBI) refused. DoCoMo had then gone into an arbitration, won the award and approached the Delhi High Court to enforce it. Meanwhile, Tata Sons has deposited the full amount on behalf of all the parties including Siva with the court. According to the insiders, Siva's share of the claim amount is Rs694 crore, which Mr Mistry was trying to recover from Siva to protect the interests of the Tata Group. According to sources, all the Tata Group companies who had sold shares to DoCoMo like Siva have deposited the amounts due from them but Siva alone has not done it.
On 15 September 2016, Cyrus Mistry briefed the Board that Siva was not responding to the Tata Sons’ demand that he pay up. The board was convinced enough to approve legal action against the Siva Group. However, within days it was Siva, who sent a legal notice to Tata Sons, Tata Teleservices and DoCoMo dated 15 September 2016, alleging oppression and mismanagement of Tata Teleservices.
This raises many questions. Did Siva know of what transpired in the Tata Sons board meeting of 15 September 2016? Did someone leak the Board decision to Siva and allow him to strike before the Tata Sons’ Board could act? Why has Tata Sons not been in any hurry to legally proceed so far? Incidentally, an article in the Mint, quotes Tata spokesperson Debasis Ray saying that the “Tata Sons is pursuing all legal options for the recovery of this amount”.
We learn that Darius Khambatta was the legal counsel who advised Tata Sons not to go initiate proceedings against Siva. Interestingly, Mr Khambatta, later became a trustee on one of the powerful Tata Trusts, but also resigned immediately after the decision to sack Mr Mistry. The next Board meeting, after all this activity, was on 24 October 2016 when Mr Mistry was ousted even before the Board Meeting could begin or take up any of these issues.
Our sources close to the Tata group say that Siva has a deep and longstanding relationship with the Tata group under Rata Tata’s leadership. Siva may have been paid nearly Rs600 crore between early 2003 and mid-2008 towards services relating to procurement and vendor management by TTSL and its listed subsidiary Tata Teleservices Maharashtra Ltd. Also, the Tata group has forked out Rs330 crore to purchase Dishnet DSL, a Siva group company in 2004, at a huge valuation. This money had to be written off later. Interestingly, Sivasankaran, who was once the Ambassador-at-large of Seychelles, was declared bankrupt in August 2014 by the Supreme Court of Seychelles.
According to those in the know, the close relationship between Ratan Tata and Siva, the huge sums involved, the sudden backtracking of Tata Sons’ Board in initiating legal proceedings against Siva, and the timing of Mr Mistry’s ouster seem curiously connected.
“Did Mistry have to be removed because he was poking into several deals that were causing discomfort to Mr Tata”, asks an insider, close to the action at Bombay House.
Updated at 9.30 pm:
Subsequent to publishing this story we received the following response from the Group Spokesperson, Tata Sons. While, we did not get answers to the specific questions we asked, we are reproducing this response verbatim.
"Mr. C. Sivasankaran had made an investment commitment much before Temasek. Considering the industry was in a growth phase at that time, the investment price was finalised accordingly.
This investment was funded partly by Mr. Sivasankaran’s companies through a loan from Standard Chartered Bank for which security of Tata Teleservices (TTSL) shares was offered to the bank.
To ensure that, in the event of default on repayment of the loan, the shares of TTSL were not sold to a third party, Tata Sons agreed to an arrangement whereby the bank would sell the shares to Tata Sons. A part of the purchase consideration was funded by another Tata company, for a short period of few days, on market-linked terms.
Subsequently in 2008, Docomo agreed to acquire shares of TTSL. Tata Sons voluntarily offered other shareholders of TTSL an opportunity for a pro-rata sale of their holdings. This was subject to the shareholders agreeing to bear a pro-rata portion of any claims or amounts payable to Docomo should such an event arise. The sale of shares in 2009 resulted in substantial profits for the selling shareholders.
Thereafter in 2014, Docomo exercised the put option. In terms of the agreement with the selling shareholders, Tata Sons demanded from Mr. Sivasankaran his pro-rata share of the amount payable to Docomo. Tata Sons is pursuing all legal options for recovery of this amount."
WHO ELECTS THEM TO HOLD TRUSTEESHIP OF SUCH A LARGE PIE.
THE GOVERNMENT OF INDIA, WITH RBI, SEBI AND THE STOCK EXCHANGES HAVE TO INVESTIGATE THE TRUSTEES FIRST OR WE WILL NEVER GET TO SOLVING THE PROBLEM.
So ultimately we have credible reason for Mistry's ouster. And that bares Tata!
I am waiting for the next episode. This beats Sherlock.