MUMBAI // The unexpected and unexplained ousting of the chairman of India’s Tata Sons, Cyrus Mistry, has sent shockwaves through the business world in India and could have negative implications for corporate India’s reputation among international investors, analysts say.
“The sudden and rather ungracious exit of Cyrus Mistry is indeed a very unusual corporate happening, and has rightly raised eyebrows,” says D Venkat, a leadership expert and chief executive of Strides HR Consulting, based in Chennai.
Last Monday, the announcement that Mr Mistry, 48, was being ousted from the group as the chairman, to be replaced in the interim by former popular chairman Ratan Tata until a permanent replacement could be found over the next four months, came as a huge surprise to many, with no details provided on why the board made the decision.
Tata is by far one of the most powerful and diverse business houses in India. It is almost 150 years old, owning names such as Jaguar Land Rover and Tetley tea, with interests spanning from IT services to property, aviation and consumer products.
The group, which is made up of about 100 companies, had revenues totalling US$103 billion in the financial year from April 2015 to March 2016 and employed 660,000 people.
“The shocking removal of Cyrus Mistry from the chairmanship of Tata Sons is a negative from the corporate governance perspective,” says V K Vijayakumar, the chief investment strategist at Geojit BNP Paribas. “It was done without grace. Nobody expected this from the Tata Group.”
He says that the lasting impression that international investors take from this would largely depend on how the situation evolves.
“The Tatas have had a great reputation – not just among domestic investors, also among foreign investors, an unblemished track record,” said Mr Vijayakumar. “If some clarity emerges and there is a peaceful reconciliation and the issue does not go to the court, then the damage will be limited. If the situation escalates to a legal tussle, there will be damage.”
When Ratan Tata retired at the end of 2012, Mr Mistry succeeded him, becoming only the second person from outside of the immediate Tata family to take up the position of chairman. Mr Mistry, who is an Irish citizen, is the son of construction tycoon Pallonji Mistry, who runs the Shapoorji Pallonji Group, which has a major stake in Tata.
Mr Mistry himself has said he “was shocked beyond words” at being pushed out and that he was not given any explanation. In a five-page leaked confidential letter which was emailed to the board and printed by the Indian press, he described himself as “a lame duck”.
The move “has done my reputation and the reputation of the Tata Group immeasurable harm”, he wrote.
Mahesh Singhi, the founder and managing director of Singhi Advisors, says that Mr Mistry’s removal “is indeed a watershed moment for the Indian Inc”.
“The exit at such a critical position could have certainly been handled in a better manner,” he says.
Stock market investors have clearly been shaken by the decision. Shares in Tata Motors tumbled during the week by more than 8 per cent from about 560 rupees on Monday to 512 rupees, while shares in other Tata companies including IT services consultancy Tata Consultancy Services (TCS) and Indian Hotels have also fallen sharply.
“Investors will be jittery,” said Abhimanyu Sofat, the vice president research at India Infoline, a financial services company headquartered in Mumbai. “It could be months or even years before you know what has actually transpired between the two parties.”
Mr Venkat, meanwhile, believes that although there is speculation that “performance and lack of so-called strategic direction are attributed as reasons for Mr Mistry’s removal, that argument doesn’t hold water”.
The rift was created by differing opinions on how the group should be run, and the fact that Mr Mistry was not a Tata did not help at all, he believes.
“Cyrus’ exit is more to do with cultural issues within the group,” Mr Venkat says. “Most of the company CEOs have gotten used to being managed by Ratan Tata himself, and in a sense may not have been too comfortable to the aggressive performance-oriented culture, purportedly driven by Cyrus during his tenure.”
Given that most top leadership is in-house and Mr Mistry was probably seen as an “outsider” did not play to his favour, he says.
Mr Mistry’s departure would certainly have a short-term impact on the group, but because Ratan Tata was already largely calling the shots, business may continue as normal for many of the companies, he adds.
Mr Mistry stated that he inherited a raft of challenges when he took on the role of chairman of Tata and “without meaning to air a laundry list”, he outlined these in his letter. Among them was the “debt overhang” caused by foreign acquisitions made under Ratan Tata. He said he did not believe that he was removed “on the grounds of non-performance”.
He pegs the writedowns that the conglomerate could suffer at about $18 billion.
He cited the Tata Nano, designed to be the world’s cheapest car, as a major flop and a money guzzler. He said that he was pushed into approving deals made by Ratan Tata on the joint venture for an airline venture with Air Asia, and a few months later he was pressured to conclude a deal to launch its Vistara airline with Singapore Airlines.
The Indian press has said that one of the things that has irked Ratan Tata was Mr Mistry’s strategy for Tata Steel to sell off its European assets, in particular its loss-making assets in the UK, an acquisition that was made by Ratan Tata. Mr Mistry reportedly also riled Tata Trusts when he made a $1.4bn acquisition of Welspun’s solar farms under Tata Power without seeking their approval.
Apoorv Ranjan Sharma, the co-founder of Venture Catalysts, says that Mr Mistry is likely to have been shunted because “the business ideologies were different” resulting in “a conflict”.
“Tata is known for expanding businesses and building communities around them and the observation seems to be that last couple of moves taken by Mr Mistry were not in line with that.”
However, Mr Mistry’s departure may not directly hit the performance of Tata’s companies, despite the huge controversy surrounding the event, some analysts say.
“It is a fact that last year the group turnover declined and debt increased,” says Mr Vijakumar, “But this is not a phenomenon confined to the Tata group alone. Short-term poor performance is normal during times of economic and business slowdown. In recent times, only TCS and Tata Motors have been the only major wealth creators from the Tata stable.”
How the various Tata companies perform following Mr Mistry’s exit, however, will largely depend on other external factors, according to Mr Vijayakumar.
“From the market perspective nothing has changed,” he says. “Tata Motors will continue to do well since the new launches are doing well and the pound depreciation is a major positive. The performance of TCS will be muted since the IT industry is facing headwinds. The outlook for these companies is unlikely to be impacted by the decision to oust Mistry.”
Mr Vijayakumar points out that with Mr Mistry’s dismissal and any impact it might have on perception of corporate India, “we would have to distinguish between the hit that corporate India took when we had the Satyam episode for instance, which was a case of manipulation. Not just corporate India, there were scandals such as Enron in the United States. But this issue is nothing in comparison. There is nothing below the belt.”
The other question on everyone’s lips now is who will eventually take over as chairman, a move which will watched with interest by international investors.
A few internal candidates, namely Noel Tata, chairman of Tata’s retail arm Trent, and TCS chief executive Natarajan Chandrasekaran, and JLR head Ralf Speth, are among those being considered, sources told Bloomberg News on Thursday.
“Coming to the replacement, in all probability the group and Mr Ratan Tata personally will settle down with an insider,” Mr Venkat says. “There would be a panel that will do a broad search, but finally I don’t see anyone from outside the group.”
An empire of cars, telecoms and commodities
Cyrus Mistry is understood to be behind the decision to try to sell Tata Steel’s loss-making UK business. Analysts have said that Mr Mistry’s departure from Tata raises questions about whether Tata Steel will now continue with the strategy of disposing of its European assets. Ratan Tata steered the takeover of Corus, an Anglo-Dutch steel firm, in 2007 for US$12 billion, which included the British Steel assets. The UK business was put up for sale in March. Ratan Tata is said to be firmly against selling off the assets.
A legal battle is raging between Tata and Japan’s NTT Docomo, which is suing Tata in the US and the United Kingdom and also with litigation in the Delhi High Court. Docomo invested $2.2bn in Tata Teleservices in 2009 under a deal that Tata would buy back Docomo’s shares at least 50 per cent of the price paid in five years’ time. Docomo decided to exit India in 2014, but Tata declined to pay the price asked for the shares. There has been speculation that this issue contributed to the decision to remove Mr Mistry from the group.
Cyrus Mistry is known to be a car enthusiast. But the company has continued to face challenges of weak sales, steep losses and a poor brand perception. The Nano, launched as the world’s cheapest car in 2009 with a price tag of 100,000 rupees, failed to ever really take off. Following his departure, Mr Mistry said that Ratan Tata would not pull the plug on the loss-making venture for emotional reasons. The bright spot is Tata bought Jaguar Land Rover from Ford for $2.3bn in 2008. The deal was met with some scepticism as it took place during the global financial crisis and was followed by plunging sales. But under Tata’s control, the business was turned around.