Decoding Cyrus Mistry’s Letter To Tata Sons: It’s The Attack Of a Wounded Tiger

Sow the wind, reap the whirlwind. The underhand boardroom manoeuvre that ousted Cyrus Mistry from the chairmanship of Tata Sons earlier this week has received its expected blowback, with Mistry snarling like a wounded tiger. In a damaging five-page letter written to the Tata Sons board and the trustees of the Tata trusts, Mistry has levelled many charges, many of which ring true.

Among other things, he has accused the Tata Sons board of a “total lack of corporate governance”, of being reduced to a “lame duck chairman” due to behind-the-scene manipulations by (presumably) Ratan Tata, of handing him a overly debt-laden group, of striking bad acquisition deals that left some of the group companies with large losses, and of harbouring dubious business practices and even turning a blind eye to possible fraud in some parts of the group (read the full text of the letter here)

Prima facie, many of these allegations seem plausible, but from the “laundry list” of accusations levelled by Mistry, one cannot but conclude that he has gone overboard in making the Tatas seem like some kind of buccaneering rogue operation. This is not to say that he is wrong, but surely any large business group would have its share of failures and even some degree of wrongdoing? If you run some 100-and-odd companies, many of them megacorps, what is the possibility that all of them will be kosher?

Given below are key excerpts from the letter written by Mistry, with our comments and decoding in italics.

Mistry began by writing about his shock at the manner of his ouster, which has done both his reputation and that of the Tata group immeasurable harm.

He wrote: “I am writing this letter to the board 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 of the group companies. All of this does not augur well for the future of the Group. All that is said here is well known to many among you, but I would like to put in one place my journey as Chairman of Tata Sons. It is important to emphasise the enormity of what has transpired in the Group and what corrective action is to be taken.”

Comment: Mistry’s removal through a boardroom coup certainly didn’t show the Tata group in good light. But his charge of a “total lack of corporate governance” seems to be a sweeping judgment. He has also accused the directors of failing to “discharge the fiduciary duty owed to stakeholders”, which is surely something that can be debated, unless it relates to a specific failure of the board. Tata Sons directly owns only one operating company, TCS, and this company is very well run. The charge of failing to discharge fiduciary duty can only arise in regard to how the dividends received by the company were used or invested. Is that what Mistry, whose family owns 18.4 percent of Tata Sons, is hinting at?

Mistry wrote: “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.”

Comment: It seems likely that Mistry had the promoter trusts and Ratan Tata breathing down his neck, but if his freedom of action was severely constrained, surely the time to force a backoff was two or three years ago, and not now? Why did he live with this constraint all this while, and bring it to the fore only after being turfed out of the chairmanship?

Mistry wrote: “I am not sure if the individual board members and the trustees truly appreciated the extent of the problems I had inherited. I cannot blame them, for I myself, as a non-executive director, did not have a clear grasp of the gravity of the issues involved….As is public knowledge, the foreign acquisition strategy, with the exceptions of JLR and Tetley, had left a large debt overhang. The European steel business faced potential impairments in excess of USD 10 billion, only some of which has been taken as of date. Many foreign properties of IHCL and holdings in Orient Express have been sold at a loss. The onerous terms of the lease for The Pierre in New York are such that it would make it a challenge to exit. Tata Chemicals still needs tough decisions about its UK and Kenya operations.

“IHCL (ie, Taj Group of hotels), beyond flawed international strategy, had acquired the Searock property at a highly inflated price and housed in an off-balance sheet structure. In the process of unravelling this legacy, IHCL has had to write down nearly its entire networth over the past three years. This impairs its ability to pay dividends.”

Comment: This is the core of the allegations levelled by Mistry, including hints of bad deal-making, and over-priced global buys. Since all these happened under Ratan Tata’s watch, it means these bad decisions can be directly traced to his predecessor, and now temporary successor. Mistry is largely right here, for the problems of the group do relate to the high prices paid for acquisitions during a boom period in the global economy. But it is also worth pointing out that such mistakes are not uncommon in global businesses, with “winner’s curse” being the term applied to successful bidders who overpaid for acquisitions.

Mistry wrote: “Tata Capital had a book that required significant clean-up on account of bad loans to the infrastructure sector. The loan to Siva (C Sivasankaran) was under the strong advice of Executive Trustee Venkatraman (sic, probably a reference to R Venkataramanan, Managing Trustee of all Tata Trusts), which has turned into a non-performing asset. All of this resulted in Tata Capital having to recognise abnormal size of NPAs.

“Board members and trustees are also aware that in the case of Air Asia, ethical concerns have been raised with respect to certain transactions as well as the overall prevailing culture within the organization. A recent forensic investigation revealed fraudulent transactions of Rs 22 crore involving non-existent parties in India and Singapore. Executive Trustee, Mr Venkatraman (Venkataramanan), 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.”

Comment: These are allegations that could get the Tatas into trouble, since they could lead to actions by government regulatory agencies, including the Company Law Board. Fraud, or suspicious dealings are being hinted at, and the link to Ratan Tata comes through Venkataramanan, the man in charge of running the Tata trusts headed by Tata.

Mistry wrote: “Of all the companies in the portfolio, the telecom business has been continuously haemorrhaging. If we were to exit this business via firesale or shut down, the cost would be USD 4-5 billion. This is in addition to any payout to DoCoMo of at least a billion plus dollars. The original structure of the DoCoMo transaction raises several questions about its appropriateness from a commercial or prudential perspective within the then prevailing Indian legal framework. In (the) light of all of this, our strategy over the past three years has been to increase the EBITDA from Rs. 400 crores to Rs. 2,500 crores, in the hope of being a potential player in consolidation of the industry.

“Tata Power aggressively bid for the Mundra project based on low-priced Indonesian coal. As regulations changed, the losses in 2013-14 alone amounted to Rs 1,500 crores. Given that Mundra constitutes Rs 18,000 crore of capital employed (40 percent of' the overall company's capital employed), this substantially depresses the return on capital for Tata power as well as carries the risk of considerable future impairment.
An even more challenging situation arose in Tata Motors, both on the commercial and passenger vehicles. Before 2013, in order to shore up sales and market share, Tata Motors Finance extended credit with lax risk assessment. As a result, the NPAs mounted to being in excess of Rs. 4,000 crore. Historically, the company had employed aggressive accounting to capitalise a substantial proportion of the product development expenses, creating a future liability.”

Comment: These accusations show the Tatas in poor light, since they relate to bad commercial decisions, and attempts to push sales by undertaking high-risk loans, aided by grey accounting practices. While this will certainly make Tata company shareholders wonder if their companies are under-reporting problems, such practices are not unheard of in India Inc. And bad commercial decisions are a dime a dozen, as the current bad loan books of Indian banks indicate. Mistry has done us a service by bringing this out into the open, but one cannot assume that, prima facie, these are unique to the Tatas.

Mistry’s unkindest cut came when he talked about the Nano: “The Nano product development concept called for a car below Rs 1 lakh, but the costs were always above this. This product has consistently lost money, peaking at Rs 1,000 crore. As there is no line of sight to profitability for the Nano, any turnaround strategy for the company requires to shut it down. Emotional reasons alone have kept us away from this crucial decision. 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.”

Comment: This part is damaging to Ratan Tata’s credibility, given his emotional attachment to the Nano concept. The fact that Mistry has indirectly hinted that Nano can’t be shut down because Tata has an interest in an electric car project that depends on supplies from the car project is seriously damaging, for it shows that there may be related party transactions happening in Tata Motors. This happens in other business groups, too, but it is the Tatas who have held up ethics as a defining element of the group.

Mistry wrote: “Early in my tenure, our foray into the aviation sector began when Mr Tata ushered me into his office and handed me a report on AirAsia by Bain & Co. He had concluded negotiations to partner with Air Asia and wanted the proposal tabled at the forthcoming Tata Sons board meeting. My pushback was hard but futile. However, I was able to extract a promise of no debt to be raised at the level of the JV as well as limiting Tata Sons’ investment to 30 percent of the US$ 30 million equity. A few months later, I was surprised to be confronted with a similar situation requiring me to execute a fait accompli JV with Singapore Airlines. Without the benefit of time and experience to fully evaluate the proposal, I had to accept that Tata Sons would take a 51 percent stake in a US$ 100 million joint venture. The passion for the airlines sector has led Mr Tata to continue his involvement with the strategy of the two airlines. It is on his advice that the Tata Sons board has increased the capital infusion in the sector at multiple levels of the initial commitment.”

Comment: Like with the Nano comment, Mistry is essentially making the point that some decisions were led more by Ratan Tata’s personal passions than sound business logic. He is probably absolutely right here. It also indirectly hints at the way Tata boards acquiesced in Ratan Tata’s projects, which does not speak much for board independence and governance. Mistry also confesses that he too went with these bad decisions, but one wonders why he did not take a stand earlier, well before his ouster.

Overall, Mistry’s charges ring true most of the time, and it does seem likely that his freedom was circumscribed, either due to his own restraint in dealing with Ratan Tata, or pressures from the trusts. But that also shows him up as a man unwilling to fully assert himself.

Bottomline: His letter seems 75 percent true, 25 percent post facto lament. The Tatas will not emerge smelling of roses from this.