RBI diktat to force Tata Sons to scrap articles that bars new shareholders

The Reserve Bank of India’s (RBI) order directing Tata Sons to list will force forcing the privately held holding company of the salt-to-chips conglomerate to junk the provisions in its own Articles of Association that have for more than a century kept outside shareholders out and kept control locked firmly within Tata Trusts.

Tata Sons' Articles of Association (AoA), in existence since 1917 but amended repeatedly since, states within Article 4(c) that "no invitation shall be issued to the public to subscribe to any securities of the company."

This single clause had thus far made public listing legally impossible under the company’s current constitution. Tata Sons cannot proceed with a public share sale until this article is rewritten. Following the RBI’s September 11 rejection of Tata Sons attempt to voluntary surrender its Core Investment Company registration and stay out of the ambit of UL-NBFC category, amending the article is now unavoidable.

Interestingly, the AoA goes beyond just simply barring a public issue.

Article 57 gives existing Tata Sons shareholders, that is largely the Tata Trusts and group companies, the first right of refusal on any outside sale, requiring the company to first find a member willing to buy at “fair value” before an outsider can be admitted.

“Save as hereby otherwise provided, no ordinary share shall be transferred to any person, who is not a member of the company holding ordinary shares so long as a member of the company selected by the directors as one who in the interest of the company should have a larger shareholding, or failing such a member, any other person selected by the directors as one whom it is desirable in the interest of the company to admit to membership, is willing to purchase the same at the fair value which shall be determined as hereinafter provided,” states the article.

Also, Article 66 hands the board absolute discretion to refused registering a transfer to anyone it considers “undesirable.”

Similarly, Article 76 lets the board block any transfer than would push a single acquirer past 5% of the company’s ordinary share capital, or what the board believes could alter “the controlling interest” of the company.

Interestingly, Article 77 requires anyone crossing that 5% threshold to pay a board-determined premium for use of the “Tata” name, payable to the other shareholders before the transfer is even registered.

Put together, all the above clauses have helped the trusts enjoy a strong shield against any dilution of control, a structure that the Mistry’s family’s investment arm, Cyrus Investments, cited in 2017 when it wrote to Tata group companies opposing Tata Sons move to convert into a private company, arguing that the structure was detrimental to the interests of minority shareholders.

The second-largest shareholder’s long running contention that a listing would force transparency and free tradability that the current articles were specially designed to prevent, is effectively what the RBI has now indirectly mandated.

Control over the board

The AoA also gives the trusts institutional control in ways that go beyond share transfers.

Article 104 B gives Sir Dorabji Tata Trust and Sir Ratan Tata Trust, which collectively hold over 51% stake in Tata Sons, the right to nominate one third of the board’s directors as long as the trusts hold at least 40% of paid-up ordinary capital. Similarly, Article 188 gives the trusts control, through a selection committee, over selecting and removing the chairman of Tata Sons. Further, Article 121A requires board resolutions flagging “any matter affecting the shareholding of the Tata Trusts” or “the rights conferred upon the Tata Trusts by the Articles” as matters needing special board approval.

Corporate governance experts point out that as per Sebi’s Listing Obligations and Disclosure Requirements and standard governance practice expect director appointments, other than specifically permitted cases, to go through shareholder approval at a general meeting, where public shareholders get to vote.

In light of a listing, a clause that guarantees one-third of the board bypasses that process entirely is at odds with what the markets regulator expects from a board of a listed company. To comply with the listing requirements, Tata Sons would need to dilute or remove some provisions altogether alongside the transfer restrictions.

The Noel Tata angle

Within the Article 118 is a proviso, inserted by special resolution at Tata Sons annual general meeting in 2022, that states a person who is chairman of either the Sir Dorabji Tata Trust or the Sir Ratan Tata Trust, or both, is not concurrently eligible to be chairman of Tata Sons board.

Noel Tata was appointed chairman of both the trusts on October 11, 2024, following Ratan Tata’s death, which prevented him from leading Tata Sons as long as he heads the trusts. Since the trusts and the group companies held more than 75% stake, the resolution went through even as the Mistry family voted against the proposal at the 2022 annual general meeting.

Removing that proviso alongside the wider listing-related overhaul of the articles would require a 75% special resolution majority among the members voting, which the trusts with 66% cannot clear alone and would have needed the support of the six Tata group companies, who own 11.86% stake in Tata Sons. It would be interesting to see if the SP group, with its 18.4% stake, will vote in favour of the proposal.

Having pushed for years exactly the listing and transparency that the RBI has now mandated, the SP group could see it as a small price to support the trusts in amending this article too, thus paving the way for Noel Tata, who is married to Aloo Mistry, sister of Shapoor Mistry and the late Cyrus Mistry, in exchange for a structural change that the family has sought since 2016.

In effect, a potential listing, whenever it happens, will not merely add new set of shareholders to Tata Sons cap table but also dismantle the constitutional architecture that gave Tata Trusts' absolute freedom to run the 150-year-old conglomerate.