The NCLAT on Wednesday quashed the conversion of Tata Sons - the principal holding company and promoter of Tata firms - into a private company from a public firm, terming it "illegal".
The NCLAT, which ordered reinstatement of ousted Cyrus Mistry as Chairman of Tata Sons, in its order said 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," said the National Company Law Appellate Tribunal (NCLAT).
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/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 order said.
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 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 appellate tribunal 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 tribunal said.
"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 order added.
The NCLAT further said, "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".
The tribunal said that at the stage of hearing of the appeals, it was brought to its notice that RoC in the Certificate has struck down the word ‘Public’ and shown Tata Sons as ‘Private’ Company.
This was "in absence of any order passed by the Tribunal under Section 14 of the Companies Act, 2013," it added.