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Tata Group governance in spotlight after chairman's abrupt removal

MUMBAI -- The sudden ouster of the chairman of the Tata Group, Cyrus Mistry, has once again brought the salt-to-steel behemoth back in focus. It is not for huge overseas acquisitions anymore, but it is governance issue that is shaking India's largest conglomerate.

The group's chairman for 21 years until 2012, Ratan Tata, is back. The man made the decisions on acquisitions such as the Corus by Tata Steel in 2007 for a premium of around 34% in a $12 billion deal. He also gave green light to the acquisition of British brand Jaguar Land Rover by Tata Motors, which now contributes to the maker's bottom line while pushing the group's debt running in billions of dollars. Then came Nano, touted the world's cheapest car in 2009 which turned out to be a loss-making business. 

Larger concerns have arisen over governance issues. In December 2012, after a 21-year stint, Ratan relinquished his position as Tata Group chair to Cyrus Mistry, the first chairman not connected to the founding family of the 148-year-old group. On Oct. 24, less than four years after he assumed the post, Mistry was given his marching orders.

As Tata Sons, the group's holding company, is an unlisted entity, no detailed explanations for the sacking of Mistry were sought either from the regulators or the bourse authorities. The public comment came three days later on Oct. 27, when Tata Sons released a vague statement claiming that the former chairman's tenure was "marked by repeated departures from the culture and ethos of the group."

Public feud

Tata Sons, in which a network of trusts owned by the Tata family controls a 66% stake, has moved quickly to erase Mistry's mark on the conglomerate. The day after his dismissal, it disbanded the five-member Group Executive Council that Mistry had established to bolster his authority and deal with the "legacy hotspots" of his predecessor.

The announcement of Mistry's ouster shook the markets, with Tata Group listed companies falling between 1.2% and 5% on the Bombay Stock Exchange on the same day. Shares fell further after an explosive letter written by Mistry to the Tata Sons board, defending his performance as chair and protesting his sacking, was leaked to the media on Oct. 26, prompting the holding company's first public comment on Mistry's removal the following day.  

Mistry's letter claimed that debt-laden businesses such as Tata Steel's European operations, the passenger car division of Tata Motors, Indian Hotels, Tata Power's coal-fired power project in Mundra, and Tata Teleservices would face a write-down of 1.18 trillion rupees ($17.16 billion) if assessed at fair value. Tata Sons has strongly disputed the financial claims raised by Mistry in its Oct. 27 statement.

Based on the proposals of his Group Executive Council -- an advisory body which included Ernst & Young partner NS Rajan, Nirmalya Kumar of the London Business School and two senior Tata Group members -- Mistry attempted a turnaround strategy which included the closure of Nano, the sale of Tata Steel UK operations, and the rationalization of Tata Motors passenger vehicle suppliers.

Ultimately, the strategy faced opposition from the 10-member Tata Group board, against which Mistry was never able to assert his authority. Two of its members were nominated by Tata Sons, while four others are Ratan Tata loyalists. (Following Mistry's departure, Tata Sons announced that two more members -- Tata Consultancy Services Chief Executive Natarajan Chandrasekaran and Jaguar Land Rover Chief Executive Ralf Speth -- would be added.)

Strategic decisions proposed by Mistry, such as five-year plans, required  majority approval by Tata Sons board members nominated by the Tata Trusts, or the Tata family which owned these trusts. According to Mistry, this was the root cause of his powerlessness.

In the leaked letter, he argued that after his appointment, the group's articles of associations were modified, changing the rules of engagement among the Trusts, the board of Tata Sons, the chairman, and the operating companies. "Inappropriate interpretation followed, and it severely constrained the ability of the group to engineer the necessary turnaround," Mistry wrote.

Mistry tried to strengthen his team of advisors and promoted younger executives among Tata Group's subsidiaries so that his plans could be passed by the boards of those companies and their shareholders instead of seeking approval from the group board. The Tata Sons board and Tata Trusts were kept informed of these moves but were not given a decision-making role.

Mistry alleged that the Trust-nominated directors "were reduced to mere postmen" and had failed in their duties to keep Tata Trusts informed.

Mistry raised the possibility of a bitter legal battle over his ouster by describing his sacking as "illegal" and "invalid", although Tata Sons' governing charter gives the Dorabji Tata Trust and Sir Ratan Tata Trust the power to remove an incumbent chairman if they act jointly.

Tata Group characterized Mistry's allegations as "unsubstantiated" and "malicious" and said it would respond in an appropriate forum.

Business dynasties

Tata watchers believe that Cyrus Mistry's tenure coincided with a loss of trust between Ratan Tata and the Mistry family, whose company, Shapoorji Pallonji Group, owns an 18% stake in Tata Sons. Insiders say the slow pace and "fickle" nature of decision-making by Mistry irked the board, along with the communication breakdown between Mistry and Ratan Tata.

As bickering over governance intensified, Tata Group continued to lose steam. The group's sales growth slowed during Mistry's tenure. 

The association of Tata and Mistry families has a long and tangled history. It began in the early 1930s, when the late Shapoorji Mistry -- the grandfather of Cyrus -- bought a 12.5% stake in Tata Sons.

When then-chairman JRD Tata later distributed his father's stake among his siblings, part went to Shapoorji, bringing the Mistry family's holdings in Tata Sons to the current 18.35%. A source close to the Tatas said that the prospect of a company outside the Tata family becoming the single largest shareholder of Tata Sons was a concern even to JRD Tata.

Shapoorji's son, Pallonji Mistry, was said to have considerable influence on Tata Sons and was also responsible for building a cordial relationship between the families. He was known as the "Phantom of Bombay House" for his reticent nature, said to be a Mistry family trait.

That both families belong to the Zoroastrian community, a minority, pre-Islamic religion of Persia, also helped to strengthen ties. One of Pallonji's daughters, Aloo, is married to Ratan's step-brother Noel Tata.

The leaders of the 149-year-old Shapoorji Pallonji Group are tycoons in their own right. Valued at $2.5 billion, the group has interests ranging from construction, consumer products, engineering and textiles to shipping and logistics.

All these connections are said to have helped propel Mistry to become a favored choice for succeeding Ratan Tata, a bachelor, despite Mistry's relatively superficial involvement with the Tata Group. The decision was helped by the lack of a clear succession plan within the Tata family. The clan's only other prominent member, Noel, has never seemed interested in taking over the reins.

The decision has clearly backfired.

Mistry's removal as Tata Group chairman will cast a shadow on the ties between the two families. Shareholder Shapoorji Pallonji could also potentially take Tata Sons to court.

The turmoil at the Tata Group could send a ripple effect through the rest of corporate India in the weeks to come. There are 29 listed Tata enterprises with a combined market capitalization of about $116 billion as of March. The group's turnover accounts for around 5% of India's gross domestic product.

With Mistry's dismissal, Tata Group has returned to where it was four years ago, with the old guard firmly in control. In a 25-minute meeting the day after Mistry was sacked, Ratan Tata told group chief executives he looked forward to "working with you as we have worked together in the past."

"An institution must exceed the people who lead it. I am proud of all of you, and let us continue to build the group together," he added.

Ratan Tata will serve as interim chairman for four months while a selection committee will look for a replacement. However, finding a successor with credentials strong enough to take the helm of India's largest conglomerate will not be easy.

"It will take [a] considerable amount of time to decode some of these complex issues," said Jagannadham Thunuguntla, head of research at the financial services company Karvy.

-- Company in focus

-- CEO in the news

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