In a dramatic development on 24th October 2016 at the board meeting of 148 year old Tata Sons, the board decided to remove Cyrus Mistry as the chairman of the board and reappoint Ratan Tata as an interim chairman.
Tata sons is the holding company which holds a majority of shares in its listed entities. Philanthropic trusts, many controlled by Ratan Tata hold a major stake and the other biggest stake of 18% is of the Pallonji Group, of who Mr Cyrus Mistry is a scion.
Cyrus Mistry fired back a five page email in his defence and made very serious allegations against the groups working. Mistry has written of flawed strategies,questionable transactions from the past and said the value of five haemorrhaging businesses that he had inherited— Indian Hotels, Tata Motors, Tata Steel Europe, Tata Power Mundra and Teleservices—may have to be written down by a crushing Rs 118,000 crore ($18 billion).
The allegations against the Tata group range from incompetence to nepotism to veiled corruption.
Mr Mistry alleged that Nano which was an infeasible project and was kept going for emotional reasons and shutting it down would mean that it would stop the supply of the Nano gliders to an entity that makes electric cars and in which Mr Ratan Tata has a stake.
He has not restricted himself to criticising poor business decisions; he casts a shadow over a range of financial deals in the email. He spoke of ethical concerns over certain transactions in Air Asia. For eg ..A recent forensic investigation revealed fraudulent transactions of Rs 22 crore involving non-existent parties in India and Singapore, which were not explored further citing immateriality.
He also drew attention to a loan that Tata Capital advanced to serial entrepreneur C Sivasankaran, under the strong advice of Executive Trustee Venkatraman, which later turned into a non-performing asset.
Mistry who was earlier criticised for handling of the group’s dispute with DoCoMo, its Japanese joint venture partner in telecom, pretty much questioned the legality of the deal by saying the original structure of the transaction raises several questions about its appropriateness from a commercial or prudential perspective within the then prevailing Indian legal framework.
He also raised doubts on the acquisition of the Searock property in Mumbai stating that it was acquired at a highly inflated price and housed in an off-balance sheet structure. Later, almost its entire net worth had to be written down.
Apart from the accusations, Mistry also questioned Ratan Tata’s year’s long strategy to drive the group’s global presence through acquisitions such as Corus and JLR. The foreign acquisition strategy, with the exceptions of JLR and Tetley, had left a large debt overhang, referring in particular to the group’s European steel business and overseas hotels, which had to be sold at a loss.
The Tata group has refuted all charges calling them false and malicious. They called his accusations unforgivable and have damaged its image in the eyes of its six lakh employees.
It is also said that Ratan Tata is talking to some Sovereign Wealth funds to buy out the stake of the Pallonji group.
Meanwhile as the drama unfolded over last week, the Tata group of companies lost about Rs 27500 Crores of marketcap over three days. Domestic and Institutional investors naturally have concerns over the manner in which the matter was handled and uncertainty over the veracity of allegations and true state of affairs in the group.
Corporate Governance is a very sticky issue and this unceremonius sacking of a large conglomerates chairman again brings forth the role of independent director’s accountability to minority shareholders.
There are no more icons in Indian Industry as it will be a tough turnaround for the Tata to regain their glory as none other their own chairman of four years have indicted them on several issues.
We hope regulators and media will not cow down and ask Tata to respond to the insinuations point against point. Just some placatory words of trust deficit and board losing confidence in the erstwhile chairman are insufficient.
Unfortunately these scandals reinforce some of the Foriegn Institutional Investors view that Indian companies are run as personal fiefdoms of power. It doesn’t matter how illustrious is the legacy and the unimpeachable reputation of integrity and professionalism the company enjoys, at the end of the day one really doesn’t know what goes inside Board Rooms. Personal egos, dreams and bureaucracy override rational business decisions.
This scandal may or may not blow over, but without doubt the energies of Tata senior management will be diverted from their normal business as they will be busy defending their past actions.
What should investors who hold Tata group shares do?
They need not have a knee jerk reaction to this hugely unfortunate event, but revisit their companies on their financials and their growth prospects.
The question they should ask is would they have remain invested in these companies purely on the merits of the business like any other Indian company without the goodwill of Tatas larger than life persona.
The excess leverage and debt of some Tata group companies which is being compensated for by some other business which are cash cows is public knowledge. The comfort of investors to stay invested in group companies facing challenges was in the staunch belief of Tatas competence and ability to generate profits.
The business and profitability of the company whose shares they own would have to pass muster as independent entities. Also the investor should ask himself another question. Would he invest in the company if it was not a Tata?
The question to hold or sell your Tata group stocks will be answered.