New Delhi: One week ago, the $100-billion Tata Group surprised the Indian and international business community by unceremoniously sacking its chairman, Cyrus Mistry. The last week has seen pre-emptive legal measures from interim chairman Ratan Tata, a slump across all Tata Group company shares and a controversial public airing of dirty laundry.
In a letter to the Tata Group board last Wednesday, Mistry defended himself, saying that not only was he placed in the position of a “lame-duck chairman” but that in 2012 when he first assumed his position he inherited a “debt-laden enterprise saddled with losses”. In his letter, Mistry also alleged that his tenure was marked by interference from Ratan Tata (particularly when it came to Air Asia and Singapore Airlines joint ventures). The Tata Group on its part replied with a public statement that dismissed Mistry’s claims without directly refuting them and pointed out that his tenure as chairman was “marked by repeated departures from the culture and ethos of the group”.
What next for the Tata Group? What are the hurdles it needs to go through before returning to a state of normalcy? The Wire breaks it down.
What are the legal troubles awaiting Mistry and Tata, and how might they be resolved?
The first thing Ratan Tata and the Tata Group board needs to do is ensure that Mistry steps down as director of a number of Tata Group firms. Mistry currently sits on the board of a number of Tata Group companies, including TCS, Tata Motors and Tata Steel. While the Tata Sons board removed him as chairman of the overall group last week, it did not (and does not have the power to) strip Mistry of his other titles.
According to industry sources, this is a bargaining chip that the “Mistry camp” currently holds. The Tata Group’s senior management doesn’t want to kick-off a formal procedure to have Mistry removed from the board of each Tata Group company.
“It’s not that it would be difficult to have it done, only that it would have to take place in full public view. At the next public shareholder meetings of each Tata Group company, a formal resolution would have to be passed and it could get ugly if anybody who supports Mistry wants it to get ugly,” a senior Tata Group executive told The Wire.
To this end, the Ratan Tata camp is open to corporate mediation and has taken a few steps in that direction. It remains to be seen, however, what Mistry’s next course of action will be and whether he will be amenable to mediation.
Does this mean that Mistry, and the Shapoorji Pallonji group, will not fight against his removal?
In the immediate aftermath of last week’s events, a number of media reports pointed out that Mistry’s family business, Shapoorji Pallonji (which is the single largest stakeholders in Tata Sons), planned to launch a legal intervention against the Tata Group board’s decision. To be fair, the Tata Group might have believed that Mistry was planning on doing the same. On Tuesday, one day after Mistry was sacked, Tata Trusts and Ratan Tata filed a number of caveats in anticipation of a potential legal challenge.
While media reports indicated that the Mistry camp had also filed caveats, it was later denied by the Shapoorji Pallonji group. “A caveat is a notice issued filed by a party fearing legal action seeking notice before action,” a statement from Mistry’s office said. “Tatas have filed caveats seeking notice from Cyrus Mistry fearing legal action. Cyrus has not filed any caveats. He has already made a statement that such concerns are misplaced at this stage.”
Mistry’s best legal bet is to cite provisions in the articles of association (which were changed once in 2012 when he assumed charge and again in 2014) or approach the National Company Law Tribunal alleging mismanagement, according to experts. At the moment, however, it doesn’t look like Mistry is planning on pursuing these options, although the coming days and weeks will shed more light on this matter.
What effect will this have on the relationship between the Shapoorji Pallonji group and the Tata group, and the former’s shareholding in the latter?
The Shapoorji Pallonji family is the single largest stakeholder in Tata Sons (the holding firm of the Tata Group), with a shareholding of a little over 18%. When Mistry was first appointed as chairman, although he wasn’t related by blood to the Tata family, it was still seen very much as an inside family choice because of the Pallonji family’s long history and shareholding with the Tata Group.
One option, as Bloomberg reported last week, is for the Tata Group to simply buy out the Pallonji stake. This option would make for a clean break and an overall amenable divorce if that is what the Mistry camp wants. Buying the Pallonjis out, however, will not be cheap. One conservative analysis values the 18% stake at somewhere around $16 billion. To that end, the Tatas are reportedly approaching a number of sovereign wealth funds (state-owned investment funds) to come on-board as a partner and buy out the Pallonji stake.
If this does go through, it will put an end to a nearly 80-year-old relationship between the Shapoorji Pallonji and Tata Group. Market experts point out that while finding a suitable investor and partner could be difficult, Mistry’s family could walk away happy and more importantly, this would go a long way in calming outside Tata Group firm shareholders.
How have senior Tata Group executives have reacted to the Mistry sacking?
Three senior Tata Group executives have put in their papers, according to a company spokesperson. The executives are Nrimalya Kumar (chief strategy officer), Madhu Kannan (business development and public affairs) and NS Rajan (chief human resources officer). Their resignations, however, are not surprising or shocking. All three of them were members of Mistry’s group executive committee (GEC), a brain trust established in late 2012 to help Mistry execute and achieve his vision for the salt-to-software conglomerate.
Shortly after Mistry was sacked last week, the Tata Group also dissolved the GEC — and according to industry sources, these three executives were perhaps closest to Mistry and didn’t see themselves moving into alternative roles.
Other members of the GEC also included Mukund Rajan (brand custodian) and Harsh Bhat (a group veteran) who according to reports will now be assigned new positions within the Tata Group.
There have been no reported resignations within Tata Group firms as of yet. In fact, two of the group firm heads (N Chandrasekaran of TCS and Ralf Speth of JLR) have been brought on as additional directors of the Tata Group board and are currently considered be as strong internal candidates for the next Tata Group chairman position.
As interim chairman, what is Ratan Tata’s strategy with the publicly controversial business hurdles such as Tata Steel? How does the investment community look at this change in management?
Last Thursday and Friday, the management of a number of Tata Group firms met institutional investors, investment fund managers and market analysts. In their talks on the steel business, the senior management of Tata Steel pointed out that there would be “no change in its strategy regarding European assets, despite the sudden change of leadership”, according to a report by Moitlal Oswal.
To a certain extent, this validates Mistry’s Tata Steel strategy, according to analysts, which was widely seen as a point of contention between the Mistry and Tata camps.
Divesting Tata Steel’s European assets is the way to go, although market observers feel that under Ratan Tata this divestment process might slow down considerably. “We expect the TSE divestment process to slow considerably as Ratan Tata is a soft target for labour unions. Also, it is unlikely that Ratan Tata will bite the bullet, given that TSE is close to his heart. Even before the exit of Cyrus Mistry, there was already a softening of stance from initially announced full exit from TS UK,” the Motilal Oswal report says.
On the Tata Docomo front, which has been involved in a nasty legal spat with its Japanese investor, while things are still yet to move, a number of Indo-Japan observers are hopeful that Ratan Tata will be able to look at the issue with “fresh eyes”. One media report points out that within the Tata Group, the Mistry camp was “most hawkish” regarding the Docomo issue, although this is not backed by any credible or on-the-record sources.