December 19, 2019

Conversion Of Tata Sons From A Public Company To A Private Company Is Illegal, States NCLAT’s Mistry Judgment

[ By Bobby Anthony ]


The National Company Law Appellate Tribunal (NCLAT) order which reinstated Cyrus Mistry as the Tata Group’s Executive Chairman, has also held that the conversion of Tata Sons from a public company to a private company is illegal.

Accordingly, the NCLAT has asked the Registrar of Companies (RoC) to recognize Tata Sons as a public company once again.

It may be recalled that in 2017, Tata Sons had decided to convert itself into a private company whereby its shareholders would not be able to trade their shares, which was vehemently opposed by Cyrus Mistry and his family who have more than 18% stake in Tata Sons.

A private limited company is a business entity which is held by private owners. This type of entity limits the owners’ liability to their ownership stake, and restricts shareholders from freely trading their shares.

This factor had restricted minority shareholders of Tata Sons like the Mistry family to sell their stakes to buyers of their choice.

However, after the NCLAT's order converting Tata Sons back to a public limited company, the Mistry family is now completely free to sell or retain their minority shareholding as per their choice in the holding firm of the Tata conglomerate.

After the Registrar of Companies (RoC) lists Tata Sons as a public limited company, the Mistry family would be able to sell or retain their minority shareholding in Tata Sons as per their choice.

The NCLAT order has stated that the action taken by the Registrar of Companies (RoC) to allow the firm to become a private company was against the provisions the Companies Act, 2013 and ‘prejudicial’ and ‘oppressive to the minority members and depositors’.

“The Company (Tata Sons) shall be recorded as ‘public company’. The RoC will make correction in its record showing the Company as public company,” the NCLAT order stated.

Months after Mistry was sacked, Tata Sons had received its shareholders’ nod in September 2017 to convert itself into a private limited company from a public limited company, thereby absolving it of the need to take shareholder consent in taking crucial decisions, which could be passed with just the board's approval.

The NCLAT said Tata Sons' action to hurriedly change the company to a private company with the help of RoC "just before filing of the appeal suggests that the nominated members of ‘Tata Trusts’ who have affirmative voting right over the majority decision of the Board of Directors and other directors or members, acted in a manner ‘prejudicial’ to the members, including minority members (Shapoorji Pallonji Group) and others as also ‘prejudicial’ to the Company (Tata Sons Ltd)”.

Tata Sons Ltd was initially a ‘private company’ but after insertion of Section 43A (1A) in the Companies Act, 1956 on the basis of average annual turnover, it assumed the character of a deemed ‘public company’ with effect from February 1, 1975, the NCLAT order stated.

Although Tata Sons' counsel had argued that the firm could become a private company on the basis of a central government circular issued in September 2013 by taking permission directly from the RoC, the NCLAT ruled that the said circular cannot override substantive provisions of Section 14 of the Companies Act, 2013 which is mandatory for conversion of a ‘public company’ to a ‘private company’.

The NCLAT observed that “curiously, the Tata Sons Limited remained silent for more than 13 years and never took any step for conversion in terms of Section 43A (4) of the Companies Act, 1956”.

Even after enactment of the Companies Act, 2013 which came into force since April 1, 2014, for more than three years, it had not taken any step under Section 14, the NCLAT stated.

“Till date, no application has been filed before the Tribunal under Section 14(2) of the Companies Act, 2013 for its conversion from Public Company to Private Company," the NCLAT order stated.

The NCLAT further stated, “In absence of any such approval by the Tribunal under Section 14, we hold that ‘Tata Sons Limited’ cannot be treated or converted as a ‘private company' on the basis of definition under Section 2 (68) of the Companies Act, 2013”.

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