Cyrus Mistry's letter gives rise to serious questions, Ratan Tata can't keep mum for long

Cyrus Mistry's letter to the Tata Sons board on Tuesday, a day after he was unceremoniously sacked as group chairman, has blown the lid off the workings in the Group. Mistry has levelled serious allegations against the working of the group during his predecessor Ratan Tata's time.

Primarily, he has said in the letter that he was not given a free hand as promised before he accepted the job. Mistry also mentioned that he was dogged by the huge debt he inherited.

Ratan Tata. Reuters

Ratan Tata. Reuters

"Prior to my appointment, I was assured that I would be given a free hand. The previous chairman was to step back and be available for advice and guidance as and when needed. 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, and as elaborated below, it severely constrained the ability of the group to engineer the necessary turnaround," he has said in the letter.

Mistry has placed on record his performance matrix vis a vis the charge that he was sacked for non-performance. In the letter to the Tata Sons board, Mistry said that he could not believe he was ousted for non performance issues simply because only recently he was lauded for his performance by the nomination and remuneration committee and independent directors, notably Vijay Singh, Farida Khambatta and Ronnen Sen.

He spelt out the irony of the trio who had praised him for his performance and then two of them were part of the coterie to vote him out of office.

Listing out the legacy hotspots that he inherited, Mistry said despite all the troubles ailing the group, largely caused by deals signed before he came to office, the group's operating cash flows grew at 31 percent compounded annual growth rate, its valuation increased by 14.9 percent per annum in rupee terms (as against Sensex's 10.4 percent) and Tata Sons' net worth increased from Rs 26,000 crore to Rs 42,000 crore.

Ratan Tata, the former chairman and present incumbent, clearly had not left Bombay House when he vacated his chair based on his self-laid rule of giving up office after reaching 75 years of age.

Mistry has alleged that Tata remained a towering figure influencing the decisions even during the board meetings, which forced him to circulate a corporate governance note "in order to clarify the distinct roles of Tata Trusts, Tata Sons Board and the Boards of the operating companies". Mistry said he was pushed to be a lame duck chairman.

However, the specific allegations made by Mistry are more serious than these. These raise doubts about the much-touted Tata ethics.

Among them the key one is the allegation of fraudulent transactions in Air Asia. "A recent forensic investigation revealed fraudulent transactions of Rs 22 crore involving non-existent parties in India and Singapore. Executive Trustee, Mr. Venkataraman, who is on the board of Air Asia and also a shareholder in the company, considered these transactions as non-material and did not encourage further study. It was only at the insistence of the independent directors, one of whom immediately submitted his resignation, that the board decided to belatedly file a first information report," the letter says.

This is a serious charge, which the Tatas need to answer.

Apart from this, a realistic assessment of the fair value of the "legacy hotspots", which Mistry lists as Indian Hotel, Tata Motors PV, Tata Steel Europe, Tata Power Mundra and Tata Teleservices, would result in a write-down of Rs 118,000 crore. This is because the huge increase in the capital employed in those companies from Rs 132,000 crore to Rs 196,000 crore. The increase is due to operational losses, interest outgo and capital expenditure.

On the much-discussed Nano project, Mistry has alleged that before 2013, "in order to shore up sales and market share, Tata Motors Finance extended credit with lax risk assessment". This resulted in NPAs mounting to more than Rs 4000 crore.

More importantly, he has said the loss-making Nano is not shut down because that would result in stopping "the supply of the Nano gliders to an entity that makes electric cars and in which Mr Tata has a stake".

According to the letter, "IHCL, beyond flawed international strategy, had acquired the Searock property at a highly inflated price and housed in an off balance sheet structure." Due to this, the company had to write down nearly its entire net worth in three years' time. "This impairs its ability to pay dividends," the letter has said.

Mistry has also said that his desire was to create an institutional framework for effective future governance of the group.

Mistry's letter raises serious and pertinent questions. Why is Nano not being shut down despite being a loss-making unit? Is it true that the model is alive only to feed orders for a vendor in which Tata has stake in? Why did Tata Motors Finance extend credit without making necessary risk assessment of the Nano? Is the group averse to taking professional decisions and just cater to somebody's personal and emotional indulgence? If not, why Mistry being made a lame-duck chairman? Moreover is the much-touted Tata governance all a facade after all?

The group is yet to say give a credible and detailed statement on the whole issue. As always, it seems to have gone incommunicado, which will negatively impact the group in particular and also project a poor image of the corporate India's governance practice globally.

As is seen in the letter the Tata Sons board seems to have been paying obeisance to the God within. But the doubts that are now lingering in the public minds are serious. The God should answer.


Published Date: Oct 27, 2016 10:01 am | Updated Date: Oct 27, 2016 10:01 am