Trusts and control

THE fact that Ratan Tata could wrest immediate and decisive control of Tata Sons, the holding company of the Tata group, after unseating Cyrus Mistry on October 24 is a telling reminder of the fact that he never lost control of the empire. Four years after apparently handing over charge to Mistry, he is back in the saddle, even if only as an interim measure until a successor to Mistry is found. The swift sacking of Mistry, and Ratan Tata’s takeover of the reins, was made possible by the unique shareholding structure of Tata Sons.

The Tata group, a gigantic international conglomerate, consists of more than 30 listed entities; but more than twice as many are unlisted companies operating in a wide range of industries. The structure of the diversified conglomerate, much like the Japanese keiretsu or the Korean chaebol , is such that success is measured group-wide and not in individual islands as in the typical single-sector corporation. The complexity of Tata Sons’ structure reflects the approach of a diversified corporation in which individual parts of the empire are not just mere “profit centres” but those that offer a measure of insurance in an unstable world. For example, a company such as Tata Consultancy Services (TCS), with its currently much higher profit margins, offers a measure of protection against the vagaries of the market in the global steel business.

The ownership structure of the Tata group is very different from most other “family-run” business enterprises in India, but it is also not cast in the mould of most global business corporations. Although the “family” in the case of the Tatas has always been the wider Parsi community, it has never ever handed over the keys of the empire to an “outsider”. Such a degree of tight control has ensured a remarkable degree of stability—the Tata Group has only had six chairpersons in its 148-year history, even if the last one had just a four-year stint at the helm. That translates into an average of a 25-year tenure for a chairperson, a remarkably stable tenure at the helm for any large corporation anywhere in the world. The key to this stability lies in how the ownership of the Tata group is structured. Control is vested not with family members, which always runs the risk of being undermined by truant or recalcitrant behaviour at the helm, but with an array of trusts that keep the keys to the holding company.

Tata Sons, the holding company of the group, is itself unlisted, which means that it is insulated from the day-to-day vagaries of the market and the resulting pressure from shareholders for short-term returns. However, the main listed companies of the group are not spared an escape from constant shareholder scrutiny and demand for profits. The complex ownership structure enables the parent company to exercise control over its empire without having to necessarily hold majority shares in the individual entities.

Significantly, for most of its history, barring the period between 1932 and 1938 when Nowroji Saklatwala was chairman of Tata Sons, the general rule in the House of the Tatas was that the chairman of the trusts was also the chairman of Tata Sons. This unwritten rule was broken when Ratan Tata stepped down as chairman of Tata Sons in 2012; he retained the chairmanship of the trusts even as he handed over the reins of Tata Sons to Mistry. A diarchy was thus established, leaving Ratan Tata with effective control while Mistry functioned as a nominal head.

Seven trusts, arranged under two main branches, hold almost two-thirds (65.30 per cent) of the shares of Tata Sons (see graphics). The two largest, and also the oldest, trusts —the Sir Ratan Trust, established in 1919, and the Sir Dorabji Tata Trust (SDTT), founded in 1932—own more than half the shares of Tata Sons. This effectively gives them a majority in the company. Moreover, the SDTT’s ownership, which is above the 26 per cent threshold, gives it a veto in the Tata Sons board. To make it even safer for the promoters, the five other trusts bring in more firepower to the boardroom by virtue of the seven trusts together holding a total shareholding that is just shy of a two-thirds majority of shares in the holding company. But this is surmounted by the fact that Ratan Tata in his personal capacity, his brother Jimmy Tata and the M.K. Tata Trust—they do not fall under the promoter category of shareholders—control 2.24 per cent of the shares. An additional layer of protection is provided by the cross-holding by five Tata group companies: Tata Steel, Tata Motors, Tata Chemicals, Tata Power and Indian Hotels hold about 13 per cent stake in the parent entity.

The ironical quirks of capitalism are such that Ratan Tata, despite personally owning less than 1 per cent in Tata Sons, compared with the 18.40 per cent stake that belongs to Shapoorji Pallonji Group, which Mistry heads, is in a position to call the shots at Tata Sons. While this structure serves for control and stability, it may prove inadequate in a more uncertain world in which corporations need to attract the best available talent to pursue its goals. This is particularly relevant now as the group embarks on a search for a new leader. Mistry’s replacement at the helm, unless he/she is also given the reins of the Tata trusts, would know that effective control lies elsewhere. That, in itself, could significantly limit the scope of the search for a new leader.

Soon after Mistry was removed, gossip in business circles centred around three main internal contenders for the post of chairman of Tata Sons: Natarajan Chandrasekaran, the CEO and managing director of TCS, the most profitable company in the group; Ralf Dieter Speth, the CEO of Jaguar Land Rover; and, of course, Noel Tata, chairman of Trent Ltd and managing director of Tata International. Noel Tata, Ratan Tata’s half-brother, is also the only one with a Tata surname in the race. Of course, the appointment of Noel Tata would, in one fell stroke, remove the problem of diarchy that would remain with the appointment of an “outsider”.

The recent resignation of S. Ramadorai, former vice chairman of TCS, from his position as chairman of the National Skill Development Agency and as chief of National Skill Development Corporation fuelled speculation that he too may be in the fray. That proved to be wrong as Ramadorai, who steered TCS to great heights as its CEO, is now reported to be heading back to Bombay House as a special adviser to Ratan Tata during his four-month term as interim chairman.

During the tenure of J.R.D. Tata, Ratan Tata’s predecessor and the chairman with the longest tenure at the helm of Tata Sons, the Tata trusts’ hold over the holding company was strengthened by amendments to its Articles of Association. They were again amended soon after Mistry took over in 2012. The changes ensured that the Tata trusts would have the right to nominate at least a third of the directors in Tata Sons so long as they held at least 40 per cent of the shares in the holding company. Moreover, the directors nominated by the trusts enjoy the power to appoint or remove the chairman of Tata Sons. And, unlike in the rest of the Tata empire, where there is an age limit beyond which those at the helm cannot continue, Ratan Tata holds the position of the chairman of the trusts for life.

While the business world awaits news on who Mistry’s successor will be, a more fundamental question arises: Who will take over the Tata trusts, which are the main vehicle of controlling the Tata empire, after Ratan Tata? Or, to put it more sharply, do the Tatas have a succession plan for the trusts, even as they search for a new chairman for the holding company? Addressing that question first before settling on a new chairman of the group may well be the most prudent option. It would settle many questions, but, most importantly, it would greatly ease the task of doing business for whoever takes over next.