Posted by: John Elliott | December 22, 2016

A bitter battle has started for the future of the Tata group

Ratan Tata has shattered his and the group’s protective halo

The Tata group, India’s largest conglomerate, faces an unpredictable new year with a battle developing for control of what has always been regarded as India’s most stable and respected business group. The end game is far from clear at this stage, but what is clear is that serious damage has been done to the Tata image.

On one side is Ratan Tata, the veteran former chairman who instigated the sacking on October 24 of Cyrus Mistry, his successor as chairman of Tata Sons, the group’s top holding company. He is trying to find a new chairman who will rebuild the image and the group’s relationship with Tata trusts that own a controlling 66% stake in Tata Sons

On the other side is Mistry, who was the first chairman not from the Tata family and held the job for nearly four years. His Shapoorji Pallonji family, which belongs to the same Parsee religion and community as the Tatas,  owns an 18.5% stake in Tata Sons – the largest minority holding after the trusts. Mistry has started destabilising regulatory and legal actions that are aimed at changing the governance structures of the group and, consequently, control.

In the wings are members of the Tata Sons board who have been backing Ratan Tata but who, according to unsubstantiated rumours swirling around Mumbai, may have other plans for the future of the group.

Mistry’s immediate aims include removing Ratan Tata from the temporary chairmanship that he assumed on October 24, and also removing board members who he has recruited in recent months. Also planned are changes in the way that Tata charitable trusts, which are also headed by Ratan Tata, relate to the companies.

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Cyrus Mistry – Dec 19, PTI photo

The first stage of Mistry’s legal campaign began today (Dec 22) with the National Company Law Tribunal (NCLT) holding a preliminary hearing on a petition from his investment companies for an administrator to take over the group’s affairs, pending the appointment of a new board – led, it is suggested, by a retired supreme court judge. The petition is based, under India’s companies’ legislation, on allegations of oppression of minority shareholders and mismanagement of Tata Sons.

Ratan Tata, who is 79 on December 28, was chairman of Tata Sons for 21 years till the end of 2012 when he was replaced by Mistry with his support. During most of those years he was also chairman of Tata trusts and of the leading operating companies, which meant he dominated decision making and few people would cross him.

That absolute authority ended with Mistry’s appointment, though Ratan Tata continued to exert corporate authority as chairman of the trusts, and less formally as the bearer of the Tata name, which gradually led to his relationship with Mistry breaking down.

The current (unnecessary) upheaval is the result of him deciding in October that he could no longer tolerate dealing either with Mistry, aged 50, or with Mistry’s top advisors, who many saw as excessively abrasive. Talking to contacts in Mumbai and elsewhere over the past few weeks, I have found far more support for Mistry than Tata on almost all grounds, except on the advisers who formed a general executive council and are widely criticised.

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Ratan Tata in October, PTI photo

Ratan Tata could have waited till next April when Mistry’s current contract expires and had him replaced then. He has said that he will take the reason why he had to act when he did “to my grave”.

The apparently impulsive action has shattered a protective halo that has surrounded both the group’s and his personal image for decades. It has released streams of pent-up personal criticism that has rarely been uttered in the past but now constantly crops up in conversations with businessmen, professionals and observers.

Mistry’s 344-page petition was served on 23 people, including members of the Tata Sons board – industrialists Ajay Piramal of the Mumbai-based Piramal group and Venu Srinivasan of TVS in Chennai, together with Nitin Nohria, Harvard Business School dean, Amit Chandra, India head of Bain Capital, Vijay Singh, a retired bureaucrat, and Ronen Sen, a former top diplomat. Also in the list is N.A.Soonawala, a Ratan Tata confidante and former top executive, now on the Tata trusts.

The inference is that these people, who Mr Tata has assembled on the board and who backed the removal of Mistry, have plans for the group that will be detrimental both to the reputation and success of operating companies, maybe after Mr Tata has finally retired. Linked with this is what would happen to the 18.5% stake that Cyrus Mistry’s Pallonji family has in Tata Sons as the biggest minority shareholder. Among the names, Piramal is know to have an appetite for takeovers.

Tata rebuts Mistry’s allegations which have been building up in a series of public statements since October. They include revelations of alleged questionable payments made by a Tata aviation joint venture with Air Asia of Malaysia, financial deals which Ratan Tata did in the past with Chinnakannan Sivasankaran, a controversial south Indian businessman who has been close to him, and other telecoms investments.

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Ratan Tata leaving the Finance Ministry in Delhi in November after lobbying Arun Jaitley, finance minister – PTI photo

The tribunal is also being asked to investigate whether the Tata trusts have breached insider trading regulations by asking for price-sensitive information from publicly-listed operating companies – something that Mistry annoyed Ratan Tata by resisting on one planned takeover.

“This is about governance — it’s not about me, it’s not about my position,” Mistry told the Financial Times yesterday. “Whatever I have said has been said for the long-term interests of the group. Nothing that I’ve said is not backed up.” He said that he would end his campaign “when a structure is put in place at the trusts, which clarifies [their role] with regard to Tata Sons”. He said that this would involve making sure that strategic moves were not made purely on the strength of “one person’s decision”.

Tata Sons dismisses Mistry’s public campaign as “a personal issue which reflects his deep animosity towards Mr Ratan N Tata”. It has also said that the group followed “the highest standards of corporate governance”.

Ethical reputation

That statement goes to the crux of recent events. For decades, the Tata group has been seen as one of India’s most ethical and corruption free businesses. Ratan Tata has often spoken about this, telling for example how he missed out on an aviation deal with Singapore Airlines in 2000 because he would not pay a bribe. Yet the revelations challenge such a reputation.

After Mistry was removed from the Tata Sons chairmanship, Ratan Tata started moves to remove him from the chairmanship of operating companies in steel, hotels, power, chemicals, beverages, and motors, alleging that Mistry was a “serious disruptive influence”.

The companies involved called emergency general meetings, several for this week. Mistry forestalled that by voluntarily resigning his chairmanships and board memberships on the evening of December 19, presumably knowing that he would lose the shareholders’ votes. Tata Consultancy Services removed him last week.

Yet all the companies, including Tats Sons, had given Mistry excellent reviews of his role as their top manager in the past few months. This meant that Ratan Tata has had few categorical reasons for sacking him, and it also led members of some of the companies’ boards to vote for Mistry to remain as chairman. Yet, Tata alleges, “Mistry has done precious little to build the goodwill of the Tata Group, built through the hard work and dedication of its employees.”

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Nusli Wadia – PTI photo

Mistry’s alleged misdeeds include not implementing changes he had proposed when he was being interviewed for the chairmanship in 2012, and not  moving fast enough on resolving problem areas including heavy debt burdens that he inherited.

He is also however accused of moving too fast on plans to close Corus, part of Tata Steel in the UK, at a time when the steel demand is picking up. There have also been criticisms of the way he handled a joint venture severance dispute with DoCoMo of Japan, plus rumblings that he clashed with Ratan Tata on the need to close down Tata’s personally-inspired but failed Nano small car project.

On the sidelines of this saga, there is a row involving Nusli Wadia, 72, a prominent Mumbai businessman and previously a close Ratan Tata friend and adviser. He is on Tata’s motors, steel and chemicals boards and has outspokenly backed Mistry.

Tata responded by calling for his dismissal from the boards – the first response came yesterday with Tata Steel voting him off its board. Wadia has filed a Rs3,000-crore defamation suit against Ratan Tata and the board of Tata Sons, and has complained about Tata’s corporate governance to the Securities and Exchange Board of India (Sebi). He has also issued a series of allegations against Tata, including criticism of the Nano production line not being closed,.

Ratan Tata has been getting a bad press internationally, though most of it has been directed more at the dominant relationship that he has expected to be able to exert on Tatas Sons through the chairmanship of the Tata trusts, plus his recent tactics.

Media reports last weekend indicated that he is willing to step down as chairman of the Tata trusts sometime next year. That would be in addition to handing over to a new Tata Sons chairman, which he has said should happen in the first two months of next year. But he wants to leave the trusts when he thinks it appropriate, not when Mistry or others seek to ease him out.

The FT’s respected Lex financial comment column took a tough line yeserday: “In resorting to counterclaims against Mr Mistry, Tata has done itself no favours. By throwing mud of its own, rather than presenting evidence that its process is clean, Tata is left with a bigger mess on its hands”.

What was left unsaid is that the whole “mess” could have been avoided with a little patience and with more care in the implementation of such a major generational change of top management.

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Responses

  1. While I was reading this blog, there are certain things that crossed my mind. Firstly the statement, “reason for ouster will go to my grave” itself sounds secretive, not expected of someone like Ratan Tata. Mistry’s claimed under performance could have been reported as per the protocol if at all there was any. Also, the fact that other independent directors like Nusli Wadia backing Mistry were expelled raises a lot of questions on Tata’s insecurity. What I understand for sure is interests of Stakeholders and liable people cannot be ignored. There has to be serious investigation on the claim of breached insider trading regulations with respect to price-sensitive information and other scams. Truth will ultimately prevail where there is pains to bring it to light.

  2. Ratan Tata’s conscience made him say those words. After all it was friendship of many many years; and the betrayal of a friendship falls heavy on the conscience of the person. The truth of the matter is that it was too huge a task for Mistry. Ratan Tata should have given the job to three people and not one.

  3. It is sad; but was inevitable. Tata group under Mistry continued to flip-fop in their UK interests. Jaguar/Range Rover depended too much on China for expansion. Under Mistry, India was being ignored in spite of the fact that Modi Government fully supported the expansion in India. Mistry did not fit in the shoes of Ratan Tata who is a visionary as well a prudent businessman. Ratan Tata, unfortunately chose a wrong man for the post. He is paying for it now.

  4. Who would have thought Tata could be involved in these scams that we are reading about lately. I’m sure this must have been a point of discussion in boardrooms, but this is the first time its out in broad daylight. Tata is a brand to which a wide range of population, ranging from business stakeholders to common man is connected directly or indirectly. Any breach in the sheath of ethics and governance in Tata affects a larger audience. I second Cyrus Mistry’s move of going legal as the facts will now be presented, discussed and meditated upon. The allegations on Ratan Tata are grave and cannot be ignored. There has to be a conclusion.

  5. Maybe there should be an obligatory retirement age for both Executive Directors.. and non Executive Directors of quoted companies ? 70? certainly no later than 75? This would at the very least require focusing earlier on the necesssary transition process and help to avoid generational conflict. Gerontocracy remains too much the Indian Way!

    PS disclosure: I would no longer be in the running for a Directorship!

  6. Hello John,
    I must say this blog-post covers the entire Tata-Mistry event aptly. Like you rightly mentioned, damage has already been done to Tata’s image. What saddens me the most is that its not only the image of the company, but the stakeholders are the ones who will bear the cost of internal corruption.I had also read about doubtful credibility of Tata Trusts in recent years. This also points out at the compromised philanthropic activities of the Trust. One positive impact of this battle is that the blindfold from the eyes of Indian population and the world has been removed. The internal secrets are out in public for people and stakeholders to decide their stand.

  7. Tata is known as the divine business in India and all over the world. Free of corruption and malpractices. But the question is, Is it really as pure as it sounds? The events that have followed from 24th October is a series of ugly allegations on Mistry. Tata’s image is definitely tainted. His defensive behavior echoes his intentions. Now the challenge is about this legal battle leading to a constructive result. Governance in a conglomerate as big as Tata cannot be compromised upon.Its good news for stakeholders that somebody has taken up the role of Corporate Activist to ensure ethics.

  8. Dear John where is the independence of the so called independent directors? they are retired bureaucrats cashing their favours in sitting fees, which run into crores. They have no conscious or consistency except sitting fees. That is what i call par for the course, bought out dependence of independence. regards, BK

  9. Dear John well done.
    I believe Ratan has shot himself in the foot. He would live to regret. He is not what he has been idolised for. I have also known Mistry, when he was out of Imperial and learning the business circa 1992-3. He was VSNL contractor. I pulled him up for slow progress. His response, you shall not see me second time for this reason.
    I am also privy to some of Ratan Tata’s misdoings as Chairman of VSNL board. He left a board meeting of VSNL to call Mr Shourie to pass instructions to GOI nominee to behave. He wrote off 965 Crore from share holder premium account of a consistently profit making VSNL; to so called cleaning the balance sheet, but ostensibly avoid giving Bonus shares. He was admonished by GOI for diverting 1200 Cr from VSNL for some telecomm venture.
    Appearances and perceptions can be deceptive and illusionary.
    season’s greetings

  10. I would agree that this appears to have been a situation which need not have become such a public soap opera. Generational change requires flexibility and understanding when the upcoming generation adopts polices that it’s seniors do not appreciate. All very sad when the management of change has been so poorly handled within such a previously superlative group.


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