Cyrus Mistry is right; problems of the Tata Group were inherited, not of his making

New Delhi: Almost every newspaper article which has anything to say about Tata Sons and the upheaval this company witnessed at a board meeting on Monday, lays the blame at Cyrus Mistry’s door. Not many commentators have found fault with Mistry’s predecessor Ratan Tata, nor have they bothered to analyse how Mistry was given a troubled empire and was left to deal with the mess, with his hands tied.

According to most analysts, nothing that Mistry did in his short four-year tenure was right. He allegedly did not uphold the values that the Tatas have stood for, he moved slowly on the group’s restructuring and worst of all he sold family jewels like the steel business in UK – these are some of the myriad allegations which have surfaced in the last 48 hours, after Mistry was sacked as Tata Sons’ Chairman.

 Cyrus Mistry is right; problems of the Tata Group were inherited, not of his making

Speculation is rife that Mistry met Prime Minister Narendra Modi last night to apprise him of the developments

But was Mistry the sole reason behind the Tata group’s sub-optimal workings - the group’s debt was rising, profitability was suffering and was he squarely to be blamed for the NTT DoCoMo fiasco or the crisis at the group’s steel unit in the UK? According to this piece in the Economic Times, Mistry has denied most of these allegations in a mail to Tata Sons after the momentous Monday meeting. He has also leveled serious charges against members of the board, besides rightfully pointing out the harm to the group’s credibility from this sudden sacking.

As several industry watchers wonder about corporate governance practices and whether these were followed while the board sacked Mistry, it is pertinent to note that Mistry could be right on all counts actually. He is surely not to blamed, at least not entirely, for what went wrong in the Tata group’s telecom business, in the group’s miscalculations of forming two competing ventures in the field of aviation, in the foreign acquisition spree pre-dating Mistry’s chairmanship which led to the group’s debt pile expanding.

Most tellingly, Mistry has also said that his hands were tied. Tata Trusts apparently amended the articles of association, changing the terms of engagement between Trusts, Tata Sons’ board and the chairman, days before Mistry’s appointment. This severely constrained Mistry’s ability to engineer a turnaround.

Aviation: In the email, Mistry said that the group’s foray into aviation through joint ventures with Air Asia BhD and Singapore Airlines was at the behest of Tata. In both cases he had been presented with a fait accompli. He is right on both counts. It was Ratan Tata’s long standing dream to enter civil aviation business – something which he had tried to do unsuccessfully twice in the past and was finally able to accomplish with AirAsia BhD when the government eased rules for foreign airlines to pick up a stake in Indian carriers. The joint venture company was formed in 2013, surprisingly, as a three way arrangement where the Tatas picked up only 30 percent and a lesser known Indian company Telestra Tradeplace held 21 percent.

The brand image of Tatas was in complete contrast with the ultra low-cost offering of AirAsia India. Even as the JV was continuously plagued with allegations about undue influence of the Malaysian parent – Telestra, which was finally bought out by the Tatas earlier this year after a messy battle splashed all over the newspapers, the airline’s expansion plans also suffered due to bickering among the shareholders. And while this low-cost venture was struggling, the Tatas went ahead and forged another venture, with Singapore Airlines, to form full-service carrier Vistara in January 2015. Again at Ratan Tata’s behest. The two airlines now operate at the fringes of India’s domestic aviation market in terms of market share.

Mistry probably did not bless the creation of two separate, competing companies in the same business – a business where margins are wafer thin and profitability remains a pipe dream – so it would be foolish to lay the blame at his door. No one has understood till date why two airline ventures were formed or why Tatas initially chose to be ‘silent’ partners in AirAsia India.

Telecom: On telecom, Mistry said the business was continuously hemorrhaging and a shutdown or a fire sale would have cost anywhere between $4-5 billion, in addition to a $1 billion payment to partner NTT DoCoMo. Again, there is a ring of truth to this. Tata group veterans say that Tata Tele is sitting on a debt pile of about Rs 30,000 crore, has market share of just about 5-7 percent and competes in a market with formidable players who have far better assets, especially spectrum. All these are inherited problems, not something Mistry brought on to Tata Tele for which he is being accused wrongly of mis-handling the telecom business.

The NTT DoCoMo episode became unavoidable after the RBI and other government entities objected to the structuring of the deal with the Japanese company where it had to be paid 50 percent of its investments on leaving the JV. “When they had come into the JV, there were commitments made on performance parameters etc. for a five year period. In case these were not met, they were to exit the JV with 50 percent value of their investment or fair market price – whichever is higher.

The matter has ended up in courts after the government objected to this clause though it had been cleared by FIPB earlier,” said one person. What has upset Ratan Tata is that Mistry did not “honour” a commitment he made to the Japanese, when Mistry was duty bound to go by the government’s objections and refuse to be part of the earlier deal.

Way Forward: Mistry is rightfully gearing up for a full fight against his sacking. Though he has not taken any legal action as of now, it would be interesting to see how the move to replace him as chairman on the boards of listed Tata group companies is executed by the Tatas. A company insider said this would be a messy affair since these boards also have independent directors who may not take kindly to a diktat by the Tatas.

Anyway, speculation is rife that Mistry met Prime Minister Narendra Modi last night to apprise him of the developments. Why the PM? Because as the chairman of Tata Sons, Mistry was also chairing the India-US and India-UK business fora and this appointment had been cleared by the PM himself. Besides, in some Tata group companies like Tata communications, the government holds a significant stake. In Tata Communications, it stands at 26 percent - so when Ratan Tata wrote to the PM about Mistry’s sacking, it was only fair that he presents his side of the story.

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Updated Date: Oct 26, 2016 12:18:23 IST