The Ugliest Boardroom Battle at India

At India’s largest business conglomerate, the Tata Group, stuff hit the fan this week.

When, on Monday, members of the board of directors walked into Bombay House, the South Mumbai headquarters of the $103-billion company, nobody could have guessed they were preparing to open a whole can of worms.

On that day, for the first time in its 148-year history, the group sacked its chairman. The 48-year-old Cyrus Pallonji Mistry had only been at the helm for four years, and the group announced that his predecessor, 78-year-old Ratan Naval Tata, would return to replace him.

All hell broke loose.

What followed has left Tata Sons, the Tata Group’s holding company, battered like never before. Here is how it all unfolded:

Oct. 24, Monday

The Tata Sons board announces Mistry’s sacking; no explanation is provided. Mistry had served on the board for five years before he was appointed chairman in 2012.

The board appoints Tata as interim chairman and also a five-member selection committee to choose the next one. “The committee has been mandated to complete the selection process in four months,” a Tata sons statement says that.

This is how the Economist described the sacking:

For a company with a culture of consensus, the abruptness of his sacking—the board did not even give him the option of stepping down—is about as brutal as it comes.

Oct. 25, Tuesday

Rumours abound over what went wrong. No official response yet from the Tatas.

Ratan Tata writes to employees saying he has retaken control in the “interest of the stability of and reassurance to the Tata Group.” Tata Sons appoints Tata Consultancy Services CEO N Chandrasekaran and Jaguar Land Rover CEO Ralf Speth as additional directors on the board.

Media reports say the Shapoorji Pallonji group, the company run by Cyrus Mistry’s family, is considering legal action against the board. The group eventually denies any such move. Its patriarch, Pallonji Mistry, owns an 18% stake in Tata Sons, making him the conglomerate’s single largest individual shareholder.

Oct. 26, Wednesday

Three days after the sacking, the mudslinging begins.

It starts with an email, which Mistry wrote to the Tata Sons board and trustees, being made public. The email details his disappointment at the sacking.

Here is what Mistry Said:

• I cannot believe I was removed on grounds of non-performance.
• I am writing… to emphasise the total lack of corporate governance and to point out the failure on the part of the directors to discharge the fiduciary duty owed to stakeholders of Tata Sons and group companies.
• During my term, the operating cash flows of the group have grown at 31% compounded per annum. The Tata Group valuation, from 2013 to 2016, increased by 14.9% per annum in rupee terms as against the BSE Sensex annual increase of 10.4% over the same period.
• Being pushed into the position of a “lame duck” chairman, my desire was to create an institutional framework for effective future governance of the group.
• After my appointment, the articles of association were modified, changing the rules of engagement between the Trusts, the board of Tata Sons, the chairman, and the operating companies. Inappropriate interpretation indeed followed… it severely constrained the ability of the group to engineer the necessary turnaround.
• As is public knowledge, the foreign acquisition strategy, with the exceptions of JLR and Tetley, had left a large debt overhang.
• Another challenge in shutting down Nano is that it would stop the supply of the Nano gliders to an entity that makes electric cars and in which Mr Tata has a stake. Emotional reasons alone have kept us away from this crucial decision (shutting down Tata Nano).
• If we look at the aggregate data between 2011 and 2015 and limit the analysis largely to the legacy hotspots (IHCL, Tata Motors PV, Tata Steel Europe, Tata Power Mundra, and Teleservices), it will show that the capital employed in those companies has risen from Rs132,000 crore to Rs196,000 crore (due to operational losses, interest and capex).
• This figure is close to the net worth of the group, which is at Rs174,000 crore. A realistic assessment of the fair value of these businesses could potentially result in a write-down over time of about Rs118,000 crore ($18 billion).
• Board members and trustees are also aware that in the case of AirAsia, ethical concerns have been raised with respect to certain transactions as well as the overall prevailing culture within the organisation. A recent forensic investigation revealed fraudulent transactions of Rs22 crore involving non-existent parties in India and Singapore.

The leaked email deals a severe blow to the Tata legacy. The group often takes pride in being India’s best practitioner of corporate governance and ethics.

Shortly after, India’s two stock exchanges, the NSE and BSE, ask some Tata group of companies to clarify on Mistry’s claim that they face a $18-billion write-down. The Federation of Indian Airlines (FIA), an airline industry body, moves the Supreme Court, challenging the aviation permits given to Tata Sons and Air Asia. The Tata group looses Rs 27000 cr in market value.

Oct. 27, Thursday

The Tata Group finally issues a statement.

It calls the email leak “unforgivable” and expresses “deep regret” at the “unseemly and undignified manner” in which a letter marked to the board trustees was made public.

“It is unfortunate that Mr. Mistry had overwhelmingly lost the confidence of the members of the board of directors..,” the group’s statement says. “The directors… had repeatedly raised queries and concerns on certain business issues, and Trustees of the Tata Trusts were increasingly getting concerned with the growing trust deficit with Mr. Mistry, but these were not being addressed.”

It further says, “As the executive chairman, he was fully empowered to lead the group and its companies… It is unfortunate that it is only on his removal that allegations and misrepresentation of facts are being made about business decisions that the former chairman was party to for over a decade in different capacities. The record, as and when made public, will prove things to the contrary.”

The group now claims it has a “multitude of records” in its defence against Mistry’s allegations which will be “duly disclosed before appropriate forums” when necessary. Meanwhile,  Tata Sons is seeking a partner that could buy out the stake held by the Mistry family.

The dirty war is only just beginning and it could go on for a while. That means, a 148-year-old legacy is on the precipice.

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