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A Hostile Takeover

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[dropcap]R[/dropcap]atan Naval Tata may have bitten more than he can chew by orchestrating the sacking of Cyrus Mistry as Chairman of Tata Sons, late last month. More and more, it does not seem to be a decision properly thought through.This, particularly since Cyrus Mistry was chosen by Tata and his team of selectors, after much scrutiny and deliberation of national and international candidates, conducted for over three years – a scant four years ago.

The holding company, owned 66%, by the major Tata trusts that Ratan Tata controls, ‘for life’, is the apex formation, for the complex cross-holdings that characterize the over 100 operating companies, spread over six continents.But some of the biggest of these companies, particularly those that are publicly traded, do not have very large, let alone majority, Tata shareholding. They are run by independent boards, mostly chaired by Mistry.

The Tata group is indeed Ratan Tata’s life work. He joined it in 1961, became Chairman in 1991, growing it manifold- revenue by 40 times, and profit by 50 times, in his 21 years at the helm. Ratan Tata was hand-picked by the legendary JRD Tata, his predecessor, in 1991; the very year India decided to liberalise its economy.He turned the ‘salt to software’ group into a multinational that generates 70% of its over $ 103 billion (2015-16), now more like $110 billion, in revenues; ($ 120 billion in assets), from its international footprint.

Cyrus Mistry, who must have been anticipating his own decades in the saddle, having come to the top job at just 44, to Ratan Tata’s 54, has instead had a classic, if unpremeditated, hostile takeover battle thrust upon him.And this, ostensibly, because he offended Ratan Tata’s sensibilities both by ignoring  some of his advice, and on a number of ‘legacy’ and ‘Tata philosophy’ issues. While the sacking came on 24th October, the reasons proffered so far are both vague and abstruse.

Illustrative of the offense given however, was Mistry’s starving badly performing group companies of new funds, and making ‘tough love’ moves to divest the group of loss-making enterprises. Mistry, in fact, showed little or no taste for large visionary moves like Tata, during his short tenure.But he did take a red pencil to Ratan Tata babies such as the UK-based steel plant at Port Talbot, and the failed Nano car project at Sanand, in Gujarat. Mistry also got rid of some loss-making foreign hotel acquisitions, and is still resisting an international  S1.2 billion arbitration award in favour of Japanese teleservices major NTT Docomo, with which Tata has a loss ridden JV  in India. Mistry is also unhappy with Tata’s latter day foray into civil aviation, that, after all, swiftly bankrupted Vijay Mallya.

Cyrus Mistry began moving aggressively on the fiscal prudence quite early on, his objective being to stem further losses in a challenging global business environment, and strengthen the balance sheets of various group companies for the medium term.For doing this, he has been criticised for not following the Tata way of riding out difficult times, and plugging financial shortfalls with fresh investment from group companies with strong balance sheets, augmented by external lending agencies/institutions/ the stock market.In other words, Mistry failed to relieve the pain of badly leveraged companies, using so called ‘good leverage’, from elsewhere.

Mistry was perceived, principally by Tata himself, to be wilfully and deliberately shrinking the group, by culling out the weak companies without making efforts to revive them!Mistry, in turn, may well have been pushing his own broader agenda of reducing the power and influence of the Tata Trusts, and attempting to boost the fortunes of a leaner, meaner, Tata group. One, to classically maximise shareholder value, and net worth.

His family firm, Shapoorji Pallonji, closely associated with the Tata group for over nine decades, is no stranger to its ways. When second-son Cyrus Mistry was chosen to run the group, he had already been a director in Tata Sons for seven years, after succeeding his father Pallonji, ‘the Phantom of Bombay House’.Cyrus is still Chairman of a clutch of the most prominent listed and unlisted Tata companies. He stays director in Tata Sons too, and is clearly determined to put up a fight.Both Tata and Mistry, enormously wealthy and influential, inhabit the highest echelons of the tiny Parsi community. They are evenly matched, and have their work cut out for them.Cyrus, at 48, is better placed for a long drawn-out fight, than Ratan at 79, but neither side should be underestimated.

Indian and international Company Law, Trust Law, Arbitration law, the conventions of Financial Institutional holdings, and their representation on the boards of companies in India and abroad, the role and responsibility of independent directors, that of shareholders,  of the finance ministry; plus  other executive and fiduciary matters – will all be put to the test.The neutral, or otherwise, stance, taken by the PM, and the PMO, already approached and briefed by both sides, will also play its part.

As is becoming apparent now, in some of the individual operating Tata company boards, both publicly and privately held, Mistry’s strict approach to the bottom-line, is clearly appreciated.This was borne out, recently, by the unanimous backing of the independent directors of Indian Hotels Company Limited (IHCL), also often called the Taj Group of Hotels, for Mistry’s continued chairmanship of that company.All seven independent directors of the publicly listed IHCL backed Mistry unanimously in the AGM just past.  The independent directors of IHCL are people of stature, and include eminent corporate citizens such as Deepak Parekh of HDFC, Nadir Godrej of the Godrej Group, and Keki Dadiseth, former MD of Hindustan Lever.

Another board meeting of the unlisted Tata Teleservices, where Mistry has refused to pay over $1 billion in compensation to Japan’s NTT DoCoMo which wants to exit its 26.5% stake in the company after heavy losses incurred, also had all three of the independent directors backing him.This was actually the fourth Tata company board meeting chaired by Mistry since his sacking from Tata Sons; beginning with Tata Global Beverages, on October 26th.

The independent directors in all these companies found no compelling reasons to follow the Tata Sons lead, and said they found Mistry to be a good chairman. They also said that they knew of no reason so far as to why Mistry had been sacked at Tata Sons. Another wave of prominent AGMs and board meetings are coming up shortly. Mistry was indeed removed, abruptly, against his will, in a surprisingly churlish manner, with scant prior warning, or explanation.This was accomplished by an acquiescent Tata Sons board of ageing satraps and recent inductees loyal to Ratan Tata. And, of course, Tata’s personal control of the Tata Trusts.But, odd as this unusual executive use of charitable trusts holdings to engineer a board-room coup is; it is a fait accompli; now left as an item to question in a court of law; if it comes to that.

However, Ratan can’t push Cyrus out of his director’s seat in the holding company. Not unless the two Mistry brothers are willing to sell their 18.5% shareholding in it.But because this is valued at $ 13.5- 18 billion today, while Tata Sons owns about $65 billion worth of shares in various listed Tata companies itself, it would be difficult .Tata nevertheless, is exploring the possibility, with various sovereign funds, and other ‘friendly’ investors, so that the chunk of shareholding does not go into hostile hands, in yet another frying-pan-to-the-fire mess.For Tata to make a worthy bid, inclusive of a tempting enough premium, by itself, is probably not practicable, given the group’s financial misery in several of its units.In short, sacked or not, Mistry cannot be wished away. And given  his wealth, stature, education, training, and track record in his family firm, amongst the biggest construction and infrastructure companies in the country, and places abroad; neither can he be easily brow-beaten.

But then again, Ratan Tata is probably content to take away Cyrus Mistry’s executive power as Chairman of the holding and other main companies; and doesn’t mind leaving him in place as one director amongst several.This, of course, is probably the diametric opposite of what Cyrus Mistry wants. If this is to be a long drawn out war, let us also understand that it may be Ratan Tata’s last, but is only Cyrus Mistry’s first.He is younger today than Ratan Tata was, when he took over from JRD Tata, and proceeded to oust the powerful satraps in each of the major Tata group companies one by one. But times may have changed.

The present situation has indeed occasioned an opportunity to put the power of the Tata charitable trusts to control executive functioning  to the test. The operational group has many elements that are not beholden to, or bound by the trusts. If Cyrus Mistry can unleash the power of these various more or less independent entities, he can take on Ratan Tata, and win.

By doing so, and he is not without sympathetic backers; he will also change the narrative of corporate governance in India. He will also write a fresh chapter on using  corporate laws, and conventions, in a manner that works appropriately to take over an Indian multinational, somewhat from the inside if against its will, in 2017, and beyond.

Tata has always presumed to declare itself a professional, rather than a family held group. Therefore, win or lose, there cannot be any bloodline-based, DNA prompted objection. Mistry can once again put his fiscally prudent stamp on the Tata group going forward. His vision may not be very different from any other professional, selected afresh by Ratan Tata and his team; if the group is to survive and grow.

Gautam Mukherjee
Gautam Mukherjeehttp://ghatotkachseriesthree.blogspot.com/
Commentator on political and economic affairs

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