The Man Who Won't Play His Aces

BEHIND all the power and prestige of the country's premier industrial group is one company: Tata Sons Ltd. It is this principal holding company that has floated most of the large and profitable Tata companies. A sample: Indian Hotels Company, Tisco, the Tata Power Companies, Tata Chemicals, Telco, and Tata Tea. These companies are supremely important for the group. Reason: not only do they tot up a large chunk of the group's sales and are among the leaders in their businesses, they also generate most of the profits.

Responding to group founder Jamshetji Tata's vision of the Tata Group being a trustee of national assets of India, the holdings of the Tata family were donated some generations ago to Tata trusts, which between them held about 80 per cent of the Tata Sons equity. Of the rest, almost 18 per cent of the equity capital was held by Pallonji Shapoorji Mistry from 1965 to 1995, with the remainder 2 per cent by the Tata family.

Two years ago, finding himself managing the Tata Group with an apology of a controlling stake, Ratan got Tata Sons to float a Rs 300-crore, 1:5 rights issue of shares. The various trusts renounced their rights in favour of group companies and some individuals. The issue was priced at Rs 1 lakh for each Rs 1,000 paid-up share, with an additional Rs 25,000 as redemption premium for each share, bringing the issue price at Rs 1.25 lakh. In a circular movement of money, the issue was picked up by Telco, Tata Chemicals, Tata Power, Indian Hotels and a host of finance companies, many of them subsidiaries of large Tata companies. Apart from the companies, Ratan picked up 50 shares, Fredie Mehta four, and Homi Sethna one share.

As a result, the stake of the trusts fell to 65.88 per cent, while the stake of the group companies rose to 12.74 per cent. Mistry, who, despite pressures didn't renounce his rights, saw his stake rise marginally to 18.37 per cent. The post-issue stake of Ratan and the Tata family reached 3.01 per cent.

In addition to the rights issue, Tata Sons has also issued non-convertible debentures worth Rs 108 crore, and had secured long-term loans and overdrafts worth Rs 73 crore from a consortium of six foreign banks. This was to finance the shoring up of its stake in the group companies—a move that was seriously questioned by RBI officials. During 1994 and 1996, Tata Sons needed to raise about Rs 700 crore out of which Rs 550 crore was required for the exercise of warrants of Tata Steel issued under the preferential allotment scheme in 1994.

Increasing the stake in the group companies was important because it had been coming under the microscope of much aware investors. For instance, investors were questioning why the Tatas were running Tisco with a mere 8 per cent stake, half of which was through group companies. With this circular investment route, the Tata stake has gone up to 15 per cent in Tisco and close to 20 per cent in Telco.

Since the trusts have no voting powers, it is the Mistry family who controls Tata Sons—and, therefore, the Tata Group. If mathematics of control was the only criteria, then for all practical purposes, the Tata Group could well be renamed the Mistry Group. Thankfully for Ratan Tata, Mistry—the new chairman of ACC—is a low-profile, non-controversial construction magnate, who, as far as Tata Sons is concerned, has till now seen himself as an investor and not a manager, and is clearly not interested in taking charge. Besides, he is also the father-in-law of Ratan's stepbrother Noel.