"A realistic assessment of the fair value these (sic) business could potentially result in write down over time of about Rs 118,000 crores." That was how Cyrus Mistry summed up the challenges within the Tata group in his letter dated 25 October 2016 immediately after his removal as the chairman of the board of Tata Sons. This naturally set off alarm bells amongst investors, especially small and institutional. After all, a sum of ₹1.18 lakh crores represents approximately 1% of India's GDP. And that is no small number. While Mistry has indeed broadly indicated the group could face this "potential write down," one is not any wiser even after reading his letter several times over as to the precise amounts and group companies to which they relate.
Lesser mortals have faced the fury of the market regulator SEBI for far milder statements.
Naturally, this raises several fundamental questions on the role of the board, independent directors, market regulator SEBI and more particularly Cyrus Mistry himself. At the core of the charge laid out by Mistry is that he inherited a challenging legacy, did everything that he could to effectuate a turnaround and yet was unsuccessful simply because of the legacy overhang. Summarising his position, Mistry adds in his letter:
"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."
Implicit in this argument is that the group indeed had legacy issues at the time of his appointment. If so, questions follow. Did Mistry know about these issues? If so, when? And if he knew of these issues, did he bring them to the attention of the board? If he did bring it to the attention of the board, what was the outcome? If not, why was he not proactive in surfacing these issues prior to his being ousted as chairman of Tata Sons? Or did he know of these only on 24 October, 2016? Remember, Mistry is no stranger to the Tata Group and has been associated with it at the board level for over a decade, including being deputy chairman for a year in 2011 before becoming a full-time chairman of the Tata Sons board in 2012. Despite such a long association with the group at the board level, Mistry claims:
"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."
And that—lack of a clear grasp of the gravity of the issues involved—according to most neutral observers, is the crux of the issue.
Historically, it may be noted that the group was governed with a three-tier structure viz., Tata Trusts, Tata Sons and the operating companies with certain members occupying positions in all three levels of the Group. This structure led to seamless communication of information from the operating companies and guidance from the Trusts through Tata Sons. Mistry dismantled this tried and tested three-tiered structure and in its stead formed a new management vehicle, Group Executive Council (GEC), obviously packed with people whom he trusted. This idea was genetically alien to the Group and created an alternate power structure. Critically, it reported at a functional level only to Mistry and he, one understands, in turn was the sole contact point between the Trusts, Tata Sons and the operating companies. Needless to emphasise, this structure did not evolve to deal with the dynamics of the group, leading to loss of communication. And once communication was lost, trust too was quick to go.
Despite a month passing since Mistry made these statements the market regulator is nowhere to be seen in restoring the confidence of investors.
Whatever it be, Mistry must have been party to the decisions of the Tata Sons board from 2006 when he was formally inducted as a director and as deputy chairman in 2012. Mistry cannot at this late point in time distance himself from those decisions and term them as "legacy issues" when he himself was party to these decisions as a director.
Nevertheless, his revelations have spooked the confidence of the small shareholders in the stock market in general and the Tatas in particular. The key questions here being, if Mistry is indeed correct, why was this not discussed in the boards of the respective companies or by Tata Sons until his ouster on 24 October? Were these facts and the magnitude of the situation informed to the directors of Tata Sons, including the Trusts-nominated directors? If these facts were indeed discussed what was the response of the other members of the boards? Crucially was Mistry unable to impress his board on such a key issue as impairments? Questions that beg answers.
Will SEBI make an appearance like the police in the last scene of most Bollywood movies when it is all over, bar the shouting?
In the alternative, if Mistry is indeed wrong then it is a clear attempt to talk down the markets. Lesser mortals have faced the fury of the market regulator SEBI for far milder statements. Despite a month passing since Mistry made these statements the market regulator is nowhere to be seen in restoring the confidence of investors. Was it right on the part of a director of a company to openly express such views on the companies without taking recourse to the board? Only regulators can help answer some of these questions. They can no longer be supinely indifferent to these developments in the premier business group of the country. They need to act pronto.
For starters SEBI should investigate the conduct of a director publicly making such statements which has caused unrest in the minds of the investors. The billion-dollar question is whether it will act now? Or will it make an appearance like the police in the last scene of most Bollywood movies when it is all over, bar the shouting?