The Insecure Tata

IN September 1, for the last board meeting he would ever attend at Bombay House, the seat of the Tata empire, Ajit Baburao Kerkar arrived early. He sat himself down in the chairman's chair in the oak-panelled boardroom and began his wait. There were still 25 minutes left before the other directors would arrive. Enough time to mull over 37 years with the Taj group?

The story of Kerkar's ouster may have  actually begun 15 years ago, in 1982, in New York, where 44-year-old Ratan Naval Tata, recently inducted by JRD as chairman of Tata Industries, was watching his mother die of cancer in Sloan Kettering Hospital. It was then that Tata wrote what he believed should be the new agenda for the Tata group, and which came to be known as the 1983 Tata Strategic Plan. Impatient with passive attitudes within the group and the lack of a unifying strategic vision, Tata's manifesto called on India's largest business house to stride aggressively into hi-tech businesses like telecommunications, oil exploration services, infotech, biotechnology, alternative energies. The other recommendation: that Tata Sons, the group's holding company, increase its stake in the group companies, which in many cases had dwindled to nearly nothing. For instance, at that time, the Birlas, through Pilani Investments, held 6 per cent of Tata Steel, twice what the Tatas held.

The benign JRD allowed Ratan to use Tata Industries to do what his strategic plan suggested, but Tata Industries had no money, and the quasi-independent satraps of the Tata empire—Russi Mody, Darbari Seth, Ajit Kerkar, who owed their allegiance to JRD and to no one else—weren't interested. Yet  Ratan managed to set up a dozen high technology and financial services companies through foreign collaborations and intelligent fund-raising over the next seven years or so. For, this painfully shy architect from Cornell also had in him a streak of stubbornness unmatched, as history has proved, in the Tata empire.

Ratan studied to be an architect but came back from the US when JRD asked him to join the Tata group. The stubborn streak surfaced soon, when, on one of his first assignments for the group, he refused to bend before what he considered were unfair worker demands, and shut electronics company Nelco down for seven months. In 1989, months within taking over as chairman of Telco, he went through one of the bloodiest strikes in recent Indian corporate history, refusing to be cowed down by even when 3,000 workers went on a hunger strike at Shaniwarwada Fort in Pune. On the seventh day of the fast, Tata managed to break the strike.

September 1, 10.15 am. Ratan Tata's Mercedes-Benz, MH01-1001, purred to a halt at Bombay House's side entrance a few minutes later, but Tata preferred to enter the boardroom along with all the other directors. Precisely at 10.30, all the directors strode into the boardroom together. None could tell Kerkar to move from the chair he had occupied for eight years. Director Nani Palkhivala had come prepared to start the proceedings by proposing Tata as chairman of Indian Hotels, better known to Indians as the Taj group, but for a minute even he was nonplussed.

Tata is stubborn, but stubbornness has nothing to do with deep insecurity, surely? For that is what people are accusing Ratan Tata of harbouring. Why is it that ever since Ratan has taken charge as chairman of Tata Sons, every two years, there is a messy fight within the group, public washing of dirty linen, and all of it finally ends up with Ratan Tata taking up the chairmanship of yet another Tata company?

First it was the Russi Mody episode, though, to be fair, Mody didn't help himself any. When in the late '80s, JRD decided to anoint Mody as his successor, he blew it by crowing about JRD's intentions in a newspaper interview. Then in 1991, in a move remarkably devoid of finesse, he tried to install his protege, companion and legal heir Aditya Kashyap as Tisco's No 2, superceding Jamshed Irani. Mody was forced to eat humble pie over that; and Ratan Tata introduced the rule that managing directors should retire at 65, and chairmen at 75. The policy appeared primarily aimed at getting rid of Mody and Darbari Seth, both of whom had been working for the Tatas since before Ratan was born. Mody refused to fall in line, and was sacked, just a month before he was supposed to go under the new rule.

Within a year, Seth too was gone, though the wily Punjabi apparently worked out a deal so that his son Manu Seth took over as MD of Tata Chemicals. Says a stock broker cum financial analyst: "For the public, Ratan was in the process of consolidating his group companies. But senior dons of the Tata empire realised that it was all an euphemism for consolidating his own position within the Tata empire." Interestingly, none of the people Outlook spoke to, whether former or current Tata employees, financial analysts or other businessmen, would come on record with any remark that could be construed as anti-Tata. Possibly because of the Rs 34,000-crore group turnover.

Then in 1994, Tata's other seeming insecurity—that Tata Sons' stakes were too low in group companies—bobbed up into public view when a business fortnightly quoted him as saying that Tata Steel was under a takeover threat from an NRI. With business circles furiously speculating about the identity of the NRI—Swraj Paul? the Hindujas? Laxmi Mittal?—Tata denied that he had ever said anything like that.

AS if on cue, group companies like Tata Steel, Telco, Tata Electric Companies, and Indian Hotels raised funds from GDR issues during 1994-95 and 1995-96 which brought down the promoters' stake even further. To augment the promoters' shareholding, all companies issued preferential warrants to group companies. Since Tata Sons is the promoter of most group companies (see box), Ratan Tata's priority was to increase Tata Sons' stake in these companies, maybe even to 26 per cent—the minimum required to block key board resolutions. Group companies subscribed to the Tata Sons' rights issue, at a premium of Rs 125,000, and this money was used to up Tata stakes in group companies themselves.

Ajit Kerkar called his last Bombay House board meeting to order and spoke for about 15 minutes. He spoke about his years with the Taj, he spoke about his commitment to the Tata group, he spoke about the last six days. On August 26, Tata had written to him, asking him to renounce his chairmanship and be instead non-executive vice-chairman. When he refused point blank, Palkhivala informed the media that the Tata group believed Kerkar to be guilty of FERA violations and were sending the relevant papers to the RBI, an unprecedented case in Indian corporate history of     promoters going to the authorities about their own CEO. Kerkar refuted the other charges that the group had made against him, speaking with sadness rather than anger. And then he pro -posed Ratan Tata's name as chairman, a hapless Palkhivala seconded, and Kerkar stood up from the chairman's chair and sat Tata there, just as JRD Tata had done eight years ago, asking Kerkar to take JRD's seat.

The full flowering of Ratan Tata's alleged insecurities, and the beginning of the end for Ajit Kerkar, the last of the powerful JRD-era satraps still around, came with the Tata Brand Royalty Scheme, feel observers. The scheme called for Tata companies to contribute 5 per cent of their profit before tax to Tata Sons towards the creation of a central corpus fund for the promotion of a strong, common Tata brand. The hue and cry was immediate. Wrote columnist Swaminathan Anklesaria Aiyar: "So many Tata branded products have flopped that the Tata brand is by no means a winner. The group's textile mills have fallen sick and closed; Tata Oil fell sick and was sold to Hindustan Lever, Lakme was sold before it suffered a similar fate. Titan Watches and Indian Hotels have prospered but neither carry the Tata name... Tisco and Telco have created the Tata reputation and cynics will say they should demand money from Ratan Tata for giving his name such prestige and not the other way around."

SURE enough, Kerkar refused to contribute to the scheme. The Taj chain had never used the Tata name and owed nothing to it, especially since the Tatas had contributed hardly any funds in the last 37 years, as Kerkar took a one-hotel badly-run company to the country's premier hotelier status. One of the biggest individual shareholders of Kerkar's Indian Hotels, N. Asher, commented last November: "I hold a large number of shares in Indian Hotels. Any payment made by the company for questionable returns substantially affects my income.  I am totally opposed to subscribing to this scheme, which in my opinion is based on registration of a brand name or logo wrongly granted, and needs to be cancelled. It will only tighten the grip of Tata Sons over Indian Hotels at our expense."

The scheme also raised questions about whether the Tata group was prioritising promoters' interests over shareholders. "Hardly any Indian promoter has understood that when he raises money from the public, he becomes a partner of the other shareholders, and it is unethical—in the West, totally illegal—to look after his own interest to the detriment of his partners," says an equity analyst. "Sadly, the Tatas, despite their holier-than-thou image have not proved any different in the last few years."

Kerkar, say Tata insiders, was an extremely corrupt man, and had amassed immense wealth at the expense of Indian Hotels. "He took a cut on every Taj purchase, even if it was just toothpicks," whispers a Bombay House loyalist. But the Tatas have not produced any evidence of that. And FERA violations, that Kerkar parked $6.4 million as security deposits paid by two airlines abroad. Kerkar maintains that the Indian Hotels board was well aware of the fact, and the RBI has condoned the lapse. It even seems plausible now that Ratan Tata not only knew about the foreign exchange deposits secured by Indian Hotels, but even helped negotiate the reduction of the deposit on behalf of Singapore Airlines from $5.6 million to $4.9 million. "Besides," asks a mutual fund CEO, "the majority of Indian Hotels board members are pro-Ratan Tata. What were they doing when Kerkar was supposedly plundering the hotel for his personal gains?"

The other charge against Kerkar is that Cox & Kings, the travel agency in which he holds an 11 per cent stake and which is run by his son Peter, has been granted many favours by Indian Hotels, which shows a clear conflict of interest between Kerkar the Tata employee and Kerkar the entrepreneur. In reply, Kerkar loyalists produce a 1989 cover story done by Business India on Kerkar succeeding JRD as the Indian Hotels chairman. It has JRD referring to the two Kerkar companies—Cox & Kings and public relations firm Good Relations—as associate companies of the Tata group. The episode is an ironic reversal of Nani Palkhivala claiming that ACC is not a Tata group company, but a company associated with the Tatas, and Ratan Tata accepting that. So no 75-year rule, no brand royalties, though the first brand royalty proposal had clearly listed ACC as a Tata company.

Besides, points out a senior FII executive, if Kerkar is in the wrong with Cox & Kings, what about some Tata deals? What about, say, Tata Ceramics? Some years ago, Tomco had guaranteed a loan of Rs 30-40 crore to the newly-set up Tata Ceramics Ltd, a company that is today sick and the Tatas are desperate to sell off. When Tomco was sold to Hindustan Lever, Tomco's guarantee was transferred to Tata Electric Companies. "Why should TEC shareholders agree to guarantee Rs 30-40 crore loan to a company that appears to have no future at all?" Bombay House did not furnish any information on the Tata Ceramics episode to Outlook.

More recently, Tisco sold its second-hand, coal-based 62.5 MW power plant in Jojobera (Bihar) to TEC for Rs 300 crore at a rate of Rs 4.8 crore per MW, which is far higher than the industry norm of Rs 3.5-Rs 4 crore per MW for a brand new power plant. Financial institutions have raised questions about Tisco's valuation of the power plant. "The whole exercise of Tata Power floating the Rs 100-crore preferential issue along with Rs 200-crore bond issue to Tisco basically amounts to Tisco itself financing the purchase of its own power plant by TEC," said an institutional source.

As Kerkar's last Bombay House board meeting came to a close, director F.A. Soonawala suddenly remembered that the Tatas' contention was that since Kerkar's term as MD had come to an end the day before, he was no longer a member of the board, definitely not chairman, so his proposing Tata as chairman was invalid.

Shouldn't Tata, instead of hounding out dissenters, asks a mutual fund executive, concentrate on business, on raising shareholder value? Even today, the 20 companies Tata has established under the Tata Industries umbrella—Tata Honeywell, Tata Telecom, Hitech Drilling, Tata Keltron and so on—tot up a combined turnover of less than Rs 1,000 crore. Voltas, once a blue chip, is nearly moribund. Tata has lost control of his Mercedes-Benz venture to the German partner, and the IBM joint venture to Big Blue, which has set up a new company, where the Tatas hold only a 20 per cent stake, which will handle the cream of the business, leaving Tata IBM, the 50:50 joint venture with a much smaller slice of the pie.

Take a gander at stockmarket performances. Outlook calculated the total returns on each of the 47 Tata companies and those on all the 30 Sensex scrips over the six years of Ratan Tata's reign. The total return has been calculated by adjusting all the gains to investors by factoring in dividends, bonus and rights issues of shares, as also the capital appreciation during the period. We then took the average of all the companies.

THE results: while the Sensex yielded returns of 456 per cent, the average Tata shareholder got 170 per cent. In each of the last six years, the returns to the Tata shareholders have been less than those of the Sensex (see chart). Within the Tata group, the best performer was—take a guess —Indian Hotels, generating total returns of 1,805 per cent. And the second-best performer: Indian Hotels' first cousin Oriental Hotels (790 per cent). Among the worst performers are Tata Steel (43 per cent) and associate company ACC (50 per cent).

The other thing that has surprised business circles is the harshness of the action against Kerkar. What did Kerkar do so wrong that he was not allowed any sort of honourable exit? The only proposal that was sent to him was that Tata become chairman of Indian Hotels and Kerkar take a demotion to vice-chairman! As managing director, he has been replaced by R. Krishna Kumar, till now running Tata Tea, who would definitely need some time to get a hang of a highly specialised business like hotels. Now, Bombay House is pressuring all companies that Indian Hotels had set up, and in all of which it holds small stakes, to remove Kerkar from their boards.

Could it be that the Tatas suspected that Kerkar was building up stakes in the various hotel companies and would finally take them away from the Tatas? But how would Kerkar generate so much money? On June 24, at the end of an Indian Hotels board meeting, Ratan Tata is reported to have hugged Kerkar and said that the latter would be with the group for another 10 years, till he turned 75. What happened? And could Kerkar conceivably do anything that can totally negate, in the eyes of Bombay House mandarins, all his achievements and contributions?

The point that Soonawala had raised, it was decided, was valid. So Soonawala proposed Tata as chairman again, with Tata already in the chairman's chair, and the motion was carried unanimously. Thus ended the Tata career of India's greatest hotelier.