When it comes to fighting for internal control, Ratan Tata finds no use for the much-touted ‘Tata culture’. Values, equity and fair-play quickly go for a toss and in come whisper campaigns, innuendo and falsehoods, on par with the worst in the country, lubricated through expensive public relations (PR) and large advertising budgets. I watched it closely in the 1990s while reporting the humiliating removal of Russi Mody, Ajit Kerkar and Darbari Seth and then, again, over the Tata Finance episode when YM Kale, a highly regarded senior partner at the accounting firm of AF Ferguson, was ignobly sacked by his firm (in order to retain the Tata business) because his 904-page special audit did not give Tatas the clean chit they expected.
The Niira Radia tapes, published by Outlook and Open magazines, among others (and still available on the net), provided the world a ringside view into how Ms Radia skilfully manipulated the media, politicians and bureaucrats through a series of trade-offs, loans and land deals for her corporate clients (primarily the Tata group and Reliance). Cyrus Mistry’s latest riposte to Tata Sons (specifically, the belated full-page advertisement attempting to explain the disgraceful boardroom coup to sack Mr Mistry) tells us that Ms Radia’s work through Vaishnavi Communications cost a cool Rs40 crore per annum.
Even before one digests this huge PR budget, one learns that Rediffusion-Edelman is being paid a whopping Rs60 crore per annum for PR support to Tata Sons as well as the Tata trusts. What exactly does this kind of money buy? Quite simple. It ensured that the 2G-telecom scandal and the machinations of the group, led by Ratan Tata, were soon forgotten. How else does one explain the shock and many allusions to ‘damage to the Tata brand’ that greeted the crude sacking of Cyrus Mistry? One must remember that this expensive PR machine is at work again in the Mistry-Tata war and investors need to analyse news reports carefully, to get to the truth.
Tata Sons’ Guarantees
A pink paper recently reported that Tata Sons may no longer guarantee loans, refinancing deals or funding requirements of group companies where Cyrus Mistry refuses to step down as chairman. Unnamed executives were quoted as saying, “Units that don’t adhere to the values and policies of Tata Sons cannot be supported with the comfort of Tata assurance, top executives.” It further says that this message about guarantees is ‘likely to be conveyed at the EGMs’ (extraordinary general meetings) convened to oust Mistry. It further quotes unnamed bankers saying, “If Tata Sons decides not to renew guarantees, borrowing costs could jump significantly for group companies and make their loans more costly.”
Almost in tandem, the Tata director on Tata Chemicals, Bhaskar Bhatt, requested Cyrus Mistry to step down as chairman, because of the “threat the company faces on account of loss of confidence of the promoter Tata Sons in the Chairman of Tata Chemicals.” He added to the drama by tendering his resignation; this would have been relevant if he were an independent director, rather than a group company head and Tata nominee on the board. There is a nice sequencing to this, with the subsequent event appearing to confirm the media narrative and reinforcing public opinion.
How true is the threat about Tata Sons’ guarantees? We learn that the only companies where Tata Sons has stuck its neck out by providing a direct guarantee of sorts is the controversial TTSL (Tata Teleservices Limited). There, too, it is against a pledge of shares. In any case, TTSL, like TCS, is a company where Tata Sons is in a position to remove Mr Mistry as chairman.
Sources close to Cyrus Mistry say that, during his tenure, bankers were specifically told to look at each group company on merit. Having said that, they agree that there is an implicit guarantee of Tata Sons, and, in the Indian context, it is unimaginable for a Tata group company to renege on a payment obligation.
However, a sticky issue is Tata Steel, where lenders have inserted covenants in the loan agreements allowing them to pull out the loans if it ceases to be a part of the Tata group. Ironically, from the shareholder perspective, Mr Mistry is most likely to cut the losses of over 1 million-1.5 million pounds a day on account of Corus Steel of the UK and bring the company back in shape. Will bankers be against such a move?
Also, would Indian banks really refuse to lend to Tata Chemicals, Tata Motors, Indian Hotels or even the debt-laden Tata Steel and another two-dozen listed Tata companies at competitive rates on a stand-alone basis? And yet, we hear that banks are struggling to find bankable projects.
If anything, the revelations of the past two weeks ought to worry Tata Sons about stricter scrutiny by the Securities and Exchange Board of India (SEBI), the tax authorities and their own investors. The current structure of Tata Sons allows one individual, heading the Tata trusts, to effectively ride roughshod over independent directors and dictate the fate of dozens of listed entities and their millions of shareholders. This goes against all norms of good governance and most proxy advisory firms have been scathing in their criticism. The 14 Tata trusts, acting under orders of a single person, can do this by way of their collective 67% shareholding in Tata Sons.
At a time when the government has cancelled the registrations of several NGOs, it is worth noting that the Tata trusts also enjoy tax exemptions from the government. The battle with Cyrus Mistry has exposed the role of ex-Tata executives (NA Soonawala and RK Krishna Kumar) in scrutinising the investments of Tata Sons, calling into question the whole edifice of philanthropic activity, not to mention the insider trading angle and sharing of price sensitive information that SEBI is reportedly investigating. One may well ask, in the context of Nitin Nohria’s role in Mr Mistry’s ouster, whether the massive $50-million donation to Harvard Business School had a quid pro quo
attached? Why is such a contribution from tax-exempted trust funds, leading to a loss of revenue for India?
The saving grace in this sorry episode is that a few of the trustees on the Tata Trusts who are also independent directors of group companies, set a great example of good governance. However, SEBI must ensure there is no scope for a repeat of this situation by telling Tata Sons that trustees of its 14 trusts cannot be ‘independent’ directors on listed group entities. Proxy advisory firms have also pointed out that as many as 10 independent directors have been on boards well past the tenure prescribed by governance regulations.
Benefits of ‘Philanthropy’
A February 2015 article by Zaheer Masani (son of the famous Swatantra Party leader Minoo Masani) points out how Tata UK, was “keen to advertise its commitment to corporate social responsibility, with the magic letters ‘CSR’ sprayed across all its publicity.” It was ‘the dominant theme’ at Tatas’ ‘inaugural reception’ in London.
He writes, “Today Tata prefers to forget the buccaneering capitalism with which its founder began his remarkable career. Like most other Indian merchant princes of his time, he cut his business teeth in the notorious opium trade with China.”
Given the aggressive muscle flexing by the Tata trusts in the Cyrus Mistry episode, one could well question whether this much-touted philanthropy has turned into a very smart business promotion and brand management tool. Such questions would have been considered sacrilegious in the past, but they are going to be raised openly and bluntly, now that the halo around that Tata name has been severely dented by Ratan Tata’s own actions.