A cold war that could soon erupt into something much hotter is perhaps the best way to describe the tension gripping Tata Trusts and Tata Sons, which control a $180 billion conglomerate. The fight has included claims of broken promises, lawsuits over governance errors and even the suitability of trustees. The battle for control over the trusts has spilled over into the Tata Sons board, questioning N Chandrasekaran’s continuity as chairman and the group’s cash-bleeding new business ventures.
The root of the issue can be traced to efforts by Noel Tata, chairman of the Tata Trusts and half-brother of the late Ratan Tata, to establish control over the group that bears the family name and ensure a clearer line of succession for his children. Against him are a number of Ratan’s confidants—Mehli Mistry, Venu Srinivasan and Vijay Singh, among others—who became trustees.
But the battle for control is also shining a light on governance issues plaguing one of the most respected business groups that has long tried to portray itself as a family business with a twist when it comes to ethics and shareholder rights. He has even confronted the chairman of Tata Trusts, who has in fact control of Tata Sons, against the second largest shareholder of Tata Sons – the Shapoorji Pallonji family.
It is the complicated story of a large conglomerate with no clear lines of succession and a complex structure that sees a number of philanthropic bosses controlling an unlisted company, which in turn controls over two dozen large listed companies. Corporate governance issues arise because the structure ensures that the chairman of the Tata Trusts can pull the strings of over 30 listed companies, despite actually owning only a small stake in a personal capacity.
Most of the big business houses in India see succession battles because they have too many claimants to the throne. The House of Tata has faced the opposite – succession has always been an issue due to the lack of eligible heirs or sons who were interested in taking over. A little business history is in order.
Jamsetji Tata had founded the group in 1868 and his son Dorabji succeeded him as chairman in 1904. Neither Dorabji nor his brother had a son. So the next chairman was NR Saklatvala, a cousin of the brothers. Saklatvala, in turn, handed over the group to JRD Tata, a member of the clan but not a direct descendant of the group’s founder. JRD, who had no children, would eventually pass the baton to Ratan Tata in 1991. Ratan would be the last person to chair Tata Trusts and Tata Sons. And therein lies the problem.
The founder and his two sons, who were philanthropists, had established a number of trusts. They had also set up Tata Sons as the holding company of the group. The trusts controlled about two-thirds of Tata Sons’ shares. The second largest holding belonged to the Shapoorji Pallonji group, which holds about 18.5 percent. The rest of the shares are dispersed, with a small number of shares belonging to various members of the Tata family.
Noel’s current struggle for control is in some ways similar—and in other ways quite different—to the one his half-brother fought to establish his influence. Ratan Tata had to contend with the group satraps even though he was the chosen successor of JR D. The problem then was that Tata Sons was a holding company of the group in name only – it was not the majority shareholder in most of them. This would lead to the CEOs and managing directors of the various Tata companies treating them as their fiefdoms. They pushed JRD because of his stature and respect, but saw little reason to do the same to Ratan.
Ratan took several steps to address the issue. Tata Sons charged royalties for the use of the Tata brand by listed group companies, and this was in return for buying shares in the company. This ensured that, by the middle of Ratan’s tenure, Tata Sons was the majority shareholder of most of the listed Tata companies. Thus, Tata Sons’ control over the group companies was firmly established.
Meanwhile, the trusts were the largest shareholders in Tata Sons – and that wasn’t a problem until Ratan Tata was at the helm of both. The structural problems arose soon after he decided to appoint Cyrus Mistry, the younger son of Pallonji Mistry and brother of Shapoor Mistry and Aloo Tata, wife of Noel Tata, as the chairman of Tata Sons after a year-long search. Cyrus became chairman of Tata Sons, but Ratan Tata controlled the trusts.
The Ratan-Cyrus relationship soured due to many reasons, including the fact that Cyrus felt that many of Ratan Tata’s projects did not make business sense. This would lead to the exit of Cyrus, created by Ratan through trustees and other board members.
Ratan Tata would eventually select Chandrasekaran, a former chairman of TCS, as chairman of Tata Sons. But the beliefs remained under Ratan’s control until his death. Since he had never married, he had no one to pass the baton to. It was after his death that Noel was voted life chairman of the Tata Trusts, most of whose members were chosen by Ratan. During Ratan’s lifetime, Noel had a say in only a relatively small part of the group.
Since taking over Tata Trusts, Noel has been trying to establish his control over the trusts and companies. He is currently bashing many of those who anointed him president. This battle is mainly to ensure that his son Neville and two daughters Maya and Leah will be in the line of succession after his term. He has inducted all three into Tata Trusts.
Meanwhile, the RBI would like Tata Sons to be listed – in line with its new regulations governing major systematic investment companies. So would the Shapoorji Pallonji group, because the listing would allow him to discover the value of his shares and monetize them as and when required.
There is little reason for Noel to want this. It is the particular current structure that allows him to maintain total control. And therein lies the cause of the tension that has engulfed one of India’s largest business groups.
Prosenjit Datta Commentator on economic issues
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(datta.prosenjit@gmail.com)
