Economic Highlights

New Delhi, 7 November 2016

House of Tatas

MISTRY SURROUNDS SHAKEUP

By Shivaji Sarkar

The mystery around the shakeup in the Tata house may take some time to solve, Events are unfolding. A big question among many others is whether the change of guard happened suddenly? Most probably not. Churnings were there for quite some time. In fact, it may have all  started even before Cyrus Mistry, a non-Tata, was appointed the chairman of the group. The decision to sack him came as a big surprise also for the reason that the entire Tata board had just two months back appreciated his work.

Mistry was on the board of directors with Tatas since 2006. He was appointed chairman on December 28, 2012. However, two amendments were made to the Articles of Association of Tata Sons 22 days before i.e. on December 6. It helped the Tata trusts consolidate power at the holding company of the conglomerate. This has now helped in the removal of Mistry.

Article 118 of the Articles of Association of Tata Sons, which deals with the appointment and removal of the chairman by constituting the “Selection Committee”, was changed on December 6 and thus concentrated power in the hands of directors of the board nominated by the Sir Dorabji Tata Trust and Sir Ratan Tata Trust.

Prior to the amendment, the committee of five consisted of two trust-nominated directors, two other directors from the board, and one independent, board-appointed external member. The article was amended mandating that the committee be comprised of three trust nominated directors, one director from the board, and one independent. Apparently, this strategic move was primarily to ensure that the majority of the selection committee was constituted by members from the Tata trusts.

Does this change indicate that for whatever reasons Mistry was appointed, there was a discomfort in the house? Nothing is obvious. However, nothing also explains why Ratan Tata, appointed interim chairman, wrote a letter to the Prime Minister on October 24, 2016 informing him of the change of guard.

He also wrote a letter to the employees announcing the changes. This is understandable as employees need to be told about changes in the corporate structure. But no company usually considers it necessary to inform the Prime Minister of such decisions. Tata’s letter is significant as it also informed that he was taking over as “interim” chairman.

Clearly, the law does not mandate a company to inform the Prime Minister about internal changes. What also comes as another surprise is that Mistry is said to have had a meeting with the PM in the last week of October. And, a few days later Tata too had called on him.

Since 1991 reforms, the corporate are not seen to lobby with the government much. In the 1980s, HP Nanda and Bharat Ram sought government intervention as their companies were under threat of takeover from London-based Swaraj Paul. Interestingly, the lobbying did help ward off the threat. Similarly, the Modi group scions including Dayawati Modi, widow of Gujarmal Modi and her sons met then Prime Minister Rajiv Gandhi as the scions fought a bitter internecine battle. The government steered clear from the Modi family dispute, but the State-owned financial institutions did play a key role by forcing a resolution, thanks to their stake in the many  companies of the group.

This particular case is not going to be resolved easily. Ratan Tata perhaps himself has sensed that the decision to become interim chairman may become contentious. Mistry’s mail to Tata Sons board members raising controversial corporate governance issues is an indication and the issue is not going to settle soon. He has also warned that the Tatas will have to write off $18 billion following the takeover of Corus steel plant and emotional launch of Nano.

But is it so personal? Partly it may be so but there are indications that Ratan Tata was not happy with a number of developments since Mistry took over. Growth in Tata Sons has slowed under Mistry's leadership, with the turnover slipping 4.6 percent to $103 billion last fiscal year from $108 billion the previous year, because of lacklustre performances at several companies including Tata Motors, Tata Power and Tata Steel.

Global economic uncertainty, a crash in commodity prices and volatility in currencies have hurt Tata revenue, according to Bloomberg News. It is said that six in 10 rupees deployed by Tata are in businesses yielding returns below its cost of funding. Eight years ago it was three in 10 rupees, according to The Economist.

Was Mistry responsible for it? While technically it was so, insiders say that almost four years prior to his taking over the reins, Tatas were bleeding. The CEO of KR Choksey Shares, Deven Choksey indicates that there were some problems in restructuring some of the assets. Mistry made decisions for some of the companies that may have triggered conflict but he had not fared badly. Markets were not disappointed with what Mistry did.

He took over as MD of his family Shapoorji Pallonji Group in 1991, which has interests in construction, real estate, infrastructure and textiles and is credited with expanding it into a multi-billion dollar business through diversification. Was this a clash of interest?

In contrast, Tata Motors and Tata Steel are making huge losses. Tata Docomo wasn’t doing well either. The Corus acquisition was bleeding the Tata revenues. Tata Power was no better. The Indian Hotel was debt-ridden due its acquisitions and the Orient Express bid. Only TCS and Jaguar Land Rover were generating margins. Some of these Mistry wanted to sell off.

There are other problems too, such as in Air Asia, Vistara partnership, 2 G and few other deals. Some even refer to the Radia tapes to suggest that things are not above board in the Bombay House. In one of his interviews, Mistry stated:“Our individual companies need to earn the right to grow. At the group level, we are focused on helping our companies earn this right by building strong operational cash flows and looking at their capital structures.” It is stated that this sent a scare among the CEOs of the group.

Another question is whether Mistry’s style clashed with the values of the Tata Group? Or was it the remote control management of Ratan Tata? It is also being asked whether a chairman needs approval from the board for any capital expenditure above Rs 500 crore?

The clash of personalities was definitely there. Mistry did not appear to have a free hand and the shots were apparently being called by someone else. In such a situation no corporate can function in an objective manner. Will a new chairman solve the puzzle or would the personal legacies choke the 147-year-old house? ---INFA

(Copyright, India News and Feature Alliance)