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Home , Cyrus Mistry, Tata Motors, Tata Steel

Vol-1, Issue-2 Amity Journal of Strategic Management May 2018

Corporate Governance and Leadership- A Case of and TATA

B. S. Hothi, Professor and Head, Gitarattan International Business School, , Mamta Shah, Assistant Professor, GNIM, New Delhi, India

Abstract India hasn’t had a great reputation with regard to corporate governance. Nevertheless, it has been ranked higher than some other Asian countries such as , China, the Philippines and Indonesia by Asian Corporate Governance Association. But recent cases of Tata and Infosys, the companies which were popular for their high reputation for governance, now lie in tatters. The corporate battle of big business houses in India have triggered the need for transparency and safeguarding that interest of minority shareholders. There is a need for regulators to come out with regulations after considering market participants opinion on overhauling of the way listed firms carry out their duties. It is very fateful that companies which have image of good governance are in a leadership tussle. Both of them known for their ethical values and their leaders for their strong decision making are in media.

Key Words: Corporate Governance, Regulations, Audit, Disclosure, Crisis, Company Law Tribunal, Standards.

JEL Classification: H83, G34, G38.

Introduction The and Infosys Ltd, which were spotless examples of corporate governance in the past, have had ill-famed image in public due to recent issues. The high-profile board room battle of big two corporate in India have triggered the need for transparency and ensuring that interest of minority shareholders is safeguarded. There is a need for regulators to come out with regulations after considering market participants opinion on overhauling of the way listed firms discharge their duties. The case of TATA is of questioning or reversing the decisions of the erstwhile chairman who continues to be as the controller of the shareholding trusts, and lack of clear board processes to address the issues reasonably and transparently. There doesn’t seem to have been an agreed formula at the board level for addressing situations that would involve reversal of decisions or even changing decision criteria between economic and social. In the Infosys case, the so- called founder believes that the established values were not followed in certain significant decisions.

About the Company The case is about two leading groups TATA and Infosys in India. Infosys established in 1981, Infosys is a NYSE listed global consulting and IT services company with more than 200,000 employees. it is started with a capital of US$ 250, and now grown to become a US$ 10.9 billion (FY 18 revenues) company with a market capitalization of approximately US$ 39 billion. Infosys was co-founded in 1981 by CEO Narayan Murthy, Nandan Nilekani, N. S. Raghavan, S. Gopalakrishnan, S. D. Shibulal, K. Dinesh and Ashok Arora all of whom were former emplyees of Patni Computer Systems. They started off as Infosys Consultants Pvt Ltd. in , . TATA is founded by in 1868; the Tata group is a global enterprise, headquartered in India, comprising over 100 independent operating companies. The group operates in more than 100 countries across six continents, with a mission 'To improve the quality of life of the communities we serve globally, through long-term stakeholder value creation based on Leadership with Trust'. Each Tata company or enterprise operates independently under the guidance and supervision of its own board of directors and shareholders. There are 29 publicly-listed Tata enterprises with a combined market capitalisation of about $130.13 billion (as on March 31, 2017). Tata companies with significant scale include Tata , , Tata Consultancy Services, , , Tata Global Beverages, , Titan, and Indian Hotels. Many Tata companies have achieved global leadership in their businesses. For instance, Tata Communications is #1 international wholesale voice provider and Tata Motors is among the top ten commercial vehicle manufacturers in the world. is among the top fifteen best steelmakers and TCS is the second largest IT services company in the world by market cap and profit. Tata Global Beverages is the second-largest tea company in the world and Tata Chemicals is the world’s second-largest manufacturer of soda ash. Employing a diverse workforce in their operations, Tata companies have made significant local investments in different geographies.

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Background of the Case Infosys: The company has struggled in finding strong leadership for nearly a decade now, and its board will do well to bring about a quick resolution to the current crisis Infosys, which is considered as one of the top IT firm situated in Bengaluru, founded in 1981 With Me. Narayan Murthy and Seven Engineers, pooled $250, which is mostly borrowed from their wives. Now the things has changed due to escalating public war of words with its founder and former executive, which has accused them for lapse of corporate governance in their company board.

Tata: It was 24th October 2016, when, - boardroom battle was started. It was a big shock to the entire corporate and others, when Tata in a surprise and unexpected move, dismissed Mistry as the chairman of . Cyrus Mistry was appointed as the chairman of the Tata group holding company in December 2012. Ever since the ouster, the Tatas and the Mistrys of the closely held have been cut and thrust in the public. While the Tatas have said Mistry was expeled, as the board of the company lost its confidence in him, Mistry has maintained that the Tatas were afraid of his clean-up drive which resulted in his dismissal. Mistry has also raised various corporate governance issues in the Tata Group since his expulsion. The Tatas also called up extraordinary general meetings of the shareholders of the listed group companies to expel Mistry from their boards. However, Mistry himself resigned from the boards after TCS and Tata Steel shareholders voted him out. However, a day after resigning from the boards of six listed Tata firms, he took the legal route by filing a suit in the National Company Law Tribunal against Tata Sons.

Impact of the problem What happened in Infosys-? The main issues of the problems are as below:  Mr. Narayan Murthy’s who own 12.75% of the firm, have questioned the pay of chief executive Vishal Sikka and severance payouts given to others, including former finance head Rajiv Bansal.  The founders have also questioned the appointment of an independent Sikka, a former member of the executive board at German software firm SAP, took the top job at Infosys in 2014, becoming its first non-founder CEO.  The board has backed Sikka, and has brushed aside concerns over CEO compensation, appointment of independent directors and severance pay relating to former employees, saying those were old issues and that full disclosures had been made.  Infosys’s main issue lies an unusually high severance payment made to former chief financial officer Rajiv Bansal. While it’s fair to question N.R. Narayana Murthy’s wisdom in going to the press, especially with insinuations the payment may include “hush money”, it’s also naive to brush the issue under the carpet.  The payment amount of Bansal’s pay is amounted to . 24 month of salary. Even security and Exchange board of India consider that the amount is excessive. The above clash and several other reasons include an unfavorable climate and potentially damaging moves on US immigration. US President Donald Trump Policy, which was associated to H-1B visas that are key to serving American customers are the key reasons which hurting the brand image of the company.

Infosy’s audit committee commissioned Cyril Amarchand Mangaldas to investigate certain allegations about the payment. The law firm found that the severance pay was “not with the intention of silencing him from disclosing any impropriety”.

Impact It was observed by many former associates of Infosys that company may have been known for good corporate governance standards in the past, but it was also because of poor standards elsewhere. Under Murthy’s watch as executive chairman, the company followed poor disclosure standards when it came to a significant profit warning that sent its stock down by over 8%. Similarly, a number of analysts and industry experts had raised eyebrows when Murthy decided to bring his son along when he was appointed executive chairman in 2013. So, while the corporate governance watch by the founders is generally welcome, they must realize going over the top comes across as extremely hypocritical. In like manner, the company’s former CFOs who are demanding that the company returns a larger proportion of cash back to shareholders seem to have forgotten that Infosys has had a long history of holding on to hoards of cash, even under their watch. Finally, those who defend Sikka point to the improvement in the company’s performance since he joined as chief executive officer in 2014. Some investors and analysts point out to this as well, also

68 suggesting that the new CEO must be given room to function freely and not bogged down by needless accusations. But being given freedom to function shouldn’t be used as a sanction for transactions that raise red flags. .Besides, it’s not like Sikka has had an outstanding run as CEO. He’s certainly done better than the previous CEO, but that’s not saying much. As the chart at the top shows, Infosys shares are only marginally better off since Sikka’s appointment was announced, especially when seen in the backdrop of enormous erosion in value (relative to peers) post the financial crisis. Clearly, not all stakeholders are enamored by the new CEO. There’s still a long way to go. If Sikka and his well-wishers want the journey ahead to be smooth, they have a major role to play in it as well, especially with regards to good corporate governance standards.

In order to establish good corporate governance standards, Infosys had to ignore all this internal disputes and redundant issues for the better future of the company.

Impact of the problem: What happened in TATA ? Ratan Tata, who in his position as chairman of the Tata Trusts—which control Tata Sons with a 66.5% shareholding— orchestrated Mistry’s exit, may have miscalculated when he expected the latter to go quietly Tata Sons’s and his interests are best served by getting Mistry to resign as chairman (or having him fired) of the various Tata operating firms, removing him from the boards of these, and, perhaps, buying out his and his family’s 18.4% stake in Tata Sons (roughly valued at around $16 billion by Bloomberg Gadfly columnist Andy Mukherjee).

The turnaround- Mistry’s interests aren’t as easy to fathom. He is angry—anyone would be, after a public firing—but surely, he can’t expect either an apology or a reinstatement. The various issues related to battle were:

1. Electrol Funding: Electoral funding, a hot button topic for any large business group, was one of the earliest issues that saw Ratan Tata express his dissatisfaction over Mistry and his team. A close Mistry advisor had proposed Rs 10 crore funding for assembly elections in middle-2014. The logic given was that Tatas had big iron ore deposits in the state. But Ratan Tata’s nominees in the Tata Sons board argued against the idea, citing the long practice of Tatas only contributing to parliamentary polls, and that too through a trust. The proposal didn’t pass. But Ratan Tata, a board member said, was unhappy that such a proposal was even mooted. And Mistry, he said, was informed that such plans were not in consonance with the group’s reputation.

2. Bids for Contract: It was sais that Ratan Tata was “dismayed” when the Tata group made two bids for a prestigious army contract earlier this year — the Rs 60,000 crore contract for 2,600 Future Infantry Combat Vehicles. Tata Power Strategic Equipment Division (SED), in a with Titagarh Wagons, and Tata Motors in a JV with , made two separate bids. Tata had suggested through interlocutors that Tata Motors, which has the expertise, should combine with SED. He also felt Mistry should lean on the two entities to resolve any differences. Mistry’s aides, however, believe that such suggestions amounted to “interference”. Cyrus respects the independence of each group company board and shareholders and would not do something to favour one over other”.

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3. Spinning the minutes: The disputes over the Tata-Welspun deal was centered around a little-known fight over fine print. Ratan Tata’s argument was that Cyrus Mistry’s refusal to bring the Tata Power-Welspun deal before the Tata Sons board amounted to a breach of the articles of association, because the deal size was large enough to merit the holding company’s approval. The Tata Power’s board meeting on the deal saw Tata Sons representatives arguing that “the fact of a breach of the articles of association” should be put on record. Mistry reportedly said the word “breach” has legal connotations and could not be used. Ratan Tata was consulted by Tata Sons’ representatives and “breach” was substituted with “not in accordance with”.

4. Fast Food Tie up: A proposal for a fast food tie-up really spiced up the Tata-Mistry battle. Tata Sons board was presented with a proposal of a tie-up with US pizza chain Little Caesars. There is a information that Rattan Tats felt, there were other Tata entities which could deal with this kind of stuff. He felt this was just pulling down the image of the group. However, Mistry’s views that Tatas tied up with a coffee chain (Starbucks), there was nothing wrong with this idea. His statement on this issue was “During our strategy discussion with the Tata Sons Board in June 2016, it was proposed we explore QSR (quick service restaurants) as a possible growth opportunity. This was done considering our success with Starbucks… As we were approached by a major player in the US to partner in a venture, we took the Board’s permission only to explore this

5. NANO issue- There were other factors related to address workers regarding project and Tata- Docomo dispute. The board member said Tata had to intervene after some of Japan Inc’s biggest names complained to him that this issue was not going down well in Japan. All the above issues added up to a “worrying picture” and that Ratan Tata also felt discomfited by Mistry’s approach to widely different subjects.

Road ahead- Boardroom turmoil is often a result of miscommunication and ineffective leadership. The various issues of both the reputed companies of India creating a unpleasant picture of India in the outside world. These types of issues must be solved internally so that it should not harm the image of India’s corporate outside world and also create poor corporate governance. It is important in the Indian context to realize that the owner or his representative has to stay in the company for things to work. His or her skin in the game matters. It provides the necessary urgency, impetus to decision- making. Ratan Tata and Narayana Murthy are important promoters who could be refusing to let go of their control and trying to backseat manage even after their retirement. Both see it as their right to interfere, make comments, and direct the way the business should be done.

References- 1. economictimes.indiatimes.com › News › Company › Corporate Trends 2. www.livemint.com › Companies › Management 3. www.forbesindia.com › Special Report › Battle at 4. www.business-standard.com › Companies › Infosys vs founders 5. www.hindustantimes.com/.../narayana-murthy-infosys...sikka.../story-0E3qBIxZCLbF. 6. timesofindia.indiatimes.com › Business › India Business New 7. www.tata.com/aboutus/sub_index/Leadership-with-trust 8. https://www.infosys.com/about/

Annexure Infosys last five Year Results

MAR'17 MAR'16 MAR'15 MAR'14 MAR'13 Parameters (₹ Cr.) (₹ Cr.) (₹ Cr.) (₹ Cr.) (₹ Cr.) Operational & Financial Ratios: Earnings Per Share (Rs) 60.18 55.28 105.96 178.22 158.82 DPS(Rs) 25.75 24.25 59.50 63.00 42.00 Book NAV/Share(Rs) 295.72 266.00 418.69 735.87 628.21 Margin Ratios: Yield on Advances 0.00 0.00 0.00 0.00 0.00

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Yield on Investments 0.00 0.00 0.00 0.00 0.00 Cost of Liabilities 0.00 0.00 0.00 0.00 0.00 NIM 0.00 0.00 0.00 0.00 0.00 Interest Spread 0.00 0.00 0.00 0.00 0.00 Performance Ratios: ROA(%) 18.20 18.99 21.42 21.50 23.29 ROE(%) 21.43 23.26 26.98 26.09 27.70 ROCE(%) 29.34 32.25 37.28 35.85 37.56 Efficiency Ratios: Cost Income Ratio 0.00 0.00 0.00 0.00 0.00 Core Cost Income Ratio 0.00 0.00 0.00 0.00 0.00 Operating Costs to Assets 0.00 0.00 0.00 0.00 0.00 Capitalisation Ratios: Tier 1 ratio 0.00 0.00 0.00 0.00 0.00 Tier 2 ratio 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Valuation Parameters: PER(x) 16.96 22.03 10.46 4.60 4.55 PCE(x) 15.47 20.25 19.46 16.60 16.47 Price / Book(x) 3.45 4.58 5.29 4.46 4.60 Yield(%) 2.52 1.99 2.68 1.92 1.45 EV / Net Sales(x) 3.63 4.64 4.79 3.69 3.96 EV / Core EBITDA(x) 10.62 13.38 13.10 10.82 10.99 EV / EBIT(x) 11.36 14.23 13.49 11.67 11.77 EV / CE(x) 2.71 3.46 3.69 3.13 3.41 M Cap / Sales 3.95 5.18 5.38 4.23 4.51 Growth Ratio: Core Operating Income Growth 0.00 -100.00 33.33 100.00 50.00 Operating Profit Growth 8.30 8.14 14.55 14.18 11.28 Net Profit Growth 8.86 4.35 19.33 11.83 7.63 BVPS Growth 11.17 -36.47 -43.10 17.14 21.18 Advances Growth 0.00 0.00 0.00 0.00 0.00 EPS Growth(%) 8.86 -47.83 -40.55 12.22 7.63 Liquidity Ratios: Loans / Deposits(x) 0.00 0.00 0.00 0.00 0.00 Total Debt / Equity(x) 0.00 0.00 0.00 0.00 0.00 Current Ratio(x) 0.00 0.00 0.00 0.00 0.00 Quick Ratio(x) 0.00 0.00 0.00 0.00 0.00 Total Debt / Mcap(x) 0.00 0.00 0.00 0.00 0.00 Net NPA in Rs. Million 0.00 0.00 0.00 0.00 0.00

TATA Last five year results MAR'17 MAR'16 MAR'15 MAR'14 MAR'13 (₹ Cr.) (₹ Cr.) (₹ Cr.) (₹ Cr.) (₹ Cr.) Parameters EQUITY AND LIABILITIES

Share Capital 679.22 679.18 643.78 643.78 638.07

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Share Warrants & Outstandings

Shareholder's Funds 20,809.15 23,262.11 14,862.59 19,176.65 19,134.84 Long-Term Borrowings 0.00 0.00 0.00 0.00 0.00 Secured Loans 1,461.17 1,213.77 1,203.36 2,505.37 2,397.97 Unsecured Loans 12,224.92 9,386.19 11,115.60 7,241.08 5,653.81 Deferred Tax Assets / Liabilities 97.95 71.39 0.00 43.11 1,963.91 Other Long Term Liabilities 1,444.90 3,289.91 286.80 1,155.48 1,238.44 Long Term Trade Payables 0.00 0.00 0.00 0.00 0.00 Long Term Provisions 850.71 750.89 2,104.19 815.20 691.19 Total Non-Current Liabilities 16,079.65 14,712.15 14,709.95 11,760.24 11,945.32 Trade Payables 11,394.50 9,028.45 8,852.65 9,672.36 8,455.02 Current Liabilities

Other Current Liabilities 4,329.16 5,489.03 3,142.88 2,463.18 4,923.10 Short Term Borrowings 5,375.52 3,654.72 7,762.01 4,769.08 6,216.91 Short Term Provisions 548.62 529.54 613.09 1,892.91 1,509.58 Total Current Liabilities 21,647.80 18,701.74 20,370.63 18,797.53 21,104.61 Total Liabilities 58,536.60 56,676.00 49,943.17 49,734.42 52,184.77 Non-Current Assets 0.00 0.00 0.00 0.00 0.00 ASSETS

Gross Block 38,776.77 39,305.42 31,814.21 28,791.45 27,067.18 Less: Accumulated Depreciation 18,539.22 18,229.61 16,030.98 13,550.88 11,611.44 Less: Impairment of Assets 0.00 0.00 0.00 0.00 0.00 Net Block 20,237.55 21,075.81 15,783.23 15,240.57 15,455.74 Lease Adjustment A/c 0.00 0.00 0.00 0.00 0.00 Capital Work in Progress 1,870.93 1,557.95 1,349.95 1,716.85 1,507.84 Intangible assets under development 5,366.03 4,128.58 4,690.84 4,638.22 3,244.96 Pre-operative Expenses pending 0.00 0.00 0.00 0.00 0.00 Assets in transit 0.00 0.00 0.00 0.00 0.00 Non Current Investments 15,307.24 15,217.48 16,966.95 18,357.57 18,171.71 Long Term Loans & Advances 1,673.03 1,506.03 1,275.88 2,072.96 2,880.70 Other Non Current Assets 1,493.76 1,328.46 1,303.35 969.19 788.86 Total Non-Current Assets 45,948.54 44,814.31 41,370.20 42,995.36 42,049.81 Total Reserves 20,129.93 22,582.93 14,218.81 18,532.87 18,496.77 Current Assets Loans & Advances

Currents Investments 2,400.92 1,745.84 20.22 100.85 1,762.68 Inventories 5,504.42 5,117.92 4,802.08 3,862.53 4,455.03 Cash and Bank 286.06 788.42 944.75 226.15 462.86 Other Current Assets 1,671.69 1,514.94 1,072.30 996.56 1,277.50 Short Term Loans and Advances 596.97 648.99 619.14 336.27 358.85 Total Current Assets 12,588.06 11,861.69 8,572.97 6,739.06 10,134.96 Net Current Assets (Including Current Investments) -9,059.74 -6,840.05 -11,797.66 -12,058.47 -10,969.65 Total Current Assets Excluding Current Investments 10,187.14 10,115.85 8,552.75 6,638.21 8,372.28 Miscellaneous Expenses not written off 0.00 0.00 0.00 0.00 0.00 Total Assets 58,536.60 56,676.00 49,943.17 49,734.42 52,184.77 Contingent Liabilities 4,726.70 5,043.12 10,702.57 13,716.27 15,433.64 Total Debt 19,573.98 16,473.34 21,134.41 15,052.80 16,798.95 Book Value (in ₹) 61.28 0.00 46.11 59.51 59.91 Adjusted Book Value (in ₹) 61.28 0.00 45.62 58.88 59.91

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