Cyrus Mistry’s Exit From Tata Boards Puts Him In A Better Position Against Ratan Tata

By resigning from the boards of various Tata Group companies, from where he was being ousted one by one, Cyrus Mistry has elevated his battle with Ratan Tata to a new level. While his resignation from six Tata company boards yesterday (20 December) may be seen as a first round victory for the Tatas, the reality is different: the fight now moves to two different fora, the courts and the Tata Sons board. And these are the most important battles, not the one so far being fought in shareholder meetings.

As Mistry himself made it clear in his statement (read the full text here) and broadcast on Monday, he is shifting gears, upping the momentum. “I have decided to shift from the forum of the EGMs to a larger platform and also one where the rule of law and equity is upheld.” For good measure, he upped the ethical ante, saying “I have been attempting to resolve the governance break-down at Tata Sons for a considerable period of time.”

This change in strategy makes a lot of sense for Mistry, for thus far it has been billed as an ego tussle between him and Ratan Tata, where there was little chance that Mistry could hold his own. Also, there was no likelihood of Mistry winning since Tata has the larger public persona and support of the Tata trusts.

By opting out of the ego tussle and propaganda war, Mistry has probably cut his likely losses and moved the battleground to a place where his chances are not only even, but possibly better than that of the Tatas.

The truth is ethical deficits in the Tata Group will be tough to prove in courts, but what a court battle can do is pressure the Tatas to settle with him. And the settlement Mistry probably seeks, despite his claims to uphold the Tatas’ age-old ethical standards, is a hefty compensation for the nearly 19 per cent that his Pallonji Mistry Group holds in Tata Sons. The ethical deficit that Mistry is trying to redress is the sidelining of minority shareholders’ interests at Tata Sons. The latter is effectively the key controlling entity in the Tata Group, rather than just a company seeking better returns for all shareholders. When you are a controlling entity, returns are less important than maintaining stakes and bailing out the weaker units.

Some 95 per cent of Tata Sons’ earnings come as dividends from Tata Consultancy Services (TCS), in which it owns 74 per cent. The other group shares owned by Tata Sons generate little by way of dividends, and a lot of the earnings from TCS also go towards shoring up the weaker companies in the group, including heavily indebted companies like Tata Steel and Tata Power.

So when Mistry talks of governance issues, he is probably asking the Tatas: “Where is the return on my 19 per cent of Tata Sons? Why should I be subsidising the weaker companies in the group?” He may want to rattle the Tata cupboard for letting a few skeletons peep out, but when he has been part of those decisions for nearly four years, he surely can’t claim to be only an impartial whistle-blower.

In his first and only interview as Tata Sons Chairman, Mistry made the point of shareholder returns differently, saying that while the group’s performance as a whole was okay, individual companies were a drag. He indicated that “hard decisions on pruning the portfolio” were needed due to the “challenging situations facing some of our businesses...”

Further, he said: “The group has invested Rs 415,000 crore ($79 billion) in capex over the last decade. Our investment over the last three years alone has been in excess of Rs 170,000 crore ($28 billion). We recognise that growth has to be a function of the operating cash flows we generate. At the group level, over the last three years, our operating cash flows have grown by over 30 per cent CAGR; but this, as we know, is not the appropriate way to use such data – our individual companies need to earn the right to grow. At the group level, we are focused on helping our companies earn this right by building strong operational cash flows and looking at their capital structures.”

Implicit in this statement is the Tata Sons interest in bankrolling the weaker companies in the group. Mistry was probably hinting that to improve returns to Tata Sons shareholders (including his Pallonji Mistry Group), the underlying companies had to be made profitable or sold. Or both.

Now, of course, the battle moves away from the broader interests of the group to Mistry’s rights as a major shareholder in Tata Sons.

This battle is likely to prove costly for the Tatas, for the only way they can end it is by buying out Mistry. And the value of Mistry’s proportionate share in TCS alone works out to more than Rs 62,000 crore; it would be much, much more if the other shareholdings of Tata Sons were valued at market prices.

In short, the price for Mistry’s quiet exit could be anywhere from $10-12 billion at the minimum.

The only way for the Tatas to end the battle is by losing it – and paying off Cyrus Mistry. It is not money that they have currently.

Mistry has chosen the right battle to win – the battle for enormous cash resources.