Cyrus Mistry’s tell-all letter a wake-up call for Tatas
It is now becoming increasingly clear that no major change can be effected at the $116-billion Tata Group without winning the confidence and blessings of the all-powerful Tata Trusts, which control over 60 per cent of Tata Sons – even if those changes are essential to turnaround many of the group’s sluggish businesses.
This is where their hunt for a new chairman can turn out to be cumbersome, if at all they are keen to pick an external candidate for the job. Without an understanding of the sway that Tata Trusts hold over the chairman of Tata Sons, and the broad expectations from a chairman, any potential candidate will find it difficult to manoeuvre the vast terrain of the group, with 29 listed companies, 6.6 lakh employees, and a presence in over 100 countries.
The Tata Trusts – the Sir Dorabji Tata Trust, the Sir Ratan Tata Trust and others that are allied to both of these – gave themselves special powers in the appointment and removal of the chairman just days before Cyrus Mistry was given the top job.
Tata Trusts also have powers to appoint one-third of the directors of Tata Sons, as long as the Trusts have at least 40 per cent shareholding in Tata Sons.
Moreover, a majority of the directors nominated by the Trusts have to approve the appointment and removal of the chairman of Tata Sons with affirmative voting. While these powers help protect the interests of the Trusts, it also makes the chairman not just answerable to the Tata Sons board, but also to the board of Tata Trusts. And since Tata Trusts, at present, are chaired by Ratan Tata, inevitably, Tata will have the last word in the matter, as is evident in the events leading to the messy leadership change at the group at present.
In his five-page letter to the Tata Sons board after his ouster, Mistry talks about how the amendments to the articles of association of Tata Trusts has severely acted as a constraint upon him and limited his ability to engineer a turnaround. This also, according to him, "created alternative structures" which limits the freedom of the chairman.
By now, the major areas of friction between the ousted chairman and the Trusts are quite evident. Be it the sale of Tata Steel’s Europe operations, the planned sale of certain Indian Hotels assets, the bitter legal battle with NTT Docomo, or the costly acquisition of Welspun’s solar power business – the issues have led to friction between the two.
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| By now, the major areas of friction between Cyrus Mistry and Tata Trusts are quite evident. |
In the letter, Mistry has warned that the salt-to-software giant may face $18 billion (Rs 1.18 lakh crore) in write-downs because of five unprofitable businesses he inherited. Mistry alleges that the foreign acquisition strategy of the Tata Group, with the exceptions of JLR and Tetley, had left a large debt overhang.
Corus faced potential impairments of over $10 billion. Foreign properties of Indian Hotels and holdings in Orient Hotels have been sold at a loss. The UK and Kenya operations of Tata Chemicals "needs tough decisions", he said.
Tata Capital, meanwhile, had a huge pile of bad loans on its books from the infrastructure sector, that had to be cleaned up. Not to talk of the telecom business, which has been "continuously haemorrhaging", and where any distress sale or shutdown would have cost the group $4-5 billion.
Non-performing assets at Tata Motors Finance mounted to an excess of Rs 4,000 crore. The Nano project has been consistently losing money, as much as Rs 1,000 crore.
Mistry felt that the best turnaround strategy at Tata Motors was to close down the project. He also says he was pushed by Ratan Tata to enter the aviation sector in partnership with Air Asia and later with Singapore Airlines, without the businesses being necessarily promising.
He signs off by saying that he was being pushed into the position of a "lame-duck" chairman, but he wanted to break free and create an institutional framework for effective future governance of the group.
After Mistry’s missive to the Tata Sons board, it is anyone’s guess that a newcomer on the hot seat at Bombay House will not find the going easy. There is bound to be a perpetual clash between what the group considers as prize assets and will keep investing in despite them bleeding, and what need to be actually trimmed or even shut down. Or the areas where investments need to be made, or ignored.
In short, a toss-up between what is an emotional engagement with a business versus what makes sense in the real world.
Unless credible answers are given to Mistry’s grouses, clouds of mistrust will continue to gather over Bombay House, and does not augur well for the reputation of the 148-year-old group.