Cyrus Mistry on What He Hopes to Achieve by Going to Court
In an interview with BloombergQuint, Mistry detailed what he hoped would be the outcome of the legal battle.
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In a surprise move, on 19 December, the former chairman of Tata Sons, Cyrus Mistry resigned from the boards of six Tata Group companies and said he was moving the battle against Tata Sons to a “larger platform”.
On 20 December, a few hours after BloombergQuint interviewed Cyrus Mistry on his change in strategy, Mistry’s investment companies filed a suit against Tata Sons in the Bombay High Court.
In an interview with BloombergQuint, Mistry detailed what he hoped the outcome of the legal battle would be.
Tata Trusts Need to Be "Recalibrated"
Q: What do you hope could be the outcome of this legal battle?
A: At end of the day what I have been consistently fighting for, governance reforms. Today is when you have to ask questions like what is the governance structure, how do you look at succession planning at the Tata Trusts, how do you ensure the Trusts are not filled with the wrong people. My main worry is that you have a large number of people beyond a certain age group. Now there’s a point in time when the trust goes into different hands. Who are those different hands? What are their ethical values? We are looking at this at one static point in time but this is actually the point in time, very frankly, where the future of the trust is being determined. It’s not just the future of Tata Sons alone.
Q: In your shareholder representation, you have drawn the attention of the RBI as Tata Sons is a core investment company under its jurisdiction. You flagged SEBI when you mentioned instances of possible insider trading violations. Third, you flagged the Charity Commissioner’s office. Let’s assume the Charity Commissioner’s office gets involved. Do you think government intervention is ever desirable? Do you think government intervention will help reform the Trusts? From the point of view that you would like them reformed?
A: At the end of the day I think what’s important is that it’s effectively reformed. There would be different ways and different methodologies for that to happen. Do I look at the Trusts being run by government as the only solution? I don’t think that’s the only solution. When we look at the breakdown of governance in a public trust as somebody stepping in to ensure that its recalibrated, I think that’s an appropriate way to look at it. What is that institution that does it, how that happens is something that needs to be thought through. But yes, from time to time, maybe institutions need to be recalibrated.
Q: Are you asking for a return to the pre-2000 situation? In 2000 the Companies Act was amended to allow Trusts to vote on their shares in listed companies. Is that what you are seeking? That the voting rights revert to a government representative?
A: I’m not seeking that all.
Q: But when you say recalibration what are you hoping for? You know how charity commissioners function, it can be a terribly corrupt situation.
A: I think someone needs to take action today otherwise how will you change it?
Q: And that action should be looking into the selection of trustees?
A: I think it’s not just purely about selection of trustees. I think this is a bigger subject than selection of trustees. I think you’ve got possibly one of the largest charitable trusts in India, possibly the largest charitable trust in the world, very frankly in terms of the assets base. You really think we can just lose control over it?
Q: Suppose all the endeavours you’ve made through the last several weeks become successful through legal action or otherwise...
A: We will have that discussion in a few weeks.
Q: But what outcome would you use to judge that your effort has been successful?
A: What I’d like to see actually is a governance framework which describes the role of the Trusts. Now there are different aspects of the role of the Trusts which actually are important. So there’s one from the philanthropic point of view, I’m not touching on that.There is one in terms of how the Trusts engage with Tata Sons, how Tata Sons engages with the group companies and that was part of my governance framework, which was to be presented to the Tata Sons board on 24 October.
"Trusts' Nominees Were Used as Postmen"
Q: Would you be suggesting, if I understand this clearly, that there needs to be some change in framework in the way the Trusts exercise their votes in Tata Sons? Is that what you’re effectively looking for?
A: It’s a much longer discussion. For example, the Trusts today have one-third nomination on the board of Tata Sons, those directors have veto rights. Today the breakdown actually is that those one-third directors were used as postmen and did not utilise their own power. Once you’re appointed as a nominee, you actually use your own judgment, fiduciary judgement, and exercise that in favour of the board of Tata Sons when you’re sitting on that board. You reflect the views of the Trusts but you do not subjugate Tata Sons to those views.
Number two, when you’re on the board of Tata Sons, how do you look at the operating companies? Again, in Tata Sons you do not approve operating companies’ actions but you actually influence them through your nominees on the operating companies’ boards. So how this whole waterfall works is important. There is a role that each one has in different circumstances.
I’m not saying that the Trusts should not know what happens at Tata Sons or the Tata Group. As a 66 percent shareholder of Tata Sons, the Trusts should clearly know the strategy going forward. The Trusts should have requirements, both in terms of capital appreciation and the dividend flow, which should be mapped out. So you should have a plan going into the future which actually says that, ‘look we as the Trusts, this is the kind of return that we would get, this is the kind of volatility and risk that we would anticipate. So if there is a concentration of risk, how do we actually look at the concentration of risk inside the portfolio’. These are the discussions which need to happen.
Q: On reading the Trusts’ deeds it appears that the Tata Trusts were formed many years ago as vehicles to do philanthropic activity and not primarily as vehicles to control Tata Sons. When do you think this changed?
A: I think you have raised a very valid issue. If we look at the track record of the dividends given by Tata Sons, they were ridiculously small. Earlier, and not from a perspective of getting more dividends for ourselves but, my father always raised the subject of additional dividend. It’s such a small amount it doesn’t make a difference. Mr Tata took great pleasure in saying no and it was a running joke at the annual general meetings of Tata Sons which happened every year. When I joined the Tata Sons board I felt embarrassed to ask for additional dividend because I was a shareholder, but I always offered it if the Trusts wanted more and it was up to him (Ratan Tata). He never asked for additional dividend.
I made sure that when TCS gave a special dividend, that we give a special dividend to the Tata Sons shareholders and he accepted it at that point in time. Very recently in 2010, we had given Tata Capital shares as a donation or gift to one of the Trusts and we bought them back in early 2016 if I am not mistaken, which gave an additional Rs 300 crore this year to the Trust. So, look, my perspective is that we are very lucky for what all we have got. I think for us to make sure that the Trusts get the right amount of money is important, in a fair way, that’s what we are looking at, clearly that’s important. The Trusts, like most global trusts, have moved away from the role that originally was there and looked at a role how to harvest investment over time to put it into good philanthropic use.
Tata Sons' Reasons for Sacking Mistry
Mistry wouldn’t reveal details of his legal strategy but his comments suggest that he will fight to reduce the power of Tata Trusts on Tata Sons and do so by calling for scrutiny of the functioning of the Trusts. He shrugged off the potential downside of any government intervention in the Trusts. And he denied Tata Sons’ allegations that Mistry had failed to deliver on the commitments he made when taking over as chairman and had also worked to create his own power structure.
Q: Tata Sons says that by not appointing any common directors between Tata Sons and group operating companies you were attempting some sort of takeover or new power structure?
A: Let’s look at the evidence rather than what’s being said. You have to understand that the nature of the Tata Sons board had changed significantly. Before me the board was totally insiders, after me it was exactly the other way round. I was the only insider with Mr Ishaat Hussain, before that R Gopalakrishnan. We need to understand the context. What happened was, as I said, we were going through a generational change. It was not just me coming in as the new chairman, there was a new team in place. When Gopal withdrew from some of the boards, I had put Nirmalya on a board, Harish Bhat was on the boards with me, NS Rajan was on boards with me, Ishaat was on two boards with me. We were looking at one or two more Group Executive Council members to be inducted freshly into the company who would again be on the boards. And over and above that we had another challenge which came in at the same point in time. We needed to have minimum of one lady director on each board. And there was not one within the group that we could look at. For example, the only one we did have was Tata Power - we took a lady from the legal department and put her on the board. At TCS, we appointed a lady. We also had challenges in companies like Tata Motors where Mr Tata, before he was leaving, had put in Mr Satish Borwankar, Ravi Pisharody, Ralf Speth and the India CEO as board members and now if I add the chief financial officer, that’s five board members and me, six. Where do I get the space for the next person? So this is just a figment of somebody’s imagination. And if they felt it, why didn’t they say it?
Q: Tata Sons says you did not deliver the annual plan in time and that you presented it only in the fourth year.
When I joined the Tata Sons board there was no strategy plan for the 10 years before that, number one. Number two, there was a very simple one sheet or two sheets of a cash flow plan which was there in Tata Sons.
How I looked at it was I am not going to be in this seat forever. If I am not in this seat forever, effectively are these items appropriate to come to the board of Tata Sons? And to ensure that the chairman of Tata Sons doesn’t run away with the group, because unbridled power is inappropriate in any context.
And when I saw what we finally came down to, if appropriately interpreted and used, then fine. If appropriately interpreted, but that was what was not happening.
So, for example, having a five-year strategic plan placed to the board of Tata Sons is absolutely fine. Having a one year business plan placed in front the board of Tata Sons, absolutely fine. We captured in the business plan the bare minimum which we should have. For example, what should be the debt? At the end of the day you have to remember what Tata Sons is. It’s a holding company. So, a business plan for a holding company largely is what are your investments and what are your exits. That becomes the part which flows in through the strategy and how you time those over five years.
We also had a separate plan for how to unravel cross holdings, how do you actually look at new businesses and what are the capital/equity injections into the existing businesses to tackle some of the challenges. All of that was put in a one year business plan.
What their definition of a business plan was did not come through clearly until one month before, when Mr Tata wrote an email to me (in September). So, what we had captured in that business plan was for a holding company business plan and there were three to four items – debt-equity ratio, cash flow... all of those were always captured. But I kept saying this is a holding company, what do you further need in a business plan for a holding company?
Then they gave me a list of things in September 2016 and I gave them the plan in October. In the October board meeting I had put down a strawman for that. The issue very clearly is they were confused, they wanted budgets for operating companies. The issue was if you go for budgets for operating companies it could become an insider trading issue.
Q: But why would the Trusts want to have budgets for operating companies?
A: That is the level of interference that was happening and the information requirements. The fact of the matter is the business budgets for many of those companies were already there with them. Because as Chairman Emeritus, Mr Tata was getting information from Tata Chemicals, Tata Steel, Tata Motors, Tata Industries and Tata Sons. And all he had to do was ask for the other ones and he would have got it, very frankly. So, the point of the matter is, very frankly, would I institutionalise a process where I started giving budgets of group companies to, one the board of Tata Sons and secondly, beyond that to the trustees, was a challenge? And that was part of the opinion that we had taken in terms of corporate governance of the companies, in terms of what is doable and what is not doable, one is from a corporate governance point of view and secondly from an insider trading point of view.
(This is part two and the final part of the interview with Cyrus Mistry, former chairman, Tata Sons. The first part can be read here. The conversation transcript has been lightly edited to make it reader friendly.)
Read the original story on BloomberQuint.
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