After Cyrus Mistry has sacked as Chairman of
the Tata Group on Monday, Cyrus Mistry wrote this email to the board of Tata Sons.
October 25, 2016
To:
Directors of Tata Sons Ltd.
CONFIDENTIAL
I was shocked beyond words at the
happenings at the board meeting of October 24, 2016. Apart from the invalidity
and illegality of the business that was conducted, I have to say that the board
of directors has not covered itself with glory. To "replace" your
Chairman without so much as a word of explanation and without affording him an
opportunity of defending himself in a summary manner must be unique in the
annals of corporate history. The suddenness of the action, and the lack of
explanation has led to all manner of speculation and has done my reputation and
the reputation of the Tata Group immeasurable harm.
At the outset, I have to say that I
have great respect for the Tata Group and the thousands of employees who are
working hard despite the challenges. 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. Each of you is already in
receipt of and familiar with the Strategy 2025 document that I presented to
you, and in which I had articulated our growth strategy for the future.
In 2011, after some exploration by
a search committee, I was approached by both Ratan Tata and Lord Bhattacharya
individually to be a candidate for the position. I politely declined. I had
myself built a business which I would continue to run. However, as the search
process progressed and the committee was unable to find a suitable candidate, I
was asked to reconsider. After consulting my family and in the broader
interests of the Tata Group, I took courage to overcome my initial reluctance
and agreed to consider the position.
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.
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. Without meaning
to air a laundry list, let me outline some of the major challenges faced at the
time of my entry.
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 Hotels have been sold at a
loss. The onerous terms of the lease for 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, beyond flawed international
strategy, has 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.
Tata Capital had a book that
required significant clean up on account of bad loans to the infrastructure
sector. The loan to Siva was under the strong advice of Executive Trustee
Venkatraman, which has turned into a non-performing asset. All of this resulted
in Tata Capital having to recognise abnormal size of NPAs.
Of all the companies in the
portfolio, the telecom business has been continuously haemorrhaging. If we were
to exit this business via fire sale 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 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 crores of capital employed (40% 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 crores. Historically, the company had employed
aggressive accounting to capitalize substantial proportion of the product
development expenses, creating a future liability. Beyond this, 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 crores. 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.
On the performance of the
portfolio, as you are aware from my presentations to you in the recent past, if
we look at the aggregate data between 2011 and 2015 and limit the analysis
largely to the legacy hotspots (IHCL, Tata Motors PV, Tata Steel Europe, Tata
Power Mundra, and Teleservices), it will show that the capital employed in
those companies has risen from Rs. 132,000 crores to Rs. 196,000 crores (due to
operation losses, interest and capex). This figure is close to the networth of
the group which is at Rs. 174,000 crores. A realistic assessment of the fair
value these businesses could potentially result in a write down over time of
about Rs. 118,000 crores.
In the face of the above
challenges, I had to take many tough decisions with sensitive care to the
group's reputation as well as containing panic amidst internal and external
stakeholders. Despite bad press, impairments were taken to clean the books but
substantial exposure remains. Dividends were reduced (e.g. Tata Motors, IHCL)
to conserve cash for needed investments in the the teeth of shareholder fury.
Apart from the hotels, the group made several exits in the fertilizer business,
UK steel operations, and of course in smaller companies such as the logisitic
company, DIESL. I had to ease out hangers-on who are prone to flaunt their
proximity to power. On the more positive side, Kalinganagar, the largest
domestic capital investment of the group was completed overcoming significant
obstacles that had left the project in doubt previously.
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 Air Asia 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% of the USD 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% stake in a USD 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.
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 crores involving non-existent parties in India and
Singapore. Executive Trustee, Mr.Venkatraman, 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.
Despite all of the above, during my
term, the operating cash flows of the group have grown at 31% compounded per
annum. The Tata Group valuation from 2013 to 2016 increased by 14.9% per annum
in rupee terms as against the BSE Sensex annual increase of 10.4% over the same
period. The Tata Sons networth has increased from approximately Rs. 26,000
crores to Rs. 42,000 crores, after considering the impairments. This has
significantly strengthened our balance sheet, enhancing our ability to absorb
further shocks from restructuring in the companies.
To come back to the amendments in
the Articles of Association, as feared, the inappropriate implementation
created a flux in the decision-making process. I have often presented to the
trustees, before and after Tata Sons board meetings. This created alternative
power centres without any accountability or formal responsibility, invalidating
the very governance role of nominated directors, who I would assume would use
their own independent judgment and discharge their fiduciary duties, were
reduced to mere postmen. As an example, once, the trust directors (Nitin Nohria
and Vijay Singh) had to leave a Tata Sons board meeting in progress for almost
an hour, keeping the rest of the Board waiting, in order to obtain instructions
from Mr. Tata. Such a work pattern has also created the added risk of
contravening insider trading regulations and exposed the Trust, apart from
exposing the trustees to potential tax liabilities. These circumstances forced
me to circulate a note on corporate governance in order to clarify the distinct
roles of Tata Trusts, Tata Sons Board, and the Boards of the operating
companies.
I cannot believe that I was removed
on grounds of non-performance. As you are aware, the Nomination and
Remuneration Committee comprising Vijay Singh, Farida Khambata and Ronnen Sen,
independent directors (two of whom have voted for my removal now), had only
recently lauded and commended my performance.
In keeping with Tata Group values,
to engage employees and have a favourable impact on the communities we operate
in, we launched a volunteering programme, challenging group employees to
volunteer a million hours in 2015 and the result was volunteering of 1.2
million hours, making it one of the top ten global volunteering programmes.
I hope you do realize the
predicament that I found myself in. Being pushed into the position of a
"lame duck" Chairman, my desire was to create an institutional
framework for effective future governance of the group. I believe I had to be
true to myself and the best interests of the organization. While I would be
lying if I said I am not disappointed, I have a sense of pride and dignity
intact in the efforts I have taken to professionalise and institutionalise,
regardless of the outcome of effort, I now witness.
Since the developments at the Board
Meeting were purported to have been initiated at the instance, I am copying the
Trustees.
Sincerely,
Cyrus
(Cyrus P Mistry)
CC Trustees of Tata Trusts
© Thomson Reuters 2016
(Except for the headline, this
story has not been edited by Taaza Vaartha and is published from a syndicated
feed.)
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