November 15, 2016
In the ultimate analysis, whether Tata wins or not, the solutions he needs for his debt-laden group may not be substantially different from what Cyrus Mistry may have had to offer.
Old soldiers, they say, are always preparing for the last war. And so would seem to be the case with Ratan Tata’s fight to rescue the Tata Group from the clutches of Cyrus Mistry, recently ousted Chairman of Tata Sons. The battle has now shifted from Tata Sons to the various Tata company boards where Mistry remains chairman.
This battle is likely to be substantially different from the one he waged in the early 1990s, when Ratan Tata was chosen to succeed JRD Tata as Tata Sons Chairman. At that time, the people he had to fight to gain control of the group were senior CEOs who had already been well-entrenched in the group – Russi Mody at Tata Steel, Sumant Moolgaokar at Tata Motors, Darbari Seth at Tata Chemicals, Ajit Kerkar at Indian Hotels, and AH Tobaccowala at Voltas. But they were all ageing satraps. Ratan Tata had time on his side.
Tata managed to see them off by imposing a new age limit for executive directors in 1992. But even so, it took him five years to oust Ajit Kerkar at Indian Hotels, which happened only in 1997. In 2002, the age group for non-executive directors was lowered from 75 to 70, but was raised again in 2005, possibly to accommodate Rata Tata, who would have had to retire much sooner had it been retained. Tata turned 70 in December 2007, but actually retired as Chairman of Tata Sons only in 2012.
But unlike the 1990s, when the financial institutions backed him and independent directors were more old retainers than directors with real independence, today’s scenario is different. And time is not on Tata’s side. He will be 79 next month. Perhaps the only high cards he holds relate to the group’s crossholdings, which are higher now than in the 1990s. If the battle moves to shareholders, Tatas will have the votes to dispel most challenges.
Signs of strife are already there. While Mistry is already out of Tata Consultancy Services, where Tata Sons holds nearly 74 per cent of the shares, moves to oust him from Indian Hotels, Tata Chemicals and Tata Motors seem to be facing hurdles. The independent directors in these boards have either backed Cyrus Mistry’s chairmanship, or affirmed the collective responsibility of the board, which is an indirect endorsement of the decisions taken by the Mistry-led board over the last four years.
Ratan Tata faces a different kind of fight this time for one simple reason: given the allegations of lack of corporate governance levelled by both sides – Mistry against Ratan Tata (read here) and Tata Sons and the latter against some of Mistry’s acts as chairman (read here) – independent directors may well come into the firing line if they act like a cabal backing one group or the other. If the matter lands up in court or the regulators start investigating specific allegations, it is the independent directors who may come under scrutiny. They are thus playing the game neutrally.
The Economic Times quotes Nasser Munjee, one of the independent directors of Tata Motors, as saying yesterday (14 November) after the board meeting: “We are trying to avoid conflict. We are behaving like independent directors. We have been accused of being in the Cyrus camp but we aren’t in any camp. As independent directors we can’t be. We are just worried about the company. And our statement today supports decisions of the past. We haven’t made any statement about the future. It is for the shareholders to decide who they want as chairman. Independent directors cannot decide that.”
In order to block Mistry from creating further trouble, the Tatas have to make board changes to reflect the new dispensation. The Tatas have called extraordinary general meetings (EGMs) of TCS, Indian Hotels and Tata Chemicals, so that they can remove some of the independent directors, including Nusli Wadia, a friend-turned-unfriend of Ratan Tata.
But this a long process, and it is by no means certain that the Tatas will emerge from the fight unbruised and with their image intact.
In the ultimate analysis, whether Tata wins or not, the solutions he needs for his debt-laden group may not be substantially different from what Cyrus Mistry may have had to offer.
The Tatas, in their nine-page critique of Mistry’s stewardship of Tata Sons, made the following points:
#1: TCS and the JLR – wholly owned subsidiary of Tata Motors – “account for around 50 percent of the total turnover and probably over 90 percent of the total profits of the whole group and have been performing successfully continuously over the past many years, for which Mr Mistry cannot take credit.”
#2: But then, the “three major problem companies are Tata Steel Europe, Tata Teleservices/Docomo and the Indian operations of Tata Motors. The fact is that even after four years, there is no noticeable improvement in the operations of these companies and in fact they have got worse as shown by continuing huge losses, increasing high debt levels and declining share in their respective markets.” The problem is if Mistry cannot take credit for TCS and JLR, he need not take the blame for the continuing problems of Tata Steel, Tata Tele and Tata Motors’ Indian ops.
#3: Tata Sons is wholly dependent on TCS for its profits. As Tata Sons pointed out on 10 November in a statement: “But for the TCS dividend and even before impairment provisions, Tata Sons would have shown operating losses over the last three years (with a small surplus in between), showing the significant dependence on TCS….Dividends received from all the other 40 companies (many non-dividend paying) has continuously declined from Rs 1,000 crore in 2012-13 to Rs 780 crore in 2015- 16…”.
That’s the crux: if the Tata Group is over-dependent on one company, surely the group needs drastic surgery rather than just a reversion to the old status quo where no hard questions are asked of any underperforming company?
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