Over nine years in financial journalism, I have specialized in covering news that matters to India Inc. and its stakeholders, including developments at India's largest corporations and and MNCs. The subject of my writing has been analysis of strategy, financial performance, M&A and fundraising activity, consumption behaviour and emerging trends in management and leadership. Industry verticals that I have written on include oil & gas, power, infra, metals & mining, auto, telecom, FMCG & retail, and start-ups. I also play the role of an editorial lead for proprietary events like the Forbes India Leadership Award and the Forbes India CEO Dialogues. An alumnus of Asian College of Journalism, Chennai and Jadavpur University, Kolkata, I have worked for publications such as Mint, The Financial Express and The Indian Express before this.
Kingship knows no kinship. Divergent interpretations of this phrase used by Alauddin Khilji, the first Turkish Sultan of Delhi, is perhaps the key to understanding the duel between two of India’s leading business personalities, Ratan Tata and Cyrus Mistry.
The word ‘kinship’ refers to both relationships as well as a sense of alignment in understanding. Scholars have interpreted Khilji’s words to imply that a ruler should be fair, just, non-partisan and dispassionate in his decision-making.
The main protagonists of the dramatis personae in the corporate battle unfolding at the $103-billion Tata Group appear to have drawn their own inferences of the 13th century ruler’s words to justify their respective actions.
Ratan Tata is the 78-year-old chairman of Tata Trusts, the charitable bodies that own a majority stake of around 66 percent in Tata Sons, the flagship holding company of the salt-to-software conglomerate. Between 1991 and 2012, the septuagenarian was the chairman of Tata Sons as well as of various group companies, many of them listed, in which Tata Sons holds a stake. He is widely credited as firmly establishing the business house as a storied institution globally, with a reputation for conducting business in an ethical manner. In December 2012, upon attaining the age of 75, Tata hung up his boots at Tata Sons and passed on the baton to Mistry, 50.
Mistry is the son of Pallonji Mistry, chairman of construction major Shapoorji Pallonji Group, whose family owns an 18.4 percent stake in Tata Sons. Mistry has been a director on the board of Tata Sons since 2006 and was also part of the selection committee that was mandated with the task of finding Tata’s successor. Tata and Mistry are also related since the latter’s sister is married to Noel Tata, Ratan Tata’s half-brother.
Impressed with his understanding of the vision that the next leader of the Tata Group must possess, and given his long association with the conglomerate, the committee—helmed by Ratan Tata himself—decided to anoint Mistry as the next chairman. For over a year Tata mentored Mistry, who was first made deputy chairman.
War of Words
Four years later, the succession story has gone all wrong with the board of Tata Sons, on October 24, voting in favour of ousting Mistry as its chairman. Tata is back as interim chairman “in the interest of stability and continuity so that there is no vacuum” in the top management of the group, he told the CEOs of various group companies during a meeting on October 25. Tata has said that he will hold fort for four months, in which time a selection committee is to identify Mistry’s successor.
The principal shareholders of Tata Sons justify the move on the grounds that Mistry had “overwhelmingly lost the confidence” of members of Tata Son’s board of directors, on account of “repeated departures from the culture and ethos of the group”.
One of the statements issued by Tata Sons on this matter states that Tata Sons directors had been repeatedly raising queries and concerns on certain business issues and trustees of Tata Trusts were increasingly getting concerned with the growing trust deficit with Mistry. Therefore, the largest shareholder of Tata Sons and Tata, chairman emeritus of Tata Sons, himself decided that it was time for Mistry to go.
Mistry has cried foul. In a letter addressed to Tata Sons’ directors and members of the Tata trusts, Mistry wrote that he was “shocked beyond words” at what had transpired and the treatment meted out to him.
The resolution to replace Mistry as chairman was not specified as a standalone item in the agenda of the board meeting on October 24 and was brought up for discussion as a part of the ‘other items’ that are usually reserved for the last. Mistry contends that he was replaced “without so much as a word of explanation and without affording him the opportunity to defend himself”.
Mistry then proceeded to outline the various challenges faced by group companies including Tata Steel, Tata Motors, Indian Hotel Co. Ltd, Tata Power and others. He also argued that the group’s global acquisition strategy, barring Jaguar Land Rover and Tetley, had left “a large debt overhang” on it. He continued that a realistic assessment of the fair value of the businesses of IHCL, Tata Motors’ passenger vehicles division, Tata Steel Europe, Tata Power’s power plant in Mundra and Tata Teleservices “could potentially result in a write-down over time of around Rs 1.18 lakh crore. In addition, he cited various instances of alleged lack of corporate governance within the group”.
“In the face of the above challenges, I had to take many tough decisions with sensitive care to the group’s reputation as well as containing panic amidst internal and external shareholders,” Mistry said in the letter. “Despite bad press, impairments were taken to clean the books but substantial exposure remains. Dividends were reduced to conserve cash for needed investments in the teeth of shareholder fury.”
Thus Mistry decided that kingship shouldn’t know any kinship and tough decisions had to be taken, even if it meant eroding parts of the legacy left behind by his revered predecessor through divestments.
Tata Sons’ statement has called Mistry’s claims “unsubstantiated” and allegations “malicious”.
Mistry has argued that contrary to the assurance of a “free hand” given to him at the time of taking over the top job at Bombay House, the group’s headquarters in Mumbai, the Articles of Association (AoA) of Tata Sons was modified to change the “rules of engagement between the Tata Trusts, Tata Sons board, the chairman and operating companies,” which “severely constrained the ability of the group to engineer the necessary turnaround”.
A source close to Ratan Tata points out that over the years there was a deliberate overlap created between people manning Tata Trusts, Tata Sons and group companies so that there was complete synergy in thought process across the spectrum, aimed at creating overall shareholder value. For instance, many senior Tata Group executives like RK Krishna Kumar and Noshir A Soonawala have been directors on the board of Tata Sons in the past.
At the time of Mistry’s appointment, for the first time that chain was being broken. While he was the chairman of Tata Sons and various group operating companies, he wasn’t the chairman of Tata Trusts, which utilise dividends from Tata Sons for its various philanthropic activities. Tata Sons, in turn, derives its dividends from the group companies in which it holds a stake. Also, till recently, the only other Tata insider on the Tata Sons board, apart from Mistry, was finance director, Ishaat Hussain.
“Mr. Tata had made it clear that because the chain was breaking for the first time in decades, there needed to be a way to institutionalise this synergy,” this person said. “It was with this intent that the Articles (of Association of Tata Sons) was changed to state that any item that requires approval of the Tata Sons board, like an annual plan, must have the affirmative vote of the directors nominated by the Trust. This doesn’t translate into an intention to interfere in the management of any enterprise.”
But a source close to Mistry claims that the amendment to the AoA were misinterpreted to imply that some of the important items meant for discussion at Tata Sons board meetings had to be discussed with the trustees first.
“This was slowing down decision-making and leading to confusion regarding Mistry’s role as chairman of Tata Sons, vis-à-vis his role as chairman of various group companies,” says the person. He cites an instance where Mistry had to meet Tata and Soonawala separately for two to three hours to apprise them of the money that Tata Teleservices was willing to put on the table to secure spectrum at a government auction. Mistry then had to repeat the same plan to the Tata Sons board at a subsequent meeting that lasted for just as long. “Certain things were also pre-decided by the trustees such as the group’s proposed entry into aviation,” he added.
Consequently, Mistry circulated a note on the ideal governance structure for the conglomerate that outlined proposed roles of all stakeholders for discussion at the board meeting in which he was booted out. But the same wasn’t considered, claims the person familiar with direct knowledge of Mistry’s version of events.
The source close to Tata says that Mistry was repeatedly prodded to elevate more senior Tata Group executives to the board of Tata Sons, but he didn’t do so. Soon after Tata taking over as interim chairman, N Chandrasekaran, CEO and MD of Tata Consultancy Services and Jaguar Land Rover CEO Ralf Speth were appointed to the board of Tata Sons.
Role of GEC
The source close to Mistry stated that the former chairman was all for inducting executives involved in the day-to-day functioning of the conglomerate into the board of Tata Sons; and that he wanted to induct two more directors on the Tata Sons board—sourced either from the pool of CEOs of group companies or members from the Group Executive Council (GEC) that he had put in place.
The GEC was another sore point in the relationship between Mistry and the trustees. The latter had doubts about the credentials of the people that were included in the GEC and claim that some of the members of this brain trust created by Mistry were exceeding their brief and authority in the their dealings with group companies.
Mistry’s GEC included Mukund Rajan, head of ethics and sustainability, brand custodian and group spokesperson; NS Rajan, head of human resources; Nirmalya Kumar, head of strategy; Madhu Kannan, head of business development; Gopichand Katragadda, chief technology officer; and Harish Bhat, who oversaw marketing and customer-centricity at the group.
Since the change of guard at the corner office of Bombay House, Kumar, Kannan and NS Rajan have been asked to leave. Mukund Rajan and Harish Bhat, both old-timers at the group have been re-assigned to other roles. In addition to ethics and sustainability, Mukund Rajan will also be in-charge of Tata Sons’ overseas representative offices in the US, Singapore, Dubai and China. Bhat, in addition to his earlier responsibilities, will also be brand custodian and hold interim charge for strategy and business development. S Padmanabhan, who currently leads the Tata Business Excellence Group, has been asked to head human resources and Sanjay Singh will oversee public affairs, based out of Delhi.
The swiftness with which the axe fell on Mistry and his core team is evident from Nirmalya Kumar’s musings on his blog. In a post titled ‘I just got Fired!’, Kumar says that news of Mistry’s departure came to him when he was on a panel in front of young students and managers participating in a competition sponsored by the Tatas.
“Back in my apartment trying to get information from the company with little success. At 9:00 pm, I get a call from a colleague with whom I had worked very closely…He informs me: ‘it is my unpleasant duty to say your services are no longer required’. No explanation. I query, does this mean I do not need to show up tomorrow morning? Receive an affirmative reply. That’s it. It’s all over in a minute.”
Kumar further states that the sacking also made him an instant pariah, with several top CEOs and executives in the group, with whom he’d worked closely over the last three years, suddenly going silent on him.
The source close to Mistry says that the latter was aware that the Tata Sons board didn’t like the GEC, but defends the decision to constitute it by saying that a chairman has every right to constitute his own team to advise him. Members of the GEC were only trying to provide recommendation and inputs for support on functional issues, he says. In fact, Mistry wanted to expand the GEC to include two more members with domain expertise in financial services and infrastructure.
Stake Sale in TCS and Welspun Deal
Another suggestion from the trustees of Tata Trusts that Mistry allegedly didn’t pay heed to, according to the person close to Tata, was to sell some shares of Tata Consultancy Services (which has been the group’s cash cow for long and contributes the most to Tata Sons by way of dividends) around two years back, when its stock price was as high as Rs 2,800 per share, and pare some of the group’s debt.
The source close to Mistry confirms that selling a stake in TCS was one of the many options that was discussed to raise capital but “there was no agreement on it”. He also pointed out that TCS, which is the group’s best performing asset, is considered a family jewel and the philosophy has always been to sell a stake in it only if it is the absolute last resort. The source stated that through various strategies to reduce leverage and bring in operational improvements at group firms, Mistry was able to generate liquidity to the tune of Rs 10,000 crore for Tata Sons till the end of the last fiscal.
There were other factors that led to the building up of the trust deficit as well. One of those was the delayed intimation to the board of Tata Sons regarding Tata Power’s plans to acquire Welspun Energy’s renewable power assets. The source close to Tata says that negotiation for the deal with Welspun had begun in November 2015 and in April 2016 the board of Tata Sons was sent a note without any details of the proposed transaction, except a strategic presentation that identified renewable energy as a focus area.
“Subsequently, the Tata Sons board was intimated that Tata Power will be going ahead with the acquisition and the Tata Sons board was asked for comments at a very late stage. On June 12, 2016 the deal with Welspun was signed; and it is only after the Tata Sons board raised a hue and cry that a detailed presentation was made on June 29,” he says. “Nobody questioned the merit of the transaction. But the very fact that the rest of the board of Tata Sons didn’t know the details till a late stage wasn’t done.”
Promoters of Tata Power, led by Tata Sons, hold a 33 percent stake in the company. Tata Sons also lends the Tata brand to group companies to use in exchange for a royalty payment.
The source in Mistry’s camp says that information on the potential deal was adequately shared with the Tata Sons board from time to time; especially since Mistry didn’t want to run the risk of the Tata Sons board voting against it at a later stage, which could have jeopardised the transaction. The board of Tata Sons cannot vote against the deal going through, since Tata Power is a listed company and the ultimate call to go ahead with a business decision has to be taken by its own board. But going ahead with the transaction would imply funding arrangements to be put in place, which could potentially alter the debt-to-equity ratio of the power generation company. This is something that the Tata Sons board would need to sign off on. The source adds that Mistry had sent a detailed note about the transaction to the Tata Sons board on May 31.
Moreover, as chairman emeritus of Tata Power, Tata would have also received the board papers in which details of the discussion on the proposed acquisition would have been outlined, he says. This person also points out that while much has been made about the $1.5 billion deal with Welspun Energy not being presented to the board in time, the acquisition of Corus Group Plc, which was a much larger transaction valued at $12.9 billion, was never brought to the board of Tata Sons, either.
Subsequently Mistry, Tata and Soonawala also met with JM Financial, merchant bankers to the deal, together to work out the details regarding the proposed structure of the transaction. The source close to Mistry says that Soonawala was against putting the assets acquired from Welspun in a Tata Power subsidiary, since the latter believed that this could have led to a holding company discount in the valuation of Tata Power.
But the Tata Power management decided to go ahead with this structure since its thinking was that such discounts don’t apply to infrastructure assets. This could have been another potential point of friction between Mistry and the old guard.
The DoCoMo issue
Mistry’s handling of the separation of Tata Teleservices’ partnership with Japanese telco NTT DoCoMo didn’t go down well with Tata either.
In 2009, DoCoMo bought a 26.5 percent stake in Tata Teleservices (TTSL) for $2.6 billion. As per the terms agreed upon during the acquisition, DoCoMo had the right to sell its stake in India at a price that was the higher of either the fair value of its investment at the time of exit, or half the acquisition cost. The joint venture struggled in India and, in 2014, DoCoMo wanted to exit at half the value of the original acquisition cost (around Rs 7,250 crore), which is higher than the current fair value of its stake. But as per current Reserve Bank of India guidelines, a foreign company can only exit its investment in India at its prevailing fair value, and not higher than that.
DoCoMo moved the London Court of Arbitration against the Tatas and was awarded a compensation of $1.5 billion to be paid by its Indian partner. The Tata Group sought permission from the RBI to make this payment, but the central bank denied. Consequently, DoCoMo has moved the Delhi High Court, asking it to direct the Tata Group to honour the international arbitration court’s verdict and the a final decision by the Indian court is awaited.
The source familiar with the matter said that if Mistry wanted, an accounting treatment could have been effected that would have increased the fair value of DoCoMo’s stake, if Tata Sons would have put in equity at a premium into the company, and repaid some of the debt on the company’s books. “If there is a determination to make something work, one can always find ways and means. It was Mr. Tata’s commitment to the Japanese investors and he has always been particular about honouring his word.”
The person close to Mistry said that various options of allowing DoCoMo to exit the investment were being considered and this was indeed one of them. “Recently it was decided to infuse capital to the tune of Rs 13,000 crore in TTSL. While Rs 3,000 crore of this capital was meant to pay for spectrum, the remaining was to be put in as equity at a premium and repay some debt,” says this person.
When asked why the decision to infuse this equity at a premium wasn’t taken earlier, the source close to Mistry said that it was essential to bring in some operational improvements at TTSL before infusing this equity; so that the fair value of the assets could be brought close to the level at which the Japanese partner had to be given an exit.
Tata Steel’s European Woes
Another sore point was Mistry’s intention to pare debt at Tata Steel, by monetising the company’s loss-making operations in UK. A part of the business, the long products division, has already been divested to Greybull Capital pursuant to a deal announced in April this year and completed in May; and efforts were underway to find a partner for the rest of the business as well.
The source close to Tata stated that the Greybull was already successful in turning around the business it bought from Tata Steel and it was generating positive cash surplus at present. “The British government has been asking the group that if a smaller company like Greybull could do turn the business around, why couldn’t a large conglomerate like the Tatas,” the person said.
The source close to Mistry says that while the Tata camp now speaks of Mistry trying to sell assets that were painstakingly created and hold potential for the future when the tide turns, the former chairman was told by trustee-nominated directors of Tata Sons that assets weren’t being monetised fast enough.
This person agrees that the British government wanted the Tatas to handhold Tata Steel Europe through this period of crisis and ensure the safety of thousands of jobs at stake. As a result, a merger of the UK steel business was being considered with ThyssenKrupp, which would have seen the two companies become equal owners of the business. “We didn’t intend to sell out the UK business lock, stock and barrel,” the source adds.
The final argument that the owners of Tata Sons have put forth against Mistry is the lack of a concrete future vision for the conglomerate. The source close to Tata says that the board of Tata Sons is yet to see a “cogent business plan”.
Mistry’s vision document-slash-future plan for the Tata Group was called Vision 2025. The vision broadly entailed propelling the Tata Group to among the top 25 globally by market capitalisation and brand value. This was to be achieved through a mixed strategy of further bolstering businesses of the group that was doing well, addressing existing challenges, and identifying and developing new avenues of growth.
The idea was to grow the group’s market value at a compounded annual growth rate of 10 percent over the next 10 years. The group’s businesses were classified into clusters—including retail and consumer-focused businesses, aerospace and defence, financial services and infrastructure—to leverage cross-functional synergies that exist.
Then there were plans to fix ‘legacy hotspots’. The idea was to put the DoCoMo issue to rest and improve the company’s operating health up to a point and then effecting a merger with another industry player. At Tata Steel, the plan to forge a joint venture with ThyssenKrupp has already been described earlier. At Indian Hotels, a new management was put in place, the balance sheet was restructured, operational strategy was changed and efforts were taken to refresh the Taj brand.
At Tata Motors, the idea was to refresh the product portfolio with new launches like the Zest, Bolt, Tiago and the upcoming SUV, Hexa; along with improvements in service and quality. The company was without an MD for over two years following the death of Karl Slym, till Gunther Butschek was appointed in February 2016. The company has had as many as four MDs in the last decade, which had made continuity of business plans a challenge, said the source close to Mistry. “Extreme care was needed to appoint the right person for the job since another rolling stone would have been a challenge for the company,” he says.
In the medium term existing Tata group businesses that were identified for growth included Tata Global Beverages, which was considered a “global opportunity on the consumer side” and Tata Capital, where a new leadership had been put in place. Over the long term, e-commerce ventures like Tata Cliq, big data and analytics venture Tata IQ and Tata Health, a real-time, preventive health monitoring system, were identified as growth areas.
Whether enough information on these ventures and how they would yield cash flows for the group were offered in the Vision 2025 document is a subjective matter on which the Tata Sons board and Mistry have differing views.
To sum up, Tata Trusts’ grouse against Mistry appears to be that he was allegedly trying to undermine the group structure that Tata had painstakingly managed to create over his two decades as chairman of the conglomerate.
The Tata camp says that Mistry’s actions over the last four years were a systematic attempt on his part to dismantle the conglomerate structure that Tata had painfully put in place at the conglomerate; as well as to diminish the relevance of the Tata trusts. Mistry’s loyalists claim that all he was trying to do was put in place a governance framework that would outlast Tata, himself and any future Tata Group chairman, and secure the future of the institution by empowering group companies with governance frameworks and talent with the relevant domain expertise.
Harsh Mariwala, chairman of FMCG maker Marico, raises a pertinent point when he says that the dynamics of the relationship between the incoming chairman at Tata Sons, his predecessor and other stakeholders should have been better codified, to avoid divergent interpretations. This is something that he had done in Marico when he handed over the day-to-day responsibilities of running the company to Saugata Gupta, its MD and CEO.
“There should have been a clear list of do’s and don’ts that should have been agreed upon, in writing, such as what decisions he can take independently and those he cannot,” says Mariwala.
Rebutting claims that he was sacked on grounds of non-performance, Mistry contended that in a recent meeting of the Tata Sons board’s nomination and remuneration committee—comprising directors Ronen Sen, Vijay Singh and Farida Khambata, apart from Mistry himself—his performance was lauded and a significant hike in his emoluments was proposed.
While the board of a company is well within its rights to replace its chairman, the optics of the way in which the process was carried out at Tata Sons has raised eyebrows. “The way the board behaved was surprising, especially if the nominations committee indeed praised Mistry’s efforts recently,” says Anil Singhvi, chairman of ICAN Investment Advisors Pvt. Ltd. “Mistry should have been given adequate time to put his case before the board at least.”
Tata sources don’t deny the claims made by Mistry in connection with nomination committee meeting, which took place on June 28. But something serious must have transpired between June 28 and October 24 for the Tata Sons board to take the drastic step of summarily dismissing Mistry.
Though Forbes India couldn’t immediately ascertain what those developments were, an email sent by Sen in his personal capacity to Ratan Tata states: “The implied assumption that there were no developments between the meeting of the Nomination and Remuneration Committee and the board meeting on October 24 is also naïve to put it mildly,” Sen wrote.
From the looks of it, the battle has just begun and both sides are digging in their heels. Sources close to Mistry indicate that he isn’t immediately looking to sell his family’s stake in Tata Sons, though that option is not ruled out in the future. This person says that Mistry is aware that recent developments may affect the value of his family’s holding in Tata Sons, but “he isn’t dependent on the value of this stake alone for his wealth.” He says: “If that is the price to be paid to set things right by way of catharsis, then so be it.”
Mistry hasn’t resigned from the board of Tata Sons where he continues to serve as a director. Neither has he stepped down from the boards of the group companies, many of them listed, where he is executive chairman. To queer the pitch further, the independent directors of IHCL met on November 4 and unanimously declared that they have full confidence in Mistry’s abilities as chairman and praised the steps taken by him to provide strategic direction and leadership to the company. IHCL’s independent directors include eminent business leaders like Deepak Parekh, Keki Dadiseth and Nadir Godrej. Interestingly, Dadiseth and Godrej belong to the close-knit Parsee business community, of which Mistry and Tata are also members.
There are more such board meetings of group companies to follow and they will serve as a barometer to gauge the extent of support that Tata Sons’ ousted chairman enjoys with the directors, especially independent ones, of these entities. While it may be easier to remove Mistry as a director of Tata Sons, considering the board already voted to replace him as chairman and majority of the company’s shareholding is with Tata Trusts; removing him from the boards of listed group companies is another matter altogether since there are independent directors and institutional investors to contend with.
In this entire imbroglio, two earlier statements made by Ratan Tata and Cyrus Mistry respectively stand out. When Mistry was succeeding Tata in 2012, the septuagenarian had advised him: “Be your own man.” Tata had also said that Mistry should take his own calls and decide what he wanted to do. Then again, in an in-house interview dated September 2016 (which was taken off after his removal chairman and then uploaded again), Mistry said that he needs to ensure “there is good alignment on strategy between Tata Sons and the Tata Trusts”.
When read together, the statements may well hold the key to what went wrong at India’s largest business house; since, in hindsight, they appear antithetical.