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Business

Company in focus: A sudden ouster reveals the internal tensions at India's Tata group

MUMBAI The Tata group is once again grabbing headlines, but unfortunately for the company, it is not for any eye-popping foreign acquisition. This time around, it is the sticky issues of corporate governance and cross-family politics that have India's largest conglomerate back in the spotlight.

The current drama started with the sudden ouster of Group Chairman Cyrus Mistry and the return of his predecessor, Ratan Tata.

Tata's first tenure as group chairman, which lasted for 21 years and ended in 2012, was an eventful one. He was the man who decided Tata Steel would acquire Corus Group in 2007 for $12 billion, paying a premium of around 34% for the deal. He also gave the green light for Tata Motors to buy Jaguar Land Rover, and though the British marque now contributes significantly to the automaker's bottom line, the acquisition helped push the group's debt into the billions of dollars. Then came the Tata Nano, touted as the world's cheapest car upon its release in 2009 but which turned out to be a loss-making venture.

Ratan Tata's return raises larger concerns over governance issues. In December 2012, he relinquished his position to Cyrus Mistry, the first group 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.

PUBLIC FEUD Because Tata Sons, the group's holding company, is not listed, no detailed explanation for Mistry's sacking was sought either by regulators or by the bourse. The company's first public comment came three days later, when Tata Sons released a statement on Oct. 27 saying only that the former chairman's tenure was "marked by repeated departures from the culture and ethos of the group."

A network of trusts owned by the Tata family controls a 66% stake in Tata Sons, and the holding company 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 shares in the group's listed companies falling between 1.2% and 5% on the Mumbai's 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 chairman and protesting his sacking, was leaked to the media on Oct. 26. It was this letter that prompted the holding company's first public comment on the issue the following day.

Mistry claimed in his letter 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 strongly disputed that claim 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 that included shelving the Nano, selling Tata Steel's U.K. operations and rationalizing Tata Motors' passenger vehicle suppliers.

Ultimately, the strategy faced opposition from the Tata group's 10-member board, over which Mistry was never able to assert 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 members of the Tata Sons board nominated by the Tata Trusts, or the Tata family which owned these trusts. According to Mistry, this was the root cause of his lack of power.

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 indeed followed, and ... it severely constrained the ability of the group to engineer the necessary turnaround," Mistry wrote.

Mistry tried to strengthen his team of advisers and promoted younger executives among the Tata group's subsidiaries so that rather than seeking approval from the group board, his plans could be passed by the boards of those companies and their shareholders. 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 Tata Trust-nominated directors "were reduced to mere postmen" and had failed in their duties to keep Tata Trusts informed.

He also raised the possibility of a bitter legal battle by describing his sacking as "illegal" and "invalid," although Tata Sons' governing charter gives Sir Dorabji Tata Trust and Sir Ratan Tata Trust the power to remove an incumbent chairman if they act jointly. The Tata group characterized Mistry's allegations as "unsubstantiated" and "malicious" and said it will respond in an appropriate forum.

DUELING DYNASTIES Tata watchers believe that 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, the Tata group continued to lose steam. The group's sales growth slowed during Mistry's tenure.

The shared history of the Tata and Mistry families is a long and tangled one. It began in the early 1930s, when Shapoorji Mistry -- 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, a portion 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 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 pre-Islamic religious minority 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 roughly 150-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 and engineering to textiles, shipping and logistics.

All these connections are said to have helped make Mistry a favored choice for succeeding Ratan Tata, a bachelor, despite Mistry's relatively slight 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.

That decision has clearly backfired.

Mistry's removal as group chairman will cast a shadow on ties between the two families, and as a shareholder, Shapoorji Pallonji could potentially take Tata Sons to court.

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

With Mistry's dismissal, the 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 let go, 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 looks for a replacement, but 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 Stock Broking.

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