Tata's Brand Royalties

THE idea had been discussed for more than a year in the soundproof conference rooms of Bombay House, the nerve centre of the Rs 30,000-crore Tata industrial empire. The rumours had wafted out to reach the ears of shareholders and medi-amen early this year, and there had been at least one major report in the press. But when the news broke—strangely enough, for the second time—on September 23, the uproar was still loud and immediate. For, the timing of the news leak—if that was what it was—was interesting. The Annual General Meeting (AGM) of Indian Hotels (which runs the Taj hotel chain) was scheduled for the next day in Mumbai. Where, naturally, shareholders were more than indignant. A prominent individual shareholder spoke for about an hour. The gist of the diatribe: that Group Chairman Ratan Tata’s proposal was serving petty self-interest rather than helping the Tata companies in any way. Tata was absent at the AGM. And he was not available for comment despite more than a dozen phone calls by Outlook. The Tata empire’s corporate chieftains are also maintaining a tight-lipped silence.

The proposal is simple—but novel. Tata Sons, the closely-held entity which is the holding company for the group, has announced a royalty—Ratan Tata prefers to call it a "contribution" or a "fee"—to be charged from all group companies for the use of the Tata name, either directly in the company’s name or indirectly. The proposed plan demands a fee of 0.25 per cent of turnover (not exceeding 5 per cent of net profit) from blue-chip group companies, referred to as the A group, that use the Tata name (see chart, pg. 42). The B group which consists of companies ‘leveraging’ the Tata name though not using it upfront, will pay 0.15 per cent while the C group will pay 0.10 per cent. Joint ventures where the foreign partner is offering its brand name gratis—for instance, Tata Information Services Ltd (TISL) where IBM is a partner—will not have to pay any fee.

But this throws open a Pandora’s box of issues which will have a significant bearing on the future of corporate governance in the country.

Why is Ratan Tata doing this?

Let’s face it, there’s hardly an Indian businessman who has not been quietly increasing his stake in his companies over the last few years, ever since economic reforms woke India up to the possibility of takeovers. It’s just that Tata is making no bones about his intentions. And the chosen means to his end are two: One, Tata Sons has, over the last year, sig-nificantly increased its stakes in at least seven group companies (see chart, pg. 41). In Tisco, for example, the Tata Sons shareholding today stands at more than 8 per cent, up from a mere 2 per cent a couple of years back. And the Tata group’s total stake should be much higher. Market sources claim that Tata Sons has been consistently picking up equity through rights issues and GDRs of group companies. The modus operandi: a group company brings out a rights issue. There is a lot of cross-holding within the group, so the other Tata companies renounce their rights and Tata Sons picks up a whole lot of equity.

But all this equity-buying needs a lot of money. So in a clever move, Tata Sons itself did a rights issue in September last year. Group companies, the Tata family and other shareholders picked up the Rs 1,000 shares at a premium of Rs 99,000 (with an additional Rs 25,000 going to Tata trusts). Critics see this pricing as exploitative, since the book value of Tata Sons shares is around Rs 36,000, one-third the price charged. Tata Sons claims that the pricing was recommended by the chartered accountancy firm S.B. Billimoria and Co. and reflects long-term growth potential.

Two, the brand fee charged by Tata Sons gives the holding company a lethal weapon. If, say, a corporate raider manages to take over Tata Steel—improbable but not impossible—Tata Sons will simply withdraw the Tata name. And Ratan Tata has been worried for years now about takeover attempts (Uneasy Moves, pg. 43).

The brand fee also sends a clear message to the Tata empire’s several independent-minded satraps about who’s boss. Russi Mody has long since been eased out, and Darbari Seth is now in semi-retirement, but many observers see in the brand fee a signal to at least two men, Ajit Kerkar, the Taj group supremo, and Xerxes Desai, the man who built Titan, the biggest greenfield success the Tata group has had in the last two decades. Both Taj and Titan are powerful brand names, and most consumers today may not even know that these are companies promoted by the Tatas.

Lastly, there aren’t too many Tatas in sight to take over from the unmarried Ratan when he hands over the reins. It is quite likely that the next Tata group chief will not be a Tata at all. Ratan Tata possibly wants the glorious legacy with Jamshedji and J.R.D. protected for all times to come.

But are his actions ethical/fair?

A lot of shareholders are displeased with the fact that at a time when a company like Tisco was raising money from the markets to finance its expansion plans, a part of its funds were being used to shore up Tata Sons’ control over the company. And no shareholders were consulted, not even the fina-ncial institutions which hold significant stakes in the Tata companies. What appears to have happened is that Tisco’s funds flowed into the coffers of Tata Sons, which then used this money to buy Tisco shares! Should one shareholder—and legally Tata Sons is just another shareholder—be allowed to take money which belongs to all shareholders and increase his stake in a company, without informing other shareholders?

The brand fee is causing even more ire. Why, ask critics, should an entity like the Taj group pay up for something it doesn’t even use—the Tata name? In fact, a recent survey conducted by Financial Times of London among investment analysts in London, Hong Kong and New York finds more respondents familiar with the Taj Group of Hotels than Tata Industries (The Power of the Name, pg. 42).

Tata Sons’ argument is that without the Tata backing, Taj or Titan could hardly be the forces they are. The Intercontinental chain would hardly have agreed to a tie-up with the Taj hotels, if they hadn’t had the Tata might behind them. All advertising in the first few years of Titan bore the line ‘Titan from Tata’ establishing pedigree and gaining the new brand acceptance. Also, as The Economic Times quoted Ratan Tata as saying, if "a Nelco TV set blows up in someone’s face, or a Rallis fan fails, then suddenly the buzz is that we didn’t expect this from a Tata company." So why shouldn’t the Tatas take the credit too along with the flak?

Some investors, however, argue that the Tata name is hardly a magic potion: it couldn’t stop Tata Textiles and Tata Oil Mills from going under. And the more rabid shareholders say that by Ratan Tata’s own logic then, Tata Sons should pay a fee to Tata companies that go bust. Emotions are clearly running high. For instance, argue the shareholders, though Tata Sons claims to be in a position to advise its group companies on business, it has actually learnt the trade from those very companies. "Where did it learn hoteliering if not from the Taj Group, or watchmaking if not from Titan?" asks one prominent shareholder. If the Tata name enjoys an excellent reputation, it is because of what group companies like Tisco, Telco and Titan have done. Tata Sons, they point out, has no product to offer except the equity of a family name and it has been amply rewarded by way of capital appreciation. Besides, companies like Tisco and Telco are formidable names in their own right. Will their business suffer if their produce does not bear the golden name?

THE other contentious issue is the fee structure. While group companies like Goodlass Nerolac (Tata holding close to 30 per cent) will pay 0.10 per cent, Indian Hotels where the holding is 12 per cent, will pay 0.15 per cent. The actual rupee value of the fee is not exorbitant: the Rs 7,900-crore Telco will shell out Rs 19 crore, the Rs 5,262-crore Tisco about Rs 15 crore and smaller companies even less. All the fees will add up to approximately Rs 45 crore, which is hardly a big sum in the group.

This money Tata Sons will definitely use to increase its stakes in group companies till Ratan Tata feels sure that the holdings are at unassailable levels. But some other expenses are also coming up pretty soon. The US-based Unisys, the group’s partner in Tata Unisys, reportedly wants to pull out. The Tata group will pick up Unisys’ 40 per cent stake at Rs 400 a share—the tab should be around Rs 118 crore. There are at least two other Tata partners who may also be planning to sell their stakes to the Tatas.

In the coming months, the Tata name can be expected to be slightly more prominent in the group companies’ advertisements. There are already rumours flying fast and thick about companies which do not bear the Tata name—like Indian Hotels—being renamed. Tata Investment Corporation in fact didn’t bear the Tata prefix until last year but has now moved into the A group which will pay the highest brand fee.

So what does the future hold?

Ratan Tata’s broader plan comprises creating a code of conduct for group companies, control of the right to use the Tata name, and making Tata Sons the apex strategic unit for the group. All this is hardly possible, says Tata, until Tata Sons has a considerable holding in the other Tata companies. Strategic crossholding, believes he, saves the group from becoming an easy takeover target. In the past, low stakes did not make a difference. In the days of economic protection, the fact that Tata Sons was holding just 2 per cent of Tisco and yet managing it would not have been questioned. And barring the Government, hardly anyone else could have endeavoured to displace the company. It has not been so since 1991, thus strengthening holdings is essential. Tata claims that judicious apportioning of the rights issue ensures that no single company has a heavy burden. At the same time, no single company has too large a share to exercise undue influence. As for paying for the use of the brand name, Tata argues that the indignation being expressed by shareholders of Tata group companies is an expected response. After all, these companies are used to using the name for years, free of cost. Tata assures that there will be "clear deliveries" from his side in return for the fee.

Primarily, Tata Sons would look into giving the group a long-term strategic direction. The ’80s saw the group embarking on hardly any big new project as there was no one single entity looking at the big picture.

And, says he, the Tata name is too precious to be allowed any sort of misuse or indiscriminate use. The name has come to signify values of trust, fair play, value for money, fairness to the stakeholder and customer, and quality. The Financial Times study clearly shows that Tata is the most powerful Indian brand name internationally. The group, therefore, should have the right to decide where its name should be used and withdraw it when the management changes and when parameters are not as defined by the Tata philosophy. And if all the group companies enjoy this brand equity, they should share the cost of maintaining and promoting it.

The late J.R.D. Tata’s greatest achievement—and also one of the key reasons for the enormous success of the Tata group under him—was his ability to find extraordinary managers and then delegate the running of the companies to them. These men—and the companies they ran—were held together by the charisma of their unquestioned leader. Ratan Tata, however, inherited an empire whose loose federalistic structure, he feared, could lead to Balkanisation or invasions. It’s a shame that as head of the Tata group, so much of his energies have had to go into unifying it into a coherent whole. But then again, perhaps it was inevitable.