THE 148-year-old house of Tatas, the pioneering industrial conglomerate that is widely admired for its brand of classy capitalism and the panache with which it conducts its business, is in the throes of its deepest-ever leadership crisis. The swift, sudden and unceremonious eviction of Cyrus Pallonji Mistry as chairman of Tata Sons, the holding company that controls a hundred business entities belonging to the group, on October 24 shocked not just the world of business but the wider public too. In a terse statement, the group announced that Mistry, who was at the helm for less than four years, would be replaced by Ratan Tata, his predecessor, as the interim chairman, with a tenure of four months during which a successor to Mistry would be found.
The eviction of Mistry threatens to engulf the House of Tatas in an unseemly battle which threatens to draw its attention away from the business end of its interests. Mistry, who succeeded Ratan Tata at the helm, first as an understudy to him in 2011 before assuming full-scale responsibilities as chairman in December 2012, also controls the largest single block of shares in Tata Sons. This is by virtue of him being the representative of the Shapoorji Pallonji group, an industrial conglomerate whose interests are primarily focussed on the construction business. Incidentally, the group traces its origin back to the time the Tatas established their empire in 1868. But, more germane to the current fracas is the fact that this large block of shares, constituting 18.4 per cent of Tata Sons, can create a few headaches for Ratan Tata.
The Mistry episode is not the first occasion senior executives have challenged Ratan Tata’s authority. In the 1990s, Russi Mody at Tata Steel fought for the control of Tata Steel, as did Ajit Kerkar to take charge of Indian Hotels—both the companies were given enormous freedom by J.R.D. Tata, whose tenure at the helm of the Tata group lasted 51 years, the longest reign ever by a chairman at the group.
However, unlike them, Mistry, by virtue of his position as group chairman, is also the chairman of the boards of all the major companies in the Tata stable—Tata Consultancy Services (TCS), Tata Steel, Tata Motors, Indian Hotels, Tata Power, and Tata Chemicals. The group is placed in a difficult situation as the clutch of companies get ready to release their second quarter results with Mistry still presiding over them. Although the chairmanship of these companies is, by convention, an ex officio one which would require Mistry to voluntarily step down once he is no longer the group’s chairman, there is no indication that Mistry is going to do so. Or, is he driving a hard bargain?
Evicting Mistry from the helm at Tata Sons was relatively easy because all it required was a majority, which was always available to Ratan Tata by virtue of his control over the Tata Trusts; but removing Mistry from the individual constituents of the empire would be more messy and long drawn because any resolution seeking his removal would require approval by shareholders at extraordinary general meetings of the individual companies.
Mistry hits back Any hopes that the Tatas may have had of Mistry silently fading into the night were dashed the following day when he mounted a scathing counter-attack whose prime target, obviously, was Ratan Tata. In a letter marked “confidential” that was addressed to the Tata Sons board members, but which was soon freely accessible on the Internet, he effectively accused Ratan Tata of back-seat driving. Referring to a string of problem areas he “inherited”, he alleged that he was not given the freedom to plan a “turnaround” of the group. He then proceeded to list a litany of woes that he had been saddled with, which, he said, constrained his room for manoeuvre.
Mistry’s allegations can be broadly classified into two sets. The first pertains to the terms of his engagement with the group’s board, and through it, his relationship with the trusts that control the holding company. The second set of issues pertains to serious problems in the major segments of the group’s business, which, he alleged, he was not allowed to address in a judicious manner while preserving the financial integrity of the group.
Terming the manner of his dismissal as “unique in the annals of corporate history”, Mistry pointed out that Tata Sons’ Articles of Association, which governed the terms of engagement among Tata trusts, the Tata Sons’ board, its chairman, and the operating companies belonging to the sprawling global empire with a turnover of more than $100 billion, were amended in a manner that curtailed his powers. In a unique arrangement which has stood the test of time, the empire has been controlled by a network of Tata trusts, which hold almost two-thirds of the shares in the holding company (see separate story).
Significantly, unlike during most of its long history when the chairman of the holding company was also the chairman of the Tata trusts, Mistry was not given the reins of the trusts that determined the composition of the Tata Sons’ board and the terms of its engagement with the rest of the empire. In effect, a diarchy of sorts prevailed, which, Mistry alleged, denied him the “free hand” that he was promised at the time of his ascension as chairman of the holding company in December 2012. In his letter, Mistry complained that he had been reduced to a “lame duck” and had been prevented from putting in place an “institutional framework for effective governance” of the Tata group.
Legacy hotspots
Mistry complained of “flawed” strategies pursued in various lines of businesses, which had left a “large overhang of debt”. He alleged that the five “legacy hotspots”—the hotels business, the steel business in Europe, Tata Motors, Tata Power’s Mundra project, and the telecom business—would require a “write down” of about Rs.1.18 lakh crore. He alleged that the capital employed in these businesses of the group had increased from Rs.1.32 lakh crore to Rs.1.96 lakh crore, mainly because of operational losses, cost of capital, and the need for investment in these lines of business. He pointed out that the capital employed had surpassed the group’s net worth of Rs.1.74 lakh crore.
Mistry also alleged that Indian Hotels’ acquisition of property in the United States, Australia and India had been based on a “flawed” strategy from which it was proving difficult to extricate. He referred to Mundra Power’s dependence on imported Indonesian coal, which from a low-cost source had turned expensive, resulting in losses. The fact that the project’s capital costs constituted 40 per cent of the capital employed by the company posed a considerable risk in the future, he said.
Referring to the “continuously haemorrhaging” telecom business of the group, Mistry said a “fire sale” of its assets would cost the group a loss of $4 to 5 billion. In addition, the payoff to NTT Docomo, its Japanese partner, would cost it an additional billion dollars. The Tata-Docomo partnership started in 2009 when the Japanese company invested $2.6 billion for a 26.5 per cent stake in Tata Teleservices. The shareholder agreement allowed for the foreign partner to exit at either a “fair value” of its stake or at half the value of its original investment. Given that the company was making significant losses, when Docomo decided to exit in 2014, it sought $1.3 billion from the Tatas. However, the request was denied by the Reserve Bank of India, for reasons which are perfectly logical. The central bank did not allow the transaction because the value of Docomo’s stake at the time of its exit did not represent “fair value” (in a loss-making company), and it did not comply with the stipulation that an assured return on equity would be a strict no-no. From a regulatory perspective too, the central bank saw that this would set a precedent for capital flight, preventing which is one of its key regulatory objectives. Docomo then took the issue to the International Court of Arbitration in London, where it received a favourable verdict, requiring the Tatas to pay it $1.17 billion. The Tatas again sought permission from the central bank, which refused it a second time.
Seen from this wider perspective, there appears to be some merit in Mistry’s insistence that the agreement with Docomo may have been flawed—legally, commercially and from a prudential perspective. Although the Tatas have not spoken about this, the tendentious criticism is that Mistry did not strive enough through negotiations with the political and regulatory authorities to surmount the legal problems in order to meet its obligations to its Japanese partners. It is possible that, unlike Mistry, Ratan Tata sensed that a window of opportunity for negotiating with the government was present because the Modi government was under pressure from Japanese investors who insisted that investments for projects—including the bullet train venture between Ahmedabad and Mumbai—would take off only after the issue with Docomo was resolved to their satisfaction.
The empire strikes back Later, in what appeared to be carefully calibrated leaks (with unnamed sources), the Mistry camp questioned the “independence” of the independent directors of the Tata Sons’ board. In particular, it pointed out that on June 28 the Nominations and Remuneration Committee at Tata Sons, headed by Ronen Sen, the former career diplomat who had served as Ambassador to the U.S. and Russia and to many other countries, had approved a salary hike and had acknowledged Mistry’s contributions.
In a hard-hitting response that appeared to be strikingly uncharacteristic of the Tata group’s leadership, Ronen Sen, speaking to a business television channel on November 3, refused to confirm the veracity of the “selective and motivated leaks by sources close to the former chairman”. Significantly, however, for the first time since the fracas came into the open, he indicated that serious happenings at Tata Sons involving Mistry in the last four months may have led to his sacking. “The implied assumption that there were no developments between the meeting of the Nominations and Remuneration Committee and the board meeting on October 24 is also naive to put it mildly,” he remarked. “The insinuation that I acted differently in the boardroom of an iconic company with a great legacy appears to reflect a mindset that measures others by their own self-centred priorities and perceptions,” he added tellingly.
Earlier, two days after Mistry’s letter was leaked, Tata Sons issued a statement terming the release of a confidential communication “unseemly and undignified”. It referred to the allegations as “malicious and unsubstantiated”. It pointed out that Mistry had been a director for a decade and was well versed with the “culture, ethos, governance structure, financial and operational imperatives of the Tata Group as well as various group companies”. It pointed out that Mistry’s tenure at the helm was “marked by repeated departures from the culture and ethos of the group”. It pointed out that the trustees of the Tata trusts were becoming “increasingly concerned with the growing trust deficit with Mr Mistry”. Still later, Ratan Tata, in a letter addressed to the nearly 600,000 employees in the Tata companies, said the move to oust Mistry was a “well considered and serious one”. The decision, he said, “was absolutely necessary for the future success of the Tata Group”.
Mistry, by all accounts, was a man in a hurry. He chose a path that was very different from the one the Tata group had followed, with its long-standing reputation as the quintessential lambi race ka ghoda —the horse that is trained for the long haul. Much younger, he was just 43 when he took over the reins, and trained in the streets of high finance and measured by those same yardsticks, his eyes were set on quicker returns. “He was focussed on unlocking shareholder value, by selling assets that were seen to be underperforming,” a recently retired senior Tata Steel executive told Frontline .
The executive council that he established at the group was a virtually “parallel structure” that bypassed the board, he said. He also pointed out that his approach was diametrically opposed to “the Tata ethos”, which took a long view of investment, often willing to wait for long periods before it turned profitable or successful. This executive, who served the Tatas for over 30 years, pointed to Tata Steel’s decision to pull out of Chhattisgarh as an indication of the “new short-sighted approach to business, which is not the Tata way”. “Since the gestation period of a steel plant is rather long, the company ought to have jockeyed itself into a position from which it could take off when the steel cycle was ready for an upswing, instead of shutting that option,” he said. Meanwhile, the company may have lost the trust of the local community, which expected employment and other opportunities for development in the area, he said.
Flawed strategy?
A dispassionate assessment of the happenings at Bombay House requires getting out of the Mistry-Ratan Tata binary, which is premised on the right or wrong actions of the two, rather than locating the current crisis in the group’s business strategy. In order to do this, it is important to reassess Ratan Tata’s role in manoeuvring the Tatas into a global conglomerate in the last decade, especially after it acquired Corus Steel’s assets in the United Kingdom in 2006.
Subsequent acquisitions, particularly of Jaguar Land Rover and the Tetley Tea brand in the U.K., deepened this engagement with the global marketplace. The global revenue of the Tata group increased from $21.9 billion in 2006 to $67.4 billion in 2010—a threefold increase in four short years—a spectacular increase by any measure. But here is the catch: while the group’s revenues from the external markets constituted a little less than one-third of overall revenues in 2006, the share of external markets in revenues was almost two-thirds by 2009.
Although the group is renowned as a diversified conglomerate, its overall revenues are extremely concentrated in a few companies; this concentration has been aggravated especially after its positioning as a global corporation in the last decade under Ratan Tata. The top 15 listed entities account for 90 per cent of the group’s revenues. Even more strikingly, the top three—Tata Motors, Tata Steel and TCS, in that order —account for almost three-fourths of the group’s earnings.
Ratan Tata’s timing of this deepening engagement on the global stage was fateful. Two years after the Corus buyout, which catapulted the Tatas as the owners of a company with the fifth largest steel production capacity in the world, the world economy dived dramatically, with Europe suffering from an unprecedented slowdown from which it is yet to recover. The highly leveraged buyout, which cost the Tatas $13.1 billion, has been hit hard in the slowdown and is reportedly costing the group a loss of $1.3 million every day.
A closer examination of the entities within the Tata empire, inspired by Ratan Tata’s vision, shows that the path of inorganic expansion through mergers and acquisitions has imparted a greater degree of uncertainty and volatility to its operations. While the revenue base has expanded dramatically, and acquired an emphatic overseas focus, it has strained group finances significantly. Consider this: in 2015-16, profits from one single company in the Tata fold, TCS, accounted for 70 per cent of all post-tax profits made by the 15 top listed entities in the group. The steel business, while bringing in revenues that accounted for about one-fifth of all revenues, made a loss of Rs.466 crore.
Do you sell your house to buy a shirt? That is the question that ought to be asked of Mistry, says a Tata insider. Mistry’s approach, in the face of a crisis that he inherited—or, at the very least, not of his making —is to shed the loss-making assets quickly in order to cut the group’s losses.
Old-time Tata insiders would argue for patience. They would, for instance, point out that there are indications of an improvement in the global steel market and that a depreciation of the British pound in the wake of Brexit augurs well for the British steel industry. They would advise a slow and sure approach rather than a hurried fire sale of assets. They have some history on their side, as the case of TCS illustrates (see The TCS Story…and Beyond , by S. Ramadorai, 2011).
TCS, which predates the onset of the global outsourcing boom by at least a good two decades, is a good example of what the so-called “Tata Way” possibly means. It started as a data processing centre for all the group companies, but blossomed into a full-fledged IT services company when the time was ripe. Along the way, it also acquired an India-centric focus, apart from expanding a global footprint that now gives it the status as India’s leading software services exporter.
But what distinguishes it from its peers in the business is the extent of its engagement with the domestic economy. It is critically important to recognise that if the Tatas had focussed on it as a mere “profit centre” at the time of its inception, it never would have blossomed into the cash cow that it has now become for the Tata group.
Unique role of Tatas
It is important to recognise that the Tatas have played a truly unique role in the evolution of Indian business. They may have started with the surpluses generated by the opium trade in British India, which brought them closer to the colonial administration, but to stop there would be unfair to history. As Indian Independence loomed on the horizon, they were quick to see the social compact that was developing, which, in the context of rising labour militancy against colonialism, required that the interests of labour be accommodated in the newly independent country. One could call it sagacity, statesmanship or being just plain smart, but the fact remains that it was the Tatas who implemented some of the far-reaching reforms that impacted labour. The concept of gratuity for labour, the eight-hour working day, compensation measures for workers suffering injury or death during the course of employment (which the Tatas extended to from the time the worker left home to the time he reached the workplace)—these were all implemented in Tata Steel well before they became legally enforceable for workers in the rest of the country.
One explanation for the Tatas’ accommodating the interests of labour has been attributed to the tireless campaign by a Tata insider but who turned out to be a champion for labour—Shapurji Saklatvala. Saklatvala, a nephew of Jamsetji Tata, submitted a statement of the Workers’ Welfare League of India to the Joint Committee on Indian Reforms in 1919, calling for wholesale labour reforms that addressed issues ranging from the implementation of the eight-hour working day to increased wages (see The Fifth Commandment: A Biography of Shapurji Saklatvala by his daughter Sehri Saklatvala, 2012).
It is for these reasons that a crisis at Bombay House is more than a mere conflict in the boardroom of a large industrial house. Much more is at stake for the world of Indian business, and much even more for those outside it.
With inputs from Anupama Katakam
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