Wednesday, October 26, 2016

Cyrus Mistry letter will force Tata Group to take hard look at itself, Ratan Tata linkage

Since Cyrus Mistry’s position as chairman of the Tata Group did not flow from his rights as a shareholder, and the board of Tata Sons was well within its rights to vote him out, it was never clear what he would gain by approaching the courts.

While maintaining radio silence on this aspect of his plans, Mistry’s 5-page letter to the board members who voted him out—as well as the trustees who reportedly wanted him out—suggests he has several aces up his sleeve.

The letter not only rubbishes the claims that he was removed for non-performance, it cites various instances to suggest the damage was done during Ratan Tata’s tenure and, if financial results were poor in the last four years as one trustee has said, it was only because of this; indeed, by talking of how Tata virtually forced him to invest in two aviation ventures, Mistry suggests this is still going on.

Though the charges against Mistry were never spelt out clearly, but only insinuated and anonymously at that, his letter obliquely addresses each one of them. In response to the charge that, under Mistry, Tata Power paid too much to acquire Welspun’s renewable assets (see FE story on how the deal was a good one), Mistry talks of how Tata Power’s aggressive bid for the Mundra project (during Tata’s tenure) had resulted in R1,500 crore of losses in FY14—and given that the R18,000 crore invested here is 40% of the company’s capital employed, he says, this substantially depresses returns and ‘carries the risk of considerable future impairment’.

And since the DoCoMo suit is cited as proof of Mistry’s poor functioning, he talks of how the decision that led to the suit was taken before his time—’raises several questions about its appropriateness … within the then prevailing Indian legal framework’—and how shutting the business could cost $4-5 billion apart from the DoCoMo payout.

While the letter is full of interesting stories, from independent directors leaving a board meeting for an hour to confer with Tata, to jibes over how shutting down the Nano ‘would stop the supply of the Nano gliders to an entity that makes electric cars and in which Mr Tata has a stake’, what will frighten shareholders is Mistry’s estimate of how the ‘legacy hotspots’ can potentially result in a write down, ‘over time’, of about R118,000 crore.

Not surprisingly, the stock exchanges have asked the companies for clarifications on the issues raised by Mistry. Not all of this, it is obvious, can be laid at Tata’s door since the global collapse was a big contributing factor—and if Corus was a dud, JLR turned out to be a success—and not all of it is true. In the case of telecom, if the business was such a dud, it is not clear why Mistry spent another R12,500 crore over the past two years as the first instalment of payments for fresh spectrum—hoping for a potential partner, as Mistry has said to justify his spending, is not the same thing as having one.

While shadow boxing between the two sides will continue, what Mistry’s letter has done is to force into the open a side of corporate India that is often brushed under the carpet, that of large investment decisions often being nothing but punts with no clear enunciation of the pros and cons of doing so.

An honest introspection of the issues raised by Mistry—and this will be forced by, if nothing else, NSE/BSE’s queries—will also make it easier for the next chairperson to deal with the radical surgery the group needs in order. As an 18.5% shareholder, Mistry will also take a big hit in the turmoil his letter has caused, but in exposing vital facets of the group’s inner workings, he has done it a big service.


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