VR Mehta, a long-time trustee of Sir Dorabjee Tata Trust which together with another Tata family trust controls as much as 66 percent of Tata Sons Ltd, let the cat out of the bag to NDTV - that the Tata trusts needed cash and were pressuring Tata Sons for dividend.
This is a big revelation and throws considerable light on why Cyrus Mistry was ousted. It was a vicious circle.
It was the operating companies like Tata Power, Tata Motors and Tata Steel that had to earn profits and declare dividend. Tata Sons, as one of the shareholders, would receive a hefty dividend from these operating companies if declared and Tata Sons in turn would declare the dividend, 66 percent of which would go to the Tata family trusts.
It is clear that the objective of Tata Sons and its dominant shareholders - the Tata trusts, were not in perfect sync. In fact they were in conflict. Tata Sons, as an investment company, would have obviously had a broad business vision that would transcend dividend obsession. On the contrary, the trusts, existing as they do for dispensing charity, have had a tunnel vision and were hence obsessed with cash dividends.
In the light of V R Mehta’s revelation, it is now easy to piece together the sequence of events. The trusts must have taken their grievances to Ratan Tata, who in turn mounted pressure on Cyrus Mistry to deliver. But Mistry couldn’t deliver because he was dependent on the operating companies for dividend, many of which were not doing well due to legacy issues and the world economic situation.
The shareholding pattern of Tata Sons have always contained seeds of discord. The dominant shareholders wanted dividend for their various charity causes. They cannot be faulted for this. But Tata Sons and the operating companies had to worry about larger issues. Even if they had cash to declare dividend, they had to see if cash could be distributed as dividend or needed to be ploughed back into the business expansion. Whether bonus shares were appropriate to conserve cash? Obviously bonus shares would not satisfy the trusts because what they wanted was hard cash, period. The trusts simply cannot sell the shares in the market like other share holders to generate cash.
Mistry in the event seems to have been the fall guy, the one caught in the crossfire - between the cash-strapped trusts and the investment-focussed Tata Sons. To be sure, the trusts alone were not responsible albeit indirectly for Mistry’s ouster. Ratan Tata himself was piqued by the actions of the Mistry who had set out to stop the cash haemorrhage of the Tata group companies, chiefly the overseas ones.
The Anglo-Dutch Corus steel was bleeding with interest burden thanks to leveraged acquisition a few years ago under Ratan Tata. Mistry’s search for a suitor so Tatas could exit seems have been the tipping point.
For Ratan Tata, the pressure by the Tata trusts was a godsend. He apparently acted to please them but inwardly he knew Mistry’s removal would put the in his place.
For the trusts, there is a valuable lesson---Don’t put all your eggs in one basket. They had apparently put all their eggs in the Tata Sons basket. A trust, especially the one practicing charity, needs to have cash in its till all the time. And for it to be dependent on one source for its cash requirements was a monumental folly.
Updated Date: Oct 31, 2016 11:12 AM