 "In this file photo of Cyrus Mistry whom Tata Sons on Monday removed as its Chairman, nearly 4 years after he took over the reins of the group.")
The war of words between Tata Group’s 78-year-old patriarch Ratan Tata and his former protégé Cyrus Mistry escalated on Thursday. Tata Group accused Mistry of “ulterior objective”, and of employing “devious” methods to take over Indian Hotels Company Limited (IHCL) and other operating companies, with help from the independent directors.
In a nine-page letter issued to the media, Tata Sons said the recent backing of 48-year-old Mistry by the independent directors of BSE-listed IHCL - the operators of Taj Group of Hotels - reveal his “true colours”.
“Mistry,” the statement alleged, “is trying to gain control of IHCL, with the support of the independent directors of the board. He has cleverly ensured over these years that he would be the only Tata Sons representative on IHCL’s board, in order to frustrate Tata Sons’ ability to exercise influence and control on IHCL.” Tata Sons owns 38.65% stake in IHCL.
The Tata Sons’ statement came within hours of group company, Tata Consultancy Services (TCS), removing Mistry as chairman and appointing old-timer Ishaat Hussain in his place. Tata Sons also called extraordinary general meetings (EGMs) of shareholders of TCS and IHCL to remove Mistry as director of the company.
In another development, independent directors of Tata Chemicals came out in support of Mistry at the board meeting on Thursday. Earlier this month, independent directors of IHCL, too, had informed shareholders of their support for Mistry.
The Tata statement said Tata Sons has historically exercised control over its group companies through its shareholding and commonality of senior directors, which had acted as a binding force in the group for many years. “We now have an unacceptable new structure where the chairman alone is the only common director across several companies and this situation could not be allowed to go on,” the statement said.
“The trust reposed by Tata Sons in Mistry, by appointing him as the chairman four years ago, has been betrayed by his desire to seek to control main operating companies of the Tata Group to the exclusion of Tata Sons and other Tata representatives,” the Tata statement said.
Calling it the “desperation” of an “angry” Tata, the Mistry camp said to allege “ulterior motive” of taking over control of companies, giving the example of IHCL only because independent directors demonstrated true independence, is not in keeping with Tata governance standards.
“The Tata statement does not have much but selective data, unsubstantiated claims and half-truths, without a word of explanation as to why it became necessary to remove him (Mistry) summarily, violating natural justice and without explanation,” it said. Soon after he was ousted as the chairman of Tata Sons on October 24, Mistry had accused Tata of meddling in Tata Group’s affairs, including in investment decisions and making him a “lame duck” chairman.
When contacted, an independent director of IHCL said it would not be right to say independent directors want to take over IHCL along with Mistry. “None of us own significant shares in the company or have vested interests. We just hope the two sort it out amongst themselves,” the director said, asking not to be quoted.
The Tata statement said it was unfortunate that Tata Sons did not anticipate such “devious moves” by Mistry and thereby did not inform other directors of the operating companies about its dissatisfaction with Mistry. “However, we will now do whatever is required to deal with this situation,” the Tata statement said.
Corporate lawyers said one of the strategies of the group will be to first remove Mistry from group companies as director by calling EGMs of listed companies and then removing the independent directors, who supported Mistry. But given Tata Group has low equity stake in Tata Steel, Tata Motors and Tata Chemicals, it will be a big task. Besides, removing independent directors has reputational risk, the lawyers said.
The Tatas said during Mistry’s four-year term, the profits of the rest of the group, apart from TCS and Jaguar Land Rover (JLR), declined, while the total borrowings of the group increased from Rs 1,55,863 crore in March 2012 to Rs 2,25,740 crore in March 2016. “Mistry continuously talks of the bad legacy issues but never mentions the two top performers of the group, viz., TCS and JLR, which were given to him when they were showing excellent results and which helped to cover up the deficiencies of the rest of the group,” said the statement.
On Mistry’s warning the group will have a potential write-down of $18 billion due to Ratan Tata’s bad acquisitions, the statement asked whether Mistry, the chairman, had informed the boards of these companies at any time in the past, specifically of the above-mentioned potential write-downs. “If so, when was this done and why was it not made public, as this is clearly a major item of information – apart from disclosing only the write-offs required to be made to date,” the Tata statement said.
The statement said the directors of Tata Sons are primarily concerned with the results of Tata Sons and their duty to all its shareholders, particularly the Tata Trusts, who hold 66% of the equity capital. The Mistry family owns 18.5% stake in Tata Sons.
The statement said, excluding TCS, the dividends received from all the other 40 companies has continuously declined from Rs 1,000 crore in 2012-13 to Rs 780 crore in 2015-16, including interim dividend of Rs 100 crore due to change in the Union Budget. This reflects the decline in total profits of those operating companies, from which dividends are paid, during the past four years.
According to the Tatas, the impairment provisions increased from Rs 200 crore in 2012-13 to Rs 2,400 crore in 2015-16, indicating inability to stem falling values and turning around the ‘hot spots’ referred to by Mistry. “But for the TCS dividend and even before impairment provisions, Tata Sons would have shown operating losses over the past three years (with a small surplus in between), showing the significant dependence on TCS. This dependence was indeed a source of concern for the directors and its shareholders,” said the statement.
It said Mistry was selected as Tata Group chairman after he made many relevant comments and submitted a detailed note in October 2010, setting out his views on how a large and complex group like Tatas should be managed, and gave a comprehensive management structure, with details of the composition and objectives of each component of the structure. But none of Mistry’s views on management structure were implemented during his tenure.
On the Tata Group’s three problem companies - Tata Steel Europe, Tata Teleservices and the Indian operations of Tata Motors - the statement said even after four years, there was no noticeable improvement in the operations of these companies and, in fact, they have got worse as shown by continuing huge losses, increasing high debt levels and declining share in their respective markets.
On Tata Motors, the Tata statement said its market share, in both passenger cars and commercial vehicle areas over the past three years, has dropped considerably. In passenger cars, the market share fell from 13% in March 2013 to 5% as on date. “It will be difficult, if not impossible, to retrieve the market share losses. However, even more concerning is the market share in commercial vehicles, which in March 2013 stood at 60% and now stands at 40% plus – the lowest in the company’s history as the market leader in commercial vehicles,” it said.
During the past three years, the group has written down, written off or made provisions for impairment worth thousands of crores. Tata Steel alone has written off a large part of its investment in its UK/European assets. It is interesting to note that the new buyers of some of the steel assets for £1 in the UK have claimed a dramatic turnaround in the very first year of their takeover. “In our view, these subpar results cannot be blamed on the commodity cycle or economic conditions – but on his leadership,” the Tata Sons statement said.
Interestingly, the Tata statement does make any mention of Rs 22 crore fraud at AirAsia, as alleged by Mistry. On Wednesday, the Tatas promised to move courts for the recovery of Rs 700 crore from Chennai-based entrepreneur C Sivasankaran, a close friend of Tata, who defaulted on payments. The statement does not make any mention of Rs 200-crore loans given by Tata Capital to Sivasankaran that turned bad.
Since the war between the two sides broke out on October 24, the Tata Group has lost Rs 76,000 crore of market value or nine%, compared to the BSE Sensex that lost 3% of its value.
Point-by-point rebuttal: Excerpts from the ‘letter bomb’
- Tata Sons’ trust in Mistry betrayed by his desire to seek control of main operating companies with the support of independent directors
- New structure unacceptable where chairman alone is the only common director
- In four years, group indebtedness increased, operations of three problem companies - Tata Steel Europe, Tata Teleservices/DoCoMo and the Indian operations of Tata Motors - have got worse
- Tata Sons’ over-dependence on Tata Consultancy Services (TCS) for dividend needed corrective action. No real material contribution by Mistry to TCS’ management. Dividends from 40 companies (ex-TCS) declined from Rs 1,000 crore in 2012-13 to Rs 680 crore in 2015-16 (excluding interim dividend)
- True colours of Mistry and his ulterior objective of trying to gain control of Indian Hotels with the support of independent directors
- Mistry’s statement of potential write-down of $18 billion not disclosed to the companies’ boards
- Significant issues of conflict of interest in relation to the Shapoorji Pallonji Group, which Mistry did not fully address
