Battle for Control Triggers Turmoil at the Top of Tata

12_22_Tata_Turmoil_01
Tata Group Chairman Ratan Tata at the annual general meeting of Tata Steel in Mumbai, India, on August 14, 2012. John Elliott writes that Cyrus Mistry, Tata's successor as chairman of Tata Sons, the group’s top holding company, is trying to find a new chairman to rebuild the group's image and relationship with Tata Trusts, which owns a controlling 66 percent stake in Tata Sons. Danish Siddiqui/reuters

This article first appeared on the Riding the Elephant site.

The Tata Group, India’s largest conglomerate, faces an unpredictable new year with a battle developing for control of what has always been regarded as the country’s most stable and respected business group.

At this stage, the endgame is far from clear, but what is clear is serious damage has been done to the Tata image.

On the one side is Ratan Tata, the veteran former chairman of Tata Sons, who instigated the October 24 sacking of Cyrus Mistry, his successor as chairman of the group’s top holding company.

Tata is currently looking for a new chairman to rebuild the group’s image and relationship with Tata Trusts, which owns a controlling 66 percent stake in Tata Sons.

On the other side is Mistry, who had been the first chairman not from the Tata family, and who held the position for nearly four years. His Shapoorji Pallonji family, which belongs to the same Parsi religion and community as the Tatas, owns an 18.5 percent stake in Tata Sons—the largest minority holding after the trusts.

Mistry has begun destabilizing regulatory and legal actions aimed at changing the group’s governance structures and, consequently, its control.

Related: Stubborn May taught hard trade lessons in India

In the wings are members of the Tata Sons board who have been backing Tata, but according to unsubstantiated rumors swirling around Mumbai, may have other plans for the group’s future.

Mistry’s immediate aims are removing Tata from the temporary chairmanship that he assumed on October 24, as well as dismissing board members who Tata had recruited in recent months. Other planned changes include how the philanthropic Tata Trusts, which is also headed by Tata, relate to the rest of the conglomerate.

The first stage of Mistry’s legal campaign began on December 22 with the National Company Law Tribunal (NCLT) holding a preliminary hearing on a petition from his investment companies for an administrator to take over the group’s affairs, pending the appointment of a new board—led, it is suggested, by a retired Supreme Court judge. The petition is based, under Indian companies’ legislation, on allegations of oppression of minority shareholders and mismanagement of Tata Sons.

Tata, who will be 79 on December 28, was chairman of Tata Sons for 21 years, until the end of 2012, when he was replaced by 50-year-old Mistry, with his support. During most of those years he was also chairman of Tata Trusts and the leading operating companies, where he dominated decision-making with few people crossing him.

That absolute authority ended with Mistry’s appointment, although Tata continued to exert corporate reign as chairman of the trusts, and less formally as the bearer of the Tata name, which led to a gradual breakdown of his relationship with Mistry.

The current unnecessary upheaval is the result of Tata deciding in October that he could no longer tolerate dealing with Mistry or his top advisors, who many considered to be excessively abrasive.

Over the past few weeks, in speaking to contacts in Mumbai and elsewhere, I have found far more support for Mistry than Tata on almost all grounds, except on the advisers who formed a Group Executive Council that is widely criticized.

Tata could have waited until next April, when Mistry’s current contract expires, and replaced him then. He has said that he will take “to my grave” his reason for acting when he did.

The seemingly impulsive action has shattered a protective halo that has surrounded both Tata and the group’s image for decades. It has released streams of pent-up criticism that in the past had rarely been uttered but now constantly crop up in conversations with businessmen, professionals and observers.

Mistry’s 344-page petition was served to 23 people, including members of the Tata Sons board—among them industrialists Ajay Piramal of the Mumbai-based Piramal Group and Venu Srinivasan of TVS Motor Company in Chennai, together with Nitin Nohria, Harvard Business School dean, Amit Chandra, India’s managing director of Bain Capital, Vijay Singh, a retired bureaucrat and Ronen Sen, a former top diplomat. Also in the list is N.A. Soonawala, a Tata confidant and former top executive, now on the Tata Trusts.

The inference is that Tata assembled a board who backed the removal of Mistry, and have plans for the group that will be detrimental both to the reputation and success of the operating companies.

Connected to this are concerns with what would happen to the 18.5 percent stake that Mistry’s Pallonji family has in Tata Sons as the biggest minority shareholder. Among those served with the petition, Piramal is known to have an appetite for takeovers.

Tata rebuts Mistry’s allegations, which since October have been building in a series of public statements. Among them are revelations of alleged questionable payments made by a Tata joint venture with AirAsia of Malaysia, financial deals with Chinnakannan Sivasankaran, a controversial South Indian businessman who has been close to Tata and other telecoms investments.

The tribunal is also being asked to investigate whether Tata Trusts have breached insider-trading regulations by asking for price-sensitive information from publicly listed operating companies—something that Mistry annoyed Tata by resisting on one planned takeover.

“This is about governance—it’s not about me, it’s not about my position,” Mistry told the Financial Times. “Whatever I have said has been said for the long-term interests of the group. Nothing that I’ve said is not backed up.”

Mistry said that he would end his campaign “when a structure is put in place at the trusts, which clarifies [their role] with regard to Tata Sons.” This would involve making sure strategic moves are not made purely based on the strength of “one person’s decision,” he said.

Tata Sons dismisses Mistry’s public campaign as “a personal issue which reflects his deep animosity towards Mr. Ratan N. Tata.” It has also said that the group followed “the highest standards of corporate governance.”

Ethical Reputation

This statement by Tata Sons goes to the crux of recent events. For decades, the Tata Group has been seen as one of India’s most ethical, corruption-free businesses. Tata has often spoken about this—for example, how he missed out on a deal with Singapore Airlines in 2000 because he would not pay a bribe. Yet recent revelations challenge his spotless reputation.

After Mistry was removed from the Tata Sons chairmanship, Tata began maneuvering to strip him of chairing the operating companies in steel, hotels, power, chemicals, beverages and motors, alleging that Mistry was a “serious disruptive influence.”

The companies involved called several emergency general meetings for this week. Mistry forestalled them by voluntarily resigning his chair and board memberships on the evening of December 19, presumably knowing that he would lose shareholders’ votes. Tata Consultancy Services dismissed him last week.

Yet all of the companies, including Tata Sons, had given Mistry excellent reviews for his role as their top manager during the past few months. Tata, it seems, has had few categorical reasons for sacking Mistry, leading some members of the companies’ boards to vote for him to remain as chairman.

Tata nonetheless alleges, “Mistry has done precious little to build the goodwill of the Tata Group, built through the hard work and dedication of its employees.”

Mistry’s alleged misdeeds include not implementing changes he proposed during his interview for the chairmanship in 2012, and not moving fast enough on resolving problem areas, including heavy-debt burdens that he had inherited.

He is also accused of moving too fast on plans to close Corus, Tata Steel in the U.K., when steel demand was just picking up. There have also been criticisms of his handling of a joint-venture severance dispute with DoCoMo of Japan, plus rumblings that Mistry clashed with Tata on closing down Tata’s personally inspired but failed Nano small-car project.

On the sidelines of this saga is a conflict with Nusli Wadia, 72, a prominent Mumbai businessman and a previous close friend and adviser of Tata. He is on Tata’s motors, steel and chemicals boards, yet has been outspoken in backing Mistry.

Tata responded by calling for Wadia’s dismissal from the boards, with the first response coming from Tata Steel voting him off its board. Wadia has since filed an Rs 3,000-crore defamation suit against Tata and the board of Tata Sons, and complained about Tata’s corporate governance to the Securities and Exchange Board of India (SEBI). In addition, he has also issued a series of allegations against Tata, including criticism of the Nano production line not having been closed.

Tata has been getting a bad press internationally, though most of it has been directed at the dominant relationship he was expected to exert on Tata Sons through his chairmanship of Tata Trusts, as well as his recent tactics.

Media reports last weekend indicate that he is willing to step down as chairman of Tata Trusts sometime next year, in addition to handing over the position to a new chairman, which he has said should happen in the first two months of next year. But he wants to leave the trusts when he thinks it is appropriate, not when Mistry or others seek to ease him out.

The Financial Times’s respected Lex financial-comment column took a tough line: “In resorting to counterclaims against Mr. Mistry, Tata has done itself no favors. By throwing mud of its own, rather than presenting evidence that its process is clean, Tata is left with a bigger mess on its hands.”

What was left unsaid is that this whole “mess” could have been avoided with more patience and care in implementing such a major generational change of top management.

John Elliott writes from New Delhi. His latest book is IMPLOSION: India’s Tryst With Reality (HarperCollins, India).