India Inc: Bruising feud tarnishes conglomerate Tata
An intensifying feud at the top of Tata Group, which has long been one of India’s most respected conglomerates, is threatening to destabilise the group and is damaging its image, analysts say.
Tata, which owns brands including Tetley tea and Jaguar Land Rover, and has interests spanning from IT services to aviation, has nurtured a largely unsullied reputation over its 150-year history, with philanthropy being at the core of the group’s values, as two thirds of it is owned by charitable trusts.
Ratan Tata, 78, the figure from the Tata dynasty at the helm of the group, is seen as an iconic figure in India, known for his anti-corruption stance and broader ethical values, even winning the admiration of taxi drivers and chai-walas who tend to despise ostentatious business leaders.
But the management battle is calling the very values the group is built upon into question.
“A public spat at the highest levels in an organisation that has remained relatively issue-free is definitely going to impact the group’s brand image,” says N Chandramouli, the chief executive of TRA Research, a brand insights company. “The personal image of Ratan Tata has also taken a beating.”
Corruption in India is nothing new, with famous cases such as the country’s largest corporate accounting scandal involving the software company Satyam Computer Services.
But the Tata affair is set to intensify scrutiny of corporate practices. India is ranked 76th out of 168 countries and territories on Transparency International’s corruption perception index. On a corruption scale, India’s score last year was 38, where 0 represented “highly corrupt” and 100 was “very clean.
Tata’s troubles began in October. Tata then unexpectedly ousted Cyrus Mistry from his position as chairman, replacing him with Ratan Tata, without citing a reason for its decision.
Mr Mistry has refused to step down without a fight and has issued statements making allegations about some questionable business practices carried out by the group.
Tata Motors has also voted to oust independent director Nusli Wadia from the automaker’s board, another sign of Ratan Tata consolidating his power over the conglomerate. A slew of extraordinary general meetings had been called in an effort to remove Mr Mistry from the boards of Tata companies including Tata Motors and Tata Steel. The saga took another surprising turn when on Monday, Mr Mistry resigned from all the boards of companies in the group. He is also preparing a legal battle with the conglomerate.
In a statement, he said he wanted to “secure the best interests of the Tata Group” and “serve the objective of governance reform”, as well as “regain lost ethical ground”.
Tata is made up of about 100 companies and 660,000 employees. It had revenue of US$103 billion in its previous financial year, which ran from April 2015 to March.
“It is now clear that my attempt to protect and preserve the ethical legacy of our founding father, Jamsetji Tata, was the real cause for my ouster,” Mr Mistry said. “The pursuit of good governance and ethical business seem to have caused a serious discomfort in some quarters.”
He says that there has been fraud and wrongdoing within the Tata joint venture Air Asia India, among other areas of the conglomerate. “Never before has the Tata Group, including the philanthropic objectives of the Tata Trusts, been in jeopardy to this extent and scale,” Mr Mistry said earlier this month.
Mr Mistry’s family owns an 18.4 per cent stake in Tata through the Shapoorji Pallonji Group.
Authorities have already started to investigate the Air Asia India issue. Subramanian Swamy, a member of parliament, this month called for Ratan Tata to be prosecuted over accusations of links to a telecoms corruption scandal. Corruption is notoriously widespread in India but Tata has largely avoided connections with such practices in the past.
“The recent brouhaha surrounding Cyrus Mistry has definitely dented the image of the India’s largest conglomerate Tata in ways that we have not witnessed in the corporate history of the country in the recent past,” says Mahesh Singhi, the managing director of Singhi Advisors, an investment bank based in Mumbai. “I feel that things could have been managed in a more dignified and matured manner instead of letting things take uglier turns. It could take a new leader 10 years to get control of things and bring back the unquestionable image of the Tata Group.”
Removing Mr Mistry from his chairmanship in itself prompted questions about corporate governance standards.
“The latest development of Mr Cyrus Mistry resigning from all Tata Group companies suggests that he is ready to fight Mr Ratan Tata with more retaliation,” says Mr Singhi. “This is definitely negative for the Tata Group. Investors will be required to brace for a long-drawn fight as both parties are now prepared for a legal tussle. Mr Mistry’s statements and counter statements from Tata have already done enough damage, while Mr Mistry will personally stand to gain with these resignations on high moral ground.”
For its part, Tata has said it is consulting its lawyers and rejects the allegations made against it as “baseless, unsubstantiated and malicious”, arguing that the company upholds high standards of corporate governance and saying that it was Mr Mistry who failed to follow the ethos of Tata Group and its founder.
“Tata Group which is one of India’s oldest and reputed groups has a strong value system,” says Vishal Kulkarni, the founder director of Faber Infinite, a management consultancy. “Their value system is a good blend of a professional approach with a social touch.” He says he is certain that Tata will be able to emerge from the crisis.
“This battle is likely to prove costly for the Tatas,” says Prateek N Kumar, the chief executive of Neoniche Integrated, a marketing agency based in Mumbai. “The truth is moral debts in the Tata Group will be tough to prove in courts but what a court battle can do is pressure the Tatas to settle with Mistry.”
The allegations of corruption against Tata are a concern for the group and should they be proved, could have a negative effect on the wider Indian economy. “Corruption is like termite who has been eating our economy day by day,” says Mr Kumar. “The more the corruption, the slower the economic growth. India’s been developing and it has become important to polish its image especially to reassure investors of the stability of the Indian market.”
Prem Rajani, the managing partner of Rajani Associates, an Indian law firm, points out that the debacle that Tata is facing raises some interesting questions about how business houses in India, many of which are still family-controlled, should be run. Mr Mistry became only the second person from outside of the immediate Tata family to take up the position of chairman.
“Are our Indian business houses ready to hand over management to professional directors – are we ready for segregation of ownership and management? Will the professional directors enjoy sufficient democracy to professionally manage the companies and at the same time respect the ethos and values of the promoters?”
He describes the Tata issue as “a wake-up call for all corporates”, which should “take a cue of this incident and evolve a proper mechanism that will lay down the powers of the professional directors and management team and the vision and the ethos of the owners.”
The Tata saga is just one of a series of controversies over the years:
India’s largest corporate accounting scandal involved the software company Satyam Computer Services. The Hyderabad-based company misrepresented information about its finances, including its profits and revenues to board members, stock exchanges and its investors. The fraud was worth about US$1.5 billion. Ironically, Satyam means “truth” in Sanskrit. The founder and former chairman, Ramalinga Raju, above, confessed to falsifying the accounts and last year was sentenced to seven years in prison for his involvement in the scandal. Nine others were also found guilty of inflating revenues and manipulating accounts and income tax returns in the case.
The multibillion dollar conglomerate Sahara India Pariwar has experienced a dramatic fall from grace since the group’s founder and chairman, Subrata Roy, 67, below, was in March 2014 held in jail. The group allegedly failed to repay billions of dollars to investors after bonds Sahara sold to them were later ruled to be illegal. Sahara, based in Lucknow in northern India, has interests in sectors ranging from property to media.
Billionaire liquor baron Vijay Mallya, above, left India for the UK more than nine months ago, as he is dodging attempts by banks and authorities to recover debts. The self-styled “king of good times built up his inherited empire, the United Breweries Group, but the collapse of its Kingfisher Airlines in 2012 resulted in him losing much of it, as the carrier amassed $1bn in debt. In March, Mr Mallya was summoned to appear before the enforcement directorate in a money-laundering investigation but he had already fled the country.
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