Tata Sons Head: Will A Yes-Man Be the Fate of the Group?
Will Ratan Tata’s image survive the shock and outrage caused by the brutal and, one would say, dubious, sacking of Cyrus Mistry as chairman of Tata Sons? The jury is still out on that. I suspect it is going to be a long-drawn war with many small battles on the way. The question is: What will be Ratan Tata’s ultimate legacy and in what shape will he leave India’s most famous corporate group? 
 
As I write this column, the media narrative is that Cyrus Mistry’s sacking was vicious and unfair; but Ratan Tata will, eventually, get his way because he alone controls the ownership, either directly or indirectly. Right now, independent directors of four of the biggest six Tata companies (Tata Motors, Tata Steel, Tata Chemicals and Indian Hotels Corporation Limited) have all endorsed Cyrus Mistry’s leadership; he has been removed as chairman of TCS Ltd and, in the fifth, Tata Global Beverages, Mr Mistry alleges that he has been removed by similar dubious stratagems as were deployed to oust him from Tata Sons. 
 
That Ratan Tata has not hesitated to seek the removal of Nusli Wadia (a childhood friend and his biggest ally in consolidating the group in the 1990s) for backing Cyrus Mistry in Tata Chemicals appears to have jolted several ‘independent’ directors of other group companies into being more aligned with Tata Sons’ thinking. 
 
Remember, being a Tata director or a trustee on its many mega charities has such a big social cache that only a rare person would allow considerations such as fairness and good governance to jeopardise that position. The reputed directors of Tata Sons showed no compunction about being party to a grossly unfair decision, not even when three of the big names had been on the board for just a couple of months. In some cases, financial incentives and endowments flowing from the Tata charities appear to have had a powerful influence. 
 
The dominant view is that Cyrus Mistry was targeted for trying to clean up Ratan Tata’s legacy of massive debts (steel), messy projects (telecom) and emotional investments (the Nano project that had to leave Singur in West Bengal after a public uprising and many deaths and is now an acknowledged financial and marketing disaster). However, the numbers are stacked against him because of the sheer muscle of Tata Sons’ shareholding and cross-holdings. That may or may not be a miscalculation about Mistry’s game plan; but only time will tell. Let us look at a few facts.
 
First, Cyrus Mistry chose to keep a studiously low profile (contrary to the allegations contained in Tata Sons’ nine-page letter about using PR to build his own image) during his three-year tenure. He has not given any media interviews; so we know very little about his tenacity, ability and willingness to fight the long war. But he has done rather well so far.
 
Secondly, our Cover Story shows that sensible institutional investors (retail investors won’t matter because they seldom make the effort to vote) need to make a dispassionate assessment about each Tata company; that will happen if the government truly maintains a hands-off policy and foreign investors do what is best for their funds. 
 
A third issue that ought to be the biggest consideration for all investors and the future of the Tata group.  Cyrus Mistry, and his family with an 18.4% holding, is probably as much, or more, concerned about this and Ratan Tata’s next steps, as are institutional investors. Ratan Tata does not have age on his side and nobody believes he is going to find an effective replacement for Cyrus Mistry in just four months. In fact, he may remain fully occupied in trying to oust Cyrus Mistry and Nusli Wadia from the group in that timeframe.
 
Will the Rata Tata-headed selection committee pick any of the names being speculated about by the media (Indra Nooyi and N Chandrashekaran, among others), or find an expatriate of high standing (as they have in Tata Motors) to head the group? I find it hard to believe that any professional manager will accept this otherwise coveted job, without demanding thick lines to be drawn between the Tata trusts and Tata Sons and a clear articulation of the extent of Mr Tata’s personal writ over group decisions. 
 
After all, Mr Mistry seems to have been sacked precisely for pushing those boundaries and attempting to cut the group’s losses in Tata Motors and Tata Steel and set right the unsavoury dealings at AirAsia India with Ratan Tata’s close buddy Sivasankaran in the loss-making Tata Teleservices (TTSL) (where the group has to pay over $1billion to DoCoMo). 
 
Today, Mr Tata, with dual control over Tata Sons and the powerful Tata trusts, is single-handedly in charge of the $100-billion business empire. We don’t know if an eventually legal battle will lead to a court-ordered change in Tata Sons’ equation with the powerful Tata trusts. 
 
But, until then, Ratan Tata is back at the steering wheel of this not-so-Nano group. There is a good chance that Mr Tata may put in place a puppet, who follows his orders—doesn’t matter if it is disastrous for the group. Elite Parsi circles are already abuzz with speculation about persons who may meet Mr Tata’s approval
.
There is one school of thought that Mr Tata may have to bring in another Tata, his half-brother, Noel Tata. Noel is married to Cyrus Mistry’s sister, Aloo; but this is a high stakes game. His appointment could also blunt the counter-attack by team Cyrus. Sources, who know the family, say that “Noel is used to being bullied by Ratan and could toe his line; but Ratan will only consider him as the last possible option.” Noel Tata holds a 0.5% stake in Tata Sons and his mother, Simone Tata, holds 0.5%. 
 
Then there is Mehli Mistry (a cousin of Cyrus Mistry; but the two families do not get along well) who could be a dark horse. He is very close to Ratan Tata and is a frequent companion on his many travels. Mehli Mistry, and his brother Pheroze Mistry, run a firm called M Pallonji & Co Pvt Ltd which used to have large shipping and dredging contracts from Tata Power. He maintains a very low profile, but is so close to Ratan Tata that it is his family which purchased the flat at Bakhtavar (Colaba, Mumbai) (owned by Forbes, a group company) in which Ratan Tata lived for decades, in a very curious deal. 
 
A third name doing the rounds is that of R Venkataramanan (Venkat), a former executive assistant to Ratan Tata. So deep is Mr Tata’s confidence in Venkat that he is the managing trustee of all the powerful Tata trusts, which, with their combined shareholding of 67%, have full control over Tata Sons. According to sources, most of the Tata trustees that matter (retired Tata executives who have sinecures at the trusts and do the job of vetting investment decisions of Tata Sons) are already used to reporting, or working in close coordination with Venkat. Further evidence of Venkat’s standing with Ratan Tata is the fact that he holds the critical 1.5% balancing stake in AirAsia India, while AirAsia Investments Ltd and Tata Sons hold 49% each. 
 
None of these names is being discussed because they are the best or most competent persons to head Tata Sons. What recommends them to the post is that they are unlikely to challenge Mr Tata’s authority or decisions as Cyrus Mistry did. Eventually, it will be up to shareholders of the Tata group companies to decide if any of them is a good custodian of their investment and they may vote with their feet.
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    COMMENTS

    Simple Indian

    3 years ago

    Fine analysis of the situation unfolded so far. As is stated in the article, it's highly likely that Ratan Tata will install a "puppet" whom he can instruct at will, and who will owe his position and stature to Ratan Tata alone. Ratan Tata's many recent visits to Delhi to meet PM and FM indicate that he's keen to have FI's backing to oust Cyrus Mistry from Boards of all Tata Group firms, where PSUs like LIC have significant stakes. As FIIs will vote keeping their own interests in mind, PSUs like LIC can be 'persuaded' by the Govt to vote in favour of Ratan Tata in EGMs to oust Cyrus. From what is known so far, it does appear that Cyrus' ouster was primarily because of his trying to undo the wrongs of Ratan Tata, which didn't go down well with the former Chairman. He does appear to have had the interests of the Tata Group in mind while taking several radical decisions to cut losses in Group firms. But, seems as in politics, good economics makes for bad politics, even in corporate boardrooms.

    Unmesh Bhathija

    3 years ago

    Appointing a Parsi as a Chairman has bombed. This time a Tam Brahm may get the glitz. A "yes" man is something that R. Tata would certainly prefer..

    Tata Trusts get summons from I-T dept over tax avoidance: Report
    The Income Tax (I-T) department has summoned Tata Trusts to explain the misuse of tax exemption granted to the trusts for charitable purposes, says a report. 
     
    According to a report from Business Standard, the action by the I-T department is based on a Comptroller and Auditor General (CAG) report of 2013 that said the trusts are earning a huge profit instead of using it for charitable purposes. The executive trustee of Tata trusts, R Venkataramanan, will have to explain to the I-T department on Friday evening in Mumbai, the report says.
     
    The CAG in its 2013 report had mentioned that the Tata Trusts, chaired by Ratan Tata, were making huge profits by spending less on charitable purposes and accumulating it as surplus funds, which are then used for creating fixed assets for earning more profit or are transferred to other trusts rather than for charitable purposes to avoid tax. 
     
    The CAG audit pointed out that the 22 trusts under scrutiny have accumulated surpluses of Rs819 crore. The I-T department allowed irregular exemptions to Jamshetji Tata Trust and Navajbai Ratan Tata Trust, which invested Rs3,139 crore in prohibited modes arising from accumulations of capital gains which involved tax effect of Rs1,066.95 crore, the newspaper says quoting CAG report.
     
    According to the CAG report, Jamshetji Tata Trust and Navajbai Ratan Tata Trust earned Rs1,905 crore and Rs1,234 crore as capital gains during assessment year 2009 and 2010, respectively. Further, they invested the same in prohibited mode of investments, which is in contravention to the provisions of Section 13(1)(d) of the Income Tax Act.
     
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    COMMENTS

    Ananthanarayanan P

    3 years ago

    Recently when this news of IT summons appeared in the media, there was also a news about Ratan Tata meeting the Finance Minister. Is this just a coincidence ?
    When CAG audit points out such a serious charge against it cannot be just brushed aside. If this charge is for 2009 and 2010, then there is every reason to believe that such act would been repeated in the six years since 2010. Would IT Dept pro-actively investigate such misdeeds rather than waiting for CAG reporting.

    Demonetisation: Cash flow could impact asset quality of MFIs
    India Ratings and Research (Ind-Ra) says that if money flow does not fully normalise by fourth quarter (4Q) of FY17, Tier 1 capital of few microfinance institutions (MFIs) could near regulatory minimum levels. Moreover, overcrowding of MFIs in some highly penetrated states may adversely affect MFIs' asset quality, especially with low growth in new-to-microfinance borrowers, the ratings agency says. 
     
    The ratings agency expects MFI borrowers to reprioritise their expenses because of a cash flow mismatch in the next few weeks. "This would lead to an increase in one-month overdues of many MFIs. If money flow does not fully normalise by 4QFY17, Tier 1 capital of few MFIs could near regulatory minimum levels." 
     
    Ind-Ra says its analysis indicates that most MFIs have liquidity in the form of unencumbered cash and un-availed bank lines to meet debt obligations for 30-60 days in the event of business disruption. The agency expects banking habits to improve in the long term, as currency flow resumes. 
     
    A section of joint liability group (JLG) borrowers could be overleveraged, the ratings agency says. In Ind-Ra's opinion, a typical two-income JLG borrower household could service Rs50,000 to Rs60,000 of debt in over two years. The peak advantage of a section of JLG borrowers is approaching these levels. In first half (1H) of FY17, the level of the real income growth of rural borrowers was almost the same as the rural consumer price index, indicating that the ticket size growth rate of existing borrowers should moderate to contain the impact of borrowers' rising leverage, it added.
     
    According to the ratings agency, growth in the gross loan portfolio (GLP) of MFIs in nine of top 10 states was driven more by an increase in ticket size than by a rise in penetration (clients serviced per branch), which indicates an uptrend in leverage in these states. It says wage rate-based annual income to annual EMI ratio stands at 1.8 to 2.0 times for the highest leveraged states such as Karnataka, Madhya Pradesh and Odisha and at five times for the lowest leveraged states such as Kerala.
     
    Ind-Ra seeks rising risk of unreported multiple borrowings in some states. "...the continued focus of MFIs on some of the highest penetrated states such as West Bengal, Kerala, Tamil Nadu and Karnataka has increased the risk of unreported multiple borrowings in such states. Hence, the chance of a surge in delinquencies is high in these states. The agency's analysis of penetration indicates that West Bengal is the highest penetrated state, followed by Kerala, Tamil Nadu and Karnataka," it added.
     
    In some regions, the ratings agency says, steady rise in delinquency indicates stress. It says, "...the percentage of one-month overdue loans (portfolio at risk greater than 30 days (PAR >30)), as reported by MFIs, underestimate the actual default rate of borrowers because of the base effect. The currently reported PAR>30 numbers have become artificially low because of the accelerated growth registered by MFIs last year. Ind-Ra's estimate of PAR>30 for end-1QFY17, based on the base of the disbursement in 1QFY16 and 2QFY16, indicates that PAR>30 crossed 1% in Karnataka and Uttar Pradesh, and is in fact close to 2% for Gujarat." 
     
    Ind-Ra feels that credit assessment and operational practices of MFIs need to be tightened. This includes interpretations of the two MFI lender norms, low correlation between borrower cycle and ticket size, among other practices, could result in adverse borrower selection. The key examples of operational lacunae are non-verification of Aadhaar, involvement of agents due to portfolio build-up pressure and prepayments leading to faster introduction of borrowers to higher ticket size, it added.
     
    The microfinance portfolio of all MFIs stood at Rs67,000 crore in FY16 compared with Rs22,700 crore in FY11, with penetration (non-unique borrowers) increasing to 3.25 crore from 1.76 crore. The sector receives regulatory support and preference for financial inclusion (8 of the 10 small finance banks -SFBs approved were MFIs). 
     
    MFIs are likely to play a pivotal role in providing the large informal income segment, with estimated credit demand of Rs10 lakh crore, access to formal financing, and this may, in turn, provide MFIs new avenues for future growth by designing new products for this segment, the ratings agency concluded.
     
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