Tatas are a family managed business with a different mechanism of control

 There have been several important developments in the Tata group in recent days. First, Mehli Mistry, who was a member of a dissident group at Tata Trusts (by which I mean the two key trusts that control the Tata group, Sir Ratan Tata Trust and Dorabji Tata Trust), had his term as Trustee not being renewed.

Next, Mistry, who had entered a caveat with the Charities Commissioner in Mumbai asking to be heard in the matter, wrote a letter to Tata Trusts saying he was not inclined to the pursue the matter.

Finally, at the meeting of Tata Trusts last week, Noel Tata’s son, Neville, was inducted as a member of the board along with a Tata confidante and former Titan MD, Bhaskar Bhat.

Clearly, Noel Tata is tightening his grip on Tata Trusts which has a 66 per cent stake in Tata Sons, the holding company of the group through which the Tata family has controlled the many companies in the conglomerate.

There has been a lot of discussion about governance in the Tata group. Many ask how Tata Trusts can control a whole group. Well, in most industrial groups, the family directly owns a dominant stake- or the majority stake- in the group companies. The head of the family and his members sit on the boards of the group companies and chair those.

The Tatas have a chosen a different mechanism of control. They parked their funds in Tata Trusts and invested in group companies through Tata Sons. They hold very little personal stakes in the companies. The dividends and other cash flows from group companies go to Tata Trusts, which carries out philanthropic activities instead of going into the personal accounts of the Tata family. While the mechanism of control is different, the outcome is the same: the Tata family calls the shots by controlling Tata Trusts.

That is exactly what you would expect in a family managed business. So, it’s not clear what commentators are unhappy about. In the battle between Ratan Tata and Cyrus Mistry, former chairman of Tata Sons, a few years ago, several issues of legality and governance were raised. The honourable Supreme Court dismissed Mistry’s contentions. Critics of the Tata group may not like it but they must remember that whatever norms the Tatas have put in place bear the stamp of legitimacy. 

More in my column in BS, Tata storm blows over? 

FINGER ON THE PULSE

Tata storm blows over?

 

The Tata group has been in the news again for the wrong reasons. A fight has broken out between a Tata family scion, Noel Tata, and a few individuals in positions of authority in the group. 

The boards of two important trusts of the Tata family — the Sir Dorabji Tata Trust and Sir Ratan Tata Trust (Tata Trusts) — are said to be riven by differences between a group led by Noel Tata and another group in which Mehli Mistry, a relative of Noel Tata’s, is prominent. Now, we learn that Mehli Mistry, until recently a member of the boards of the Tata Trusts, will not pursue his fight with Mr Tata. In all likelihood, the storm has blown over.

Mr Mistry had taken comfort in a board resolution passed by  Tata Trusts in October 2024 that stated that all board members at the Trusts would be renewed for life when their term came up for renewal. Accordingly, the term of Venu Srinivasan, a trustee and Noel Tata confidant, was renewed in the third week of October. 

Alas, when Mr Mistry’s term came up for renewal, the Noel Tata faction withheld its consent. Mr Srinivasan stayed on but Mr Mistry was out. Mr Mistry subsequently entered a caveat in the matter with the Charities Commissioner. He has since written a letter that suggests he has thrown in the towel. 

Many commentators were aghast at the in-fighting and fretted about the grave implications for the fortunes of the Tata companies. Had they closely watched the outcome of the earlier battle between Ratan Tata and Cyrus Mistry, then executive chairman of Tata Sons, they need not have worried. 

The battle between Ratan Tata and Cyrus Mistry lasted five years but did not come in the way of the performance of the Tata group companies. Likewise, the Tata group performance is still less likely to be disrupted by the present battle between Noel Tata and a few individuals. The battle makes for great drama in the media, though. 

There is much hand-wringing over the functioning of the Tata Trusts, their relationship with Tata Sons, the role of the board of Tata Sons, the role of the boards at the Tata group companies and so on. Some commentators say that the Tata group today falls short of the governance standards one would expect of such a highly respected group.

Critics of the Tata group need to read the judgment of the honourable Supreme Court in 2021 in the dispute between Tata group and Cyrus Mistry, who was ousted as executive chairman of Tata Sons. The Court declared, in emphatic terms, that in the matters raised by Cyrus Mistry, the Tata group was fully compliant with the law. Not only that, the group had unilaterally met norms of governance that it was not legally required to meet. 

The Tata family exercises control over the sprawling conglomerate through  various trusts, notably the two mentioned above. The Tata Trusts have two-thirds of the shares in Tata Sons, which is the holding company for a large number of companies in the Tata fold, both listed and unlisted. 

The Tata Trusts nominees have “affirmative voting rights” at Tata Sons, that is, no decision can be taken by the board of Tata Sons without their approval. The other directors on the board (at present said to be numbering five, including three independent directors) cannot outvote the two Tata Trusts nominees. Critics see this contrary to the spirit of corporate governance; on a board, should not the majority view prevail?

Well, the Supreme Court didn’t think so. It observed that affirmative voting rights are “a global norm” and that a “shareholder or a group of shareholders who constitute a majority, can always seek to be in the driving seat by reserving affirmative voting rights.” It also noted that, by reason of having 66 per cent of shares in Tata Sons, the two Trusts could have packed the board of Tata Sons with their own directors. They chose to limit their nominees to one-third of the board strength. 

 

The Tata Trusts also chose to appoint independent directors at Tata Sons even though Tata Sons is not a listed company and is not obliged to have any independent directors on its board. Contrary to what the critics say, Tata Sons is, in technical terms, ahead of the governance curve. 

 

No doubt, the motivation for having independent directors at Tata Sons was to get the benefit of the views of experts independent of the Tata group.  But these views, it must be understood, are only advisory in nature. As the Supreme Court noted, at any general meeting of Tata Sons, the Tata Trusts would command the majority of votes. There is thus no question of the board of Tata Sons taking a decision that the principal shareholders, Tata Trusts, would not approve of. The Article that provides affirmative voting rights to the nominees of Tata Trusts on the board of Tata Sons merely codifies this reality. 

 

In most family-managed industrial groups, the head of the group or his family member typically chairs the boards of the group companies. The industrial group would be the majority shareholder or the dominant shareholder in the group companies. All decisions of the group’s boards would require the family’s approval. In listed companies, only one-third of the board would comprise independent directors. There is no question of independent directors overriding the wishes of the family. 

The Tatas have far too many companies in their group and too few family members. They have thus adopted a structure that gives the Tata family the final say in all matters without the members of the Tata family having to chair the boards of group companies or even be a director. The group companies are controlled by Tata Sons and Tata Sons is controlled by Tata Trusts. It is delusional to suppose that matters have been left to the various boards.

He who rules the Tata Trusts rules the Tata group. And it is Noel Tata who, as chairman, today rules the Tata Trusts. Mehli Mistry has been shown the door at Tata Trusts. One should not be surprised if the same happens to other members of his group. 

Over time, the boards of the Tata Trusts will have members that Mr Tata is more comfortable with. Peace will return. Many like to think the Tatas are different. Well, the Tatas are different in the particular manner in which the family controls the group. However, as in other family-managed businesses, it is the dominant shareholder who calls the shots. And that, as the Supreme Court has averred, is legal.

 

Turbulence in the Tata group

For some reason I have not been able to fathom, some of the best reporting on the Indian economy and Indian corporates happens in the foreign media.

The Indian media has flagged the board-level disputes in the group and the fact that the government has stepped in to arrange a resolution. But it hasn't quite spelt out what the issues are. FT's report yesterday does that.

i. Operational issues: The Air India plane crash in Ahmedabad last year was bad publicity. Then came the cyber attacks on JLR in the UK and the involvement of TCS, which manages JLR's technology backbone. TCS also was at the cetnre of the cyber attack on Marks and Spencer as it happens to be the service provider. Then, the job layoffs- estimated at 12,000- have spelt controversy. 

Analysts are asking whether top management has a grip over the sprawling empire.

ii. In-fighting in the board of Tata Trusts which ultimately controls the group: Noel Tata, chairman, could not succeed in getting an extension for Tata Trusts member Vijay Singh, former defence secretary. It appears Noel Tata has also not been successful in engineering an exit for the Shaporji Pallonji group at Tata Sons in which Pallonji owns 18 per cent.

iii. Listing of Tata Sons: The RBI thinks Tata Sons is an NBFC and wanted it to list by September. Tata Sons is resisting the move apparently because it doesn't want greater scrutiny of itself and also doesn't want to cede control. 

We do not know what the government has conveyed to the group. 

Jio or maro?

Mukesh Ambani has bet $25 bn on Jio, his telecom venture. He has disrupted the market hugely, causing tariffs to fall and triggering consolidation amongst existing players. He has bagged 100 million customers. But will he make money out of his venture? Schumpeter, writing in the Economist, is sceptical:

Jio will start charging from April 1st. Yet even assuming it keeps cranking prices up and wins a third of the market, a discounted-cash-flow analysis suggests that it would be worth only two-thirds of the sum that Mr Ambani has spent. To justify that amount Jio would at some point need to earn the same amount of profit that India’s entire telecoms industry made in 2016. In other words, there is no escaping the punishing economics of pouring cash into networks and spectrum. For every customer that Jio might eventually win, it will have invested perhaps $100. Compare that with Facebook or Alibaba, both asset-light internet firms, which have invested about $10 per user.

Schumpeter thinks Ambani might tweak his business model at some point in order to improve the economics of his project but he's unsure about the outcome:

Perhaps he hopes to get his money back by turning Jio into an internet firm that offers payment services and content, not just connectivity. China’s Tencent, which owns WeChat, a messaging service, has successfully diversified into games and banking. Still, no telecoms firm has managed this feat and it is hard to see how RIL’s clannish culture can become a hotbed of innovation.

Or is this one big brand building exercise, one that builds equity not just with ordinary people but with the government as a huge exercise in inclusion?
 

Indian Hotels independent directors' move is a first of sorts

The unanimous support that independent directors of Indian Hotels Ltd have given to Cyrus Mistry is a first of sorts- so far a I can recall- and it adds to the damage done to the Tata group done in recent weeks. The six independent directors said:

After deliberations, the independent directors came to a view that being a listed company, it was imperative for the independent directors to state their views to the investors and public at large, such that those who trade in securities of the company make an informed decision,

Taking into account board assessments and performance evaluations carried out over the years, the independent directors unanimously expressed their full confidence in the chairman, Cyrus Mistry, and praised the steps taken by him in providing strategic direction and leadership to the company.

The independent directors have thus gone against the preferences of the dominant shareholder, an act of defiance that is entirely welcome, given that independent directors in India are widely perceived as chamchas of the promoters, often backing them to the detriment of the interests of minority shareholders.

It would be premature, however, to conclude that this marks the beginning of a trend. For one thing, we do not know how many of the independent directors were appointees of the Tata group and how many were appointees of Mr Mistry. Independent directors need to be independent of both promoters and management (although often the two are the same in Indian companies).

Secondly, I fear that promoters will now become even more circumspect in their choice of independent directors- they will only pick independent directors of whose loyalties they can be entirely certain. Perhaps, we will see more distant relatives and ex-employees as independent directors. The outcome of the Indian Hotels' independent directors could thus be turn out to be quite perverse in the long run. We need radical changes in the process of appointment of independent directors of the sort I have long advocated (see my earlier post on the Tata controversy).

Meanwhile, the blog post of Nirmalya Kumar, the former London Business School professor, who was advising Mr Mistry on strategy and was asked to go along with Mr Mistry, has elicited widespread sympathy.

It's not just the summary removal that is the issue. Prof Kumar joined the Tata group, he did not join Mr Mistry in a personal capacity. It is not that he was implicated in any improper decisions. Is it the contention of the Tata group that when a Chairman or CEO is removed, those around him must leave because they were "close" to him? I know this happens all the time in many places. Somehow, one expected things to be a little different at the Tatas.

Cyrus Mistry spat with Tata- a peek into the board room

As many commentators have noted, the sacking of Cyrus Mistry and the angry letter it has elicited from him has done great damage to the Tata brand. If the dispute drags out, the damage will be that much greater. Tata shareholders have cause for concern.

So do banks that have exposures to the group. Much of this exposure rests on the Tata reputation and TCS profit. The problems at the group will cause banks to seriously rethink the sort of name-lending they have been doing. The RBI's Large Exposure Framework is timely in this context: the restrictions on group exposures were long overdue and it's a pity that the regulator is having to require something that bank boards should have done on their own by way of prudent risk management.

One particular item in Mistry's letter stands out and it had me rubbing my eyes in disbelief. Let me reproduce that portion:

The trust 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.

This is incredibleif the staements are indeed correct. The Dean of Harvard Business School, we are told, excused himself from the board meeting and kept the board waiting for nearly an hour in order to take instructions from Mr Tata, who was not even a member of the Board! Is this what they teach by way of corporate governance at HBS? Is this how independent directors are expected to function- go out and take instructions from the leading shareholder even while a board meeting is in progress? The possible violation of insider trading regulations, to which Mr Mistry refers, makes the disclosure even more lethal. SEBI and the stock exchanges, one hopes, will look into this item closely. If proved right, Prof Nitin Nohria's behaviour might well attract strictures from the regulator and the exchanges. Since some of the listed Tata companies are shareholders in Tata Sons, institutional investors would be within their rights to raise this issue.

One wonders what HBS would make of this matter. This is not the first time that an HBS prof's behaviour has raised questions in the Indian context. In the Satyam Computers scandal, Prof Krishna Palepu, another HBS professor, drew attention as he was found to have earned a tidy amount by way of consulting fee from the company with which he was associated as independent director. As reported in the media, the court dealing with matter issued an order asking him to disgorge around Rs 2.7 crore in excess remuneration paid to him.

Mr Mistry makes a number of other statements that are damaging. He would have liked to discontinue Nano but could not do so because of Mr Tata's attachment to it. He was opposed to the group's entry into aviation. There were dubious transactions in Air Asia.The potential write down in the value of assets of group companies is Rs 118,000 crore. IHCL's investment in the Sea Rock property nearly wiped out its net worth. Tata Capital made a large loan under the advice of one trustee and it has since turned into an NPA. And so on.

The question arises: did Mr Mistry raise these concerns at Tata Sons board meetings and were these concerns duly minuted? Did he express his disapproval of the two independent directors holding up proceedings in order to seek Mr Tata's input? What did the other independent directors have to say on various matters? Were their comments, if any, recorded and minuted? It would be appropriate for SEBI to go through the minutes of the board meetings and take stock. Perhaps SEBI needs to issue guidelines on the minuting of board meetings, an area that needs considerable improvement.

Two thoughts arise. One, if this is the state of affairs at what has been India's most respected corporate brand, what can we expect at other boards?What sort of discussion happens at those places? How well are minority shareholder rights protected?

Two, what do we make of the role and functioning of independent directors. As readers of this blog would know, I have been extremely sceptical about the functioning of boards and independent directors. Most boards are rubber-stamp boards that duly accord their approval to whatever the CEO or Chairman wants done. There's very little dissent, very little questioning. This state of affairs cannot change as long as so-called 'independent' directors are selected by the CEO or the promoter. We need a wide variety of stakeholders to appoint independent directors- institutional investors, banks, minority shareholders, employees and others. In my book, RETHINC, which came out last year, I devote a whole chapter to corporate governance and the functioning of boards.

Alas, there's no sign of genuine reform in the board room.

National Airlines: Air India has plenty of company

Air India is not the only national airline being kept afloat by government money. There are plenty of others around the world, the Economist reports- and the ill-fated Malaysian Airlines is not the only one. Poland's national airline received $200 mn from the government. Italy's carrier, Alitalia, was bailed out by recently Etihad, the Gulf airline, taking a 49% stake. Indeed, national airlines that are doing well are exceptions:

The thriving airlines of Singapore and Ethiopia, and the Gulf carriers, Etihad, Emirates and Qatar Airways, all benefited from government money but have been allowed to operate as commercial enterprises with minimal interference. Such entrepreneurial thrust is rare. Elsewhere, inexperienced cronies often dominate management. State employees frequently travel free. Many carriers are obliged to maintain loss-making domestic routes to please politicians. Olympic Airlines was forced to deliver newspapers for a pittance to keep the country’s press barons happy. The Greek national carrier went to the wall in 2009.

The reasons for national airlines doing badly are common: overstaffing, poor management and strong unions. Air India, I would imagine, is in a slightly different category. Its financial problems are because of excess debt incurred by an aircraft-buying binge during the tenure of Praful Patel as civil aviation minister. The problem is not overstaffing or operational inefficiency. 

The Economist on Reliance Industries

The Economist had Mukesh Ambani on its cover in a recent issue. It carried an edit as well as a feature on the Reliance group with the edit titled, "An unloved billionaire".

The magazine is generous is handing out bouquets to the group. Reliance invests massively in India unlike other groups which have said they find the Indian environment uncongenial. It accounts for 15% of India's exports. It ventures into areas where other fear to tread and is hugely profitable.

However, the Economist thinks the group needs a major overhaul of governance. For two reasons. One, India is now exposed to MNCs with much better governance standards. Two, the country is "turning against its tycoons." The magazine has a number of suggestions:

There is plenty that Mr Ambani could do to reform his firm. He could adopt global accounting rules, reveal and simplify its ownership and appoint as directors global heavyweights with reputations to lose who can subject Reliance to scrutiny. The company’s shares—like those of many Asian firms—could be listed in America, which has the world’s toughest disclosure regime. To avoid conflicts of interest Mr Ambani could merge his private businesses into Reliance, on terms that are fair to minority shareholders. He could publish details of Reliance executives’ meetings with politicians and officials. He could sell its media assets. He would lose something in personal and political power but gain more through the opportunity to build a more global and more admired business.

One suggestion took my breath away, namely, that the company "could disclose its executives' meeting with politicians and officials." Is there any large company anywhere in the world that does this? If so, the Economist should publish a list of such companies. Also, how many other industrial groups in India have chosen to appoint global heavyweights on their boards who subject these groups to scrutiny?

I am all for improved corporate governance. However, I would like the Economist to enlighten me on which of the major companies in the world, it thinks, are models of governance.

Air India's losses? Look at private airlines

The media has been going to town about Air India's losses. With their penchant for trivialising issues, they have been carrying stories about freebies offered by Air India to its staff and its politicians- as though that is why the airline is running up losses. (Do they private owners of companies do not milk them at shareholders' expense?).

Anyway, Air India's losses for 2013-14 of Rs 2012 crore and projected loss of around Rs 1000 crore for 2014-15 look modest compared to those at Jet Airways, as today's edit in BS makes clear. Jet's losses for the first three months of calender year 2014 are a staggering Rs 2153 crore! Spice Jet and Jet Lite both made losses of over Rs 300 crore in the same period. The problems have to do with traffic and revenues not measuring up to expectations in a highly capital-intensive business. Air India's problem is the large burden of debt accumulated because of a large fleet order placed at a time when there was irrational exuberance about the growth of air traffic. Operational efficiency at Air India is not the issue. Nor is public ownership.

If ownership is the issue, then should we consider nationalising Jet because of the losses it is running up?

Fixing the PPP model

Private public partnerships were to be the answer to our investment problem, especially in the infrastructure  sector. Nearly half the investment in the current five-year Plan is supposed to come through PPPs. Sadly, the model is broken and this explains the slump in investment in the last couple of years. One of the biggest challenges for the next government is fixing the PPP model so that growth can revive. (Where it can't be fixed, we have to find ways for government to fund investment).

EPW has a though-provoking article on the subject, with several interesting proposals for reform. The piece is written by an office in the ministry of finance, so it is not as if the government lacks ideas.

As the author points out, the government has been a on re-negotiating binge in several PPPs. In the power sector, for instance, the regulator has revised tariffs upwards. This sort of re-negotiation makes nonsense of the bidding process- those who lost out can always protest, saying that had the more favourable terms extended later been known, they would have bid differently. Secondly, any private operator who finds a project unviable can go running to the government and ask for re-negotiation, saying he cannot proceed otherwise. Effectively, project risk is transferred to government- this is conceptually no different from government bail-outs of banks.

The author spells out three elements needed in the reform of the PPP model: upholding the sanctity of the PPP contract, creating more regulatory certainty, and increasing the value for money (to government) from PPPs:

The answer to this opportunistic behaviour (of private parties) is not renegotiations, but to cancel bad projects and re-tender them to the private sector in a transparent manner. While this would be time consuming and could also reduce the inflated premia generated for the public sector, it would incentivise more realistic bidding....

One of the frequently cited reasons for seeking renegotiations is traffic overestimation. To ameliorate traffic risk incidence on the private concessionaires in the road sector, the government may consider introducing a new bidding parameter: least present value of revenues (LPVR). Under this bidding parameter, the user fees and discount rate are predetermined and the concession is awarded to the firm that bids the least present value of toll revenue. The concession ends when the present value of actual toll revenue is equal to the winning bid.

Then there should be a requirement of value for money calculation at three stages – at the appraisal stage (to decide whether it is worth going for the PPP option), at the operation stage (because the promised benefits may not materialise as in renegotiated contracts), and finally, at the end of the contract period (to compare the actual value for money with the projected). 

To further improve PPP project performance and VfM as also transparency, the concession agreements should be in public domain. This will enable all interested parties to monitor the project, which should improve performance and VfM. The direct liabilities created by PPP projects (as in annuity projects)⁴ should also be reported in the budget, which would provide a level playing field to all procurement options for provisioning public services.

Maruti's Gujarat plant: a test case for corporate governance

The controversy at Maruti seems to be hotting up with news that independent directors on the board- or at least some of them- have raised the flag of revolt. The issue is the decision on the part of Maruti's parent, Suzuki, that it will invest in a car factory on land provided in Gujarat and not Maruti, which will be used more a sales arm for the products of the Gujarat plant.

Institutional shareholders- mutual funds and insurance companies- have protested, saying that the decision on the part of Suzuki is against the interests of minority shareholders. One critical issue is of transfer pricing of cars between the proposed Suzuki plant in Gujarat and Maruti. There are apprehensions that the transfer price can be managed in ways that suit the parent and work to the detriment of Maruti shareholders.

Now, independent directors have been stirred to protest. If they do take an uncompromising stand- and if some of them resign if Maruti and Suzuki stick to the decision on the Gujarat plant- we can say that we have finally a fundamental shift in corporate governance in India. Maruti is thus an important test case- and its resolution will be worth watching now that Sebi has reportedly taken up the matter suo moto.

ET reports:

Highly-placed sources said that the majority of independent directors on Maruti's board have opposed the decision. The independent directors are corporate lawyer Pallavi Shroff, former Ranbaxy chief executive D S Brar, NHAI chairman R P Singh and ex-PwC head Amal Ganguli. Suzuki chairman Osamu Suzuki, instrumental in pushing the deal, is also a member of the Maruti board.

The sources said the minutes of the last board meeting, where the surprise decision on the Gujarat plant was taken, will be discussed when the directors meet on March 15. The protests by shareholders and directors is bound to crop up given that the issue has now reached the market regulator Sebi.

While describing the latest event as "a repeat of 2004" when Suzuki Powertrain (majority owned by Suzuki) was formed for making diesel engines, some of the independent directors want Suzuki to clearly state that Maruti will not be asked to fund the Gujarat project later. In any case, there are fears that Maruti, which commands nearly 50% market share, will turn from a leading carmaker into a "trading concern".

Maruti management, however, insists that the deal remains profitable for the company and investors. "It is a win-win proposition and we are not re-considering it," Ayukawa told TOI, in perhaps the first reaction from the Japanese MD after the investors went public with their dissent. 

The Gujarat plant is not the only contentious issue involving Suzuki and Maruti's minority shareholders. The royalty that Maruti pays to Suzuki is also an issue. On this TN Ninan of BS has some scathing observations to make:

Consider the royalty question. Suzuki charges 5.7 per cent of Maruti sales as royalties (nearly double the level that prevailed before the government abolished caps on such payments in 2009). This is an astonishing 40 per cent of pre-royalty profits, and the company is far and away the top remitter of such royalty payments. What makes the payment particularly egregious is that cars are not like pharmaceuticals - between a half and two-thirds of the final product value comprises bought-out items like tyres, ball bearings, wheels, batteries, seats, headlights and gear assemblies. To claim royalty payments on their value, to which Suzuki has contributed nothing by way of technology, is rich. The royalty outgo, if calculated on the car value that is not bought-out, works out to 15 per cent or more. This is extortionate; the company's defence, that Maruti nevertheless offers good profits, is not an answer. Ambit Capital, which has looked at international companies in India, ranks Maruti as the worst for how it treats its Indian shareholders. 

There are conflicts of interest between the majority and minority shareholders at PSUs and Indian industrial houses. The revelation in recent years is that MNCs are not exactly exemplars of governance when it comes to treatment of minority shareholders.

Jet-Etihad deal at Air India's expense?

Etihad's acquiring a stake in Jet Airways is intended to improve the balance sheet of Jet, which, like most airlines in India, has been incurring losses. For a variety of reasons, the Indian aviation sector is in the doldrums.  It is understood that infusion of cash is a condition for recovery. In the case of Air India, the government is footing the bill. For private carriers, there seems little alternative to FDI.

Fair enough. However, as former ED of Air India Jitender Bhargava argues in a hard-hitting article in BS, the Jet- Etihad deal appears to have come at the expense of Air India:

Though there was unanimity that the two airlines would stand to benefit enormously, the bitterness came owing to the sweetener added by the ministry of civil aviation by way of granting over 40,000 additional seats per week on the India-Abu Dhabi sector over a three-year period. These seats were given away at a time when India was witnessing negative growth. Where was the need for additional capacity?
This has led to a question: was the grant of additional seats factored in for Jet Airways to obtain a higher valuation compared to what was being discussed in January 2013? Given that the two announcements - stake sale and grant of additional seats - came within hours of each other, was an assurance on additional seats demanded by the airlines and given by the government before the pronouncement of stake sale? These are serious questions because, if the link can be established, it is not only akin to insider trading but also demonstrates how decisions can be forced out of the government by powerful individuals.

 
These are very serious questions. Perhaps, we need the CAG to look into this while auditing the ministry of civil aviation? While Jet gains from the largesse, Air India is the loser. Bhargava adds with biting sarcasm:

With the survival of Air India made still more difficult, let us welcome Jet Airways as the national carrier because it enjoys the patronage of the Government of India and has been given a head start!

---

Maruti's Manesar plant

Maruti Udyog Ltd has announced that it will reopen its Manesar plant but only after dismissing about 500 workers allegedly involved in the recent disturbances leading to the tragic killing of one of its managers. I have been reading the news stories in the media to get a coherent account of what led up to the explosion of worker fury at the plant. I wasn't able to. A commentary in EPW has helped me gain some sort of perspective.

We cannot take seriously the insinuation that the problems are the work of 'Naxalites' who have infiltrated the workers at the plant. Nor can we subscribe to the notion that it was the result of vaulting  aspirations of a new generation of workers, who are keen to have the good things of life without regard for issues of affordability or productivity. It takes a lot for workers to rebel seriously in a situation such as Maruti's because the odds are stacked against them.

There is a fundamental asymmetry in management-worker relationships: the management has financial muscle and staying power, backed by support from the government which includes the police force and the labour department of the state. Workers eke out a precarious living and cannot do without their wages for long. To risk disruption and jobs and to incur the wrath of the law enforcement authorities would require serious provocation.

The EPW article tells us something about the immediate provocation:

A handful of workers we managed to speak to were unanimous in the view that the death of the Maruti Suzuki ­executive Awanish Kumar Dev “should not have happened”. According to a worker, Awanish Dev had agreed to take back Jiya Lal, the suspended worker, who had protested caste abuse by a supervisor during the A-shift on 18 July, but then Awanish Dev got a call from a senior, instructing him otherwise. Naresh Narwal, additional labour com­mis­sioner, and Gurgaon district administration officials told a joint trade union delegation that they too had received word that Maruti Suzuki management had agreed to take back the suspended worker the next day on 19 July and that the matter was almost resolved. Some B-shift workers we spoke to report hearing the same.What happened in the matter of a couple of minutes that changed the course of events that evening? 

But this episode only provided the spark to an explosive situation. The following factors seem to have been at work:

• Management's refusal to recognise the workers' union  until the workers first agreed to form grievance and welfare committees
• Management's unwillingess to implement the long-term wage settlement for casual workers and not just for for permanent workers. (There is huge gulf in wages between the two and casualisation has become the norm for many companies)
• Worker discontent over harsh working conditions including the limited breaks available for meals and toilet visits.

How the Manesar affairs pans out will have important implications for industrial relations. If management is allowed to ride roughshod over workers' sentiments and legitimate demands with the connivance of the state government and if it is emulated by other companies,  there is risk of a dangerous backlash in the years to come.

We are revisiting land acquisition and envrionment policies that have worked to the disadvantage of the poor for decades. It would be tragic if industrial relations were reworked to suit management and came to militate against the interests of workers.

Ratan Tata successor

Just a few quick responses to the choice of Cyrus Mistry as Ratan Tata's successor. One, it is quite a surprise- I don't recall Mistry's name ever having been mentioned. Not the best advertisement for the Indian media's reporting skills. Two, the appointment has been welcomed widely and even applauded by a few. Not much is known about Mistry's managerial abilities although it has been noted that he has been on the board of Tata Sons for a few years now. But the fact that he is an insider and close to the Tata family, if not part of it, has gone down well.

This is most interesting since several professionals, including high-profile names from abroad, had been mentioned as possible successors. I believe the reception accorded to Mistry is a measure of how perceptions about family management and professional management have changed in India over the past couple of decades. No longer are family businesses seen as inferior to those run by professionals; if anything, a certain distrust of professionals has crept in.

Those are the positives. In the many reports on the succession, I see lack of experience, especially lack of international exposure, being cited as negatives. But much the same could have been said against Mr Tata when he took over. Mr Tata's own lack of international experience did not come in the way of his making huge bets in terms of the Rover and Corus acquisitions. His general lack of experience did not keep him from venturing into cars.

The most essential requirement for Mr Tata's successor is maintaining the Tata group's reputation for aligning business with social purpose (admittedly frayed in recent years) and the enormous goodwill it enjoys with the Indian public.  A second requirement is consolidating diverse businesses. A third is keeping the group's competitive edge in what can only be more demanding times ahead. As an insider, Mr Mistry is well placed to take care of the first. Whether he is up to the second and third requirements only time will tell. All one can say he has that he has cut its teeth in his family business that ranges over real estate, construction, infrastructure and allied sector- not really a game for soft guys. Mr Tata has picked several able CEOs for his many businesses, so it would be fair to expect that his choice of successor would have been carefully thought through.

Mr Mistry is seen in the newspapers today in an unbuttoned shirt and rolled up sleeves and is reported as having showed up at Bombay House in a not very fancy car. It does appear the young man has made the right beginning.

Ratan Tata succession

There is word of a professional (instead of a member of the Tata family) succeeding Ratan Tata as head of the Tata group. Many people have been rooting for such a move. I am not so sure. There was the same talk when Mr Tata himself succeeded JRD. Not many gave Mr Tata a chance of succeeding. The sceptics have been proved wrong.

The number of businesses in the group has been pruned (although not enough, some would say). Controls have been tightened. The group is more international today (with the majority of revenues coming from overseas). The group has got into areas for which many had believed it unsuited (eg cars, communications). Mr Tata has put pep into many of the older businesses (steel, power, chemicals, tea).

True, the group's image has been dented by the 2 G affair and the Radia tapes. But, in commercial terms, Mr Tata has succeeded beyond all expectations. I see the Tata experience as part of a broader phenomenon of the reinvention of Indian family businesses. Reforms have not sunk India's family managed businesses but have brought out the best in many. It is no longer obvious that family-managed businesses must turn to professionals and not entrust their destinies to family members.

More in my ET column, It's okay to keep it in the family

New chairman at Infosys

Excuse me, but I am at a loss to comprehend the hoopla over the appointment of a new chairman at Infosys.

Media analysts asks whether this will make Infosys more aggressive, raise the bar at the company, etc. These questions are somewhat inappropriate once you grasp the following:

• K V Kamath is supposed to be a non-executive chairman
  
• There is also an executive co-chairman in Kris Gopalakrishnan.
• NRN does not exit the firm, he stays on as Emeritus Chairman

It is not for a non-executive chairman to make a company more aggressive or even to define its direction. That is the CEO's role. The chairman is responsible only for governance: he has to ensure that the CEO is held accountable for objectives that he proposes and that the board agrees to. For Kamath to attempt anything more would amount to overstepping his role. Kamath himself was candid on this subject in response to questions posed to him yesterday after the board meeting. He said he thought Infosys was quite aggressive at it was and he would be happy to keep pace with it. That is the right spirit.

All the excitement over the appointment of a new chairman would have been merited only if governance was an issue at Infosys; that is hardly the case. So the appointment of a new chairman should have been a non-event. Companies appoint search committees to locate a CEO. Have you heard of committees making the effort for finding a chairman? For that matter, has the appointment of a chairman at any company generated such publicity?

If the CEO is to be given any direction, the primary responsibility will be that of executive co-chairman. Note also that NRN is very much around. One of the papers (BS) reported a few days ago that even as non-executive chairman, NRN had the last word on most matters, that all cheques of over Rs 5 lakh had to be signed by him and that he made it a point to meet heads of businesses regularly as non-executive chairman. It remains to be see whether he completely distances himself from the firm as emeritus chairman. It is fair to suggest that, had he wanted to do so, NRN would have exited the firm.

Ratan Tata is angry

About a week ago, I may have been forgiven for getting the impression that the Tatas could not start an airline some years ago because they didn't want to bribe the minister concerned. That is the impression I got from newspaper headlines.

I now learn that it wasn't anything like that. A businessman told Tata that he would be stupid to pass up an chance to start an airline just because it meant paying some minister R 15 crore. Here are the details that I came across at a site on the Internet (and I hope they have reproduced Tata's clarification correctly):

I ( Ratan Tata) happened to be on a flight once, a fellow industrialist sitting on a seat next to me & he said you know I don’t understand, you people are very stupid. You know that the minister wants 15 crore of rupees, why don’t you just pay, you want the airlines. I said you will never understand this; I just want to go to bed at night knowing that I haven’t got the airline by paying for it.”

The company then included a clarification on the following three points, which India Real Time is reproducing verbatim:

–No minister ever asked Mr. Tata for a bribe

–The fellow industrialist expressed his personal view point that some minister (sic) were asking for a bribe

–Mr. Tata in no way was in agreement to the fact that he was asked for bribe by any minister

Business Standard wrote an edit saying that instead of 'whining' about the issue, Tata should name and shame the minister. Tata has written an angry letter to the paper roughly making the same points as above.

Which raises the question: how did so many papers report the news inaccurately?

Winners' curse in India's 3G auctions

I had meant to flag this article earlier but it escaped me. There is great jubilation over the Rs 70,000 crore the government is set to rake in from 3G auctions. Some people even think this makes amends for the telecom minister not having earned enough from the award of telecom licenses earlier.

Sumit Majumdar, writing in TOI, highlights the downside. One, the firms may go broke after having paid through the nose, so we will not see enough investmen in 3G infrastructure. Two, the firms that have bid may forfeit their security deposits and walk away from 3G in which we will need a fresh round of bidding. Three, the companies may be forced to charge consumers steep prices. He sums up the implications:

The diffusion of a 21century radical infrastructure which could be both a positive and disruptive influence for propelling Indias badly-needed knowledge revolution for the masses will not happen.Since the impact of general-purpose technologies at the individual level is profound,because of changes in the organisation of activities,the diffusion of a general-purpose technology such as 3G could have raised the return to cognitive skills and education.
The ability of 3G as a generalpurpose technology to have a phenomenal capacity to transform Indian society can be on hold.India can lose a golden opportunity to transform its society via a knowledge revolution using 3G technology.Indias 3G spectrum auction is fantastic for the exchequer but a fiasco for the common man.

Air India's woes

To many, Air India (which now encompasses the erstwhile Air India as well as Indian Airlines) sums up all that is bad about commercial enterprises run by government. It has made huge losses and people would say that is very typical of the public sector.

I argue in my ET column, Why Air India is in trouble, that this explanation does not hold nor is it true that Air India's losses are the result of the troubled merger between Air India and Indian Airlines.

The two basic reasons for Air India's mounting losses are huge investment in fleet expansion and high leverage arising from the failure to strengthen the two airlines' equity base before exposing them to greater competition. Needless to say, in government there are huge incentives for signing contracts for the purchase of aircraft.

There was talk of bringing on board some luminary from the private sector who would wave away Air India's problems. Now, the government has settled for high-profile businessmen and a foreign COO. Neither can make a big difference- N Vaghul, formerly of ICICI, was on the board of Air India for many years until it ran into its present crisis.

Family member to succeed Narayana Murthy?

There has some speculation as to who might succeed N R Narayana Murthy as chairman when he retires in two years' time. Murthy has in the past indicated that it could be somebody from outside the company. For the first time, an ET report hints at the possibility of somebody from his family taking over. This will come as a surprise as the Infosys founders have thus far been at pains to distance their families from the company:

I would not like to rule out bringing talent from outside...(but) we have to first assess the talent within the company so that we reward smart, loyal people and then look outside," Murthy told a news channel when asked about his succession plans for the company.

However, he did not rule out the possibility of someone younger from his family to take over the charge of the company either.

"We have not ruled out anyone from younger generation in joining (the company) but whatever will be done will be done purely on the basis of merit, suitability and competence," he said responding to a question on the possibility of someone from his family running the company in future.

Indian firms in world's 'most reputed' list

Rediff has a story on a list of the world's most reputed firms listed by the Reputation Institute of the US. (I must confess I have no clue who they are). The following are some of the Indian firms that figure (world rank in brackets):

1. Tata group (11)
2.SBI (29)
3. Infosys (39)
4.L&T (47)
5. Maruti (49)
6.HLL (69)
7. ITC (95)
8. Canara Bank (102)
9. Hindustan Petroleum (111)
10. Indian Oil (112)

Interesting omissions are the Ambanis and the Birlas. It's also interesting that Infosys, which has invested so much in building an international brand and HLL, which is a well known brand, rank below Tata and SBI. The top 10 includes four public sector firms.