The Tata Trusts turning into a hotbed of corporate intrigue may have been farthest from the mind of the founder who set up the model of the charitable trusts holding the stakes in the group companies through the vehicle of Tata Sons.
These trusts have become unrecognisable from the days when they represented the best of corporate philanthropy and charity.
Some of the public institutions that make the country proud even to this day, like the Tata Institute of Social Sciences (TISS), Tata Institute of Fundamental Research (TIFR), Tata Memorial Centre (TMC), National Centre for Performing Arts (NCPA) and Indian Institute of Science (IISc), owe their creation to these trusts.
There is little in terms of historic evidence—at least in the public domain—that the first two generations of the Tatas, who set up the trusts, did it with the objective of achieving corporate control through this structure.
It was a farsighted gesture of making a permanent arrangement that the profits of the business ventures would be used only for charity rather than benefiting a particular family.
For a long time, the trusts did not enjoy voting rights on the shares vested in them. It was to be exercised by a government official, called the public trustee. However, at the turn of the millennium, the persistence of the business community seeking a change in the company law to allow voting rights, succeeded.
After this, the mandarins at Bombay House laboured hard and reworked the relationship between the Tata Trusts and Tata Sons.
The chaotic consequences of the changes made to transform the trusts into a vehicle to viscerally control the Tata empire and investing the (chairman) trustees as the high command of control, came into public view when Cyrus Mistry was unceremoniously dumped as the chairman of Tata Sons on 24 October 2016, midway in his tenure that had been earlier approved by the board of the company.
He addressed a letter, dated 5 December 2016, to the shareholders of the listed entities from where he was sought to be removed as the chairman, shining a light on the goings-on in the bowels of Bombay House.
Some portions are excerpted to show the way the trust structure was being (ab)used to assert control at the level of one individual.
“The governance of Tata Trusts is even more sacrosanct. The very future of the Tata group lies in how the trustees govern Tata Trusts, since the main trust property is the holding of shares in Tata Sons. Trustees are required to discharge their fiduciary duties by applying their minds to matters before them, questioning, testing, debating, checking and balancing. The conferment of all decision making power in one man or a ‘high command’ among them is unethical, improper and a breach of trust.”
The appointment of Mr Mistry as the chairman of Tata Sons heralded the first-ever non-Tata family member in that seat. The previous occupants of the post were Jamsetji Tata, Sir Dorab Tata, Nowroji Saklatwala, JRD Tata and Ratan Tata.
However, the Articles 86, 104B, 121 and 121A introduced after the appointment of Mr Mistry as the chairman of Tata Sons in the articles of association (AoA) of the company made the chairman of Tata Trusts a ‘suthradhar’ with the puppet strings firmly in his palms.
Ratan Tata, 78, former chairman, Tata Sons and NA Soonawala, 81, former vice-chairman of Tata Sons, in their capacity as trustees of Tata Trusts, took the veto rights of the trustee-nominated directors as their entitlement to dictate to these directors how Tata Sons should conduct itself. They interpreted the AoA to mean that they could call for information and seek discussions on any subject they considered material.
The chairman of the trusts could overstep the NRC (nomination and remuneration committee) and the board of Tata Sons to induct additional directors who would ultimately do his bidding to vote out Mr Mistry.
Just two months before this board meeting, three new directors had been inducted into the Tata Sons board, two of them, at the personal request of Ratan Tata in his capacity as shareholder of Tata Sons. This undermined the role of the nomination and remuneration committee (NRC) of Tata Sons.
“…These three directors, who had attended but one other board meeting, voted their judgement on my four-year tenure to replace me with Mr. Ratan Tata. At the board meeting, one of them said to me that the illegal replacement (illegal, because it was contrary to law and the Articles of Association) had been blessed by opinions of retired Supreme Court judges and senior counsel. I was promised copies. Till date, none have materialised.”
These trusts did not invest any funds of their own to acquire the shares. It was a gift to serve the general public cause. The trusts cannot seek to control the company whose shares are vested in it, unlike a financial investor who puts in money for personal profit.
This differentiation even eluded the Supreme Court, that applied the logic of the global investment practices where an investor gets affirmative rights, to the charitable trusts.
“19.25 Affirmative voting rights for the nominees of institutions which hold majority of shares in companies have always been accepted as a global norm. As a matter of fact, the affirmative voting rights conferred by Article 121 of the Articles of Association, confers only a limited right upon the directors appointed by the trusts under Article 104B. Article 121 speaks only about the manner in which matters before any meeting of the board shall be decided. If it is a general meeting of Tata Sons, the representatives of the two trusts will actually have a greater say as the trusts have 66% of shares in Tata Sons.”
On the contrary, the global examples that should have been considered are the well-known foundations set up by businessmen dedicating their personal wealth for charity.
Ford Foundation was created in 1936, when the founder gave away the shares in Ford Motor Company to serve public causes. The shares were sold over time and the corpus grew.
No member of the Ford family has been associated with this Foundation for many years now. The activities of the charity do enhance the brand of Ford. However, there exists no mutual interest.
Similar is the case of the Wellcome Foundation, also set up in 1936, by Sir Henry Wellcome, the promoter of Burroughs Wellcome, a pharma giant, that later merged into GSK.
The corpus of the shares gifted has grown over the years to a sizeable amount and the Foundation is a major funding source for pharmaceutical research.
There is no connection with the founding family and the trust is managed exactly like any large public corporation in that country.
It is difficult to find a parallel to the current Tata model in the global context, a charity controlling a big business asset.
The litmus test as to whether a charity is duly fulfilling its charter is to look at the percentage of the assets it spends.
The assets of Tata Trusts constitute the second biggest globally! How much this is in the public consciousness is moot, as no information in the public domain mentions this.
But its annual outlay is abysmally low in comparison to its peers.
Managing the assets to maximise the income appears to be more critical a function in the global charities, even as compared to the deployment of the cash.
As a sample, Wellcome Trust’s asset management strategy exhibited in its latest annual report, is shown below.
Their asset management competence beats the professional fund managers, hands down!
Historically, the Tata Trusts may cite the restrictions under the Income Tax Act and the unlisted status of Tata Sons as reasons for its poor show on investment management.
There was never any restriction to list Tata Sons and monetise the value. On the contrary, the trustees have been bargaining to avoid a listing!
Another graph shows why the trusts are in this deprived state on annual cash-flows. The full benefit of the dividends that Tata Sons receives from the group companies is not passed on. This working, for simplicity, considers only a single source, dividends received from TCS.
The green bar represents what the trusts would get if Tata Sons fully redistributed the dividends from TCS. Brown represents the actual dividend received.
Data for 2009-10 and 2014-15 is unavailable and, hence, this has been assumed as zero.
Delaying the listing of Tata Sons will be an undeserved disservice to the vision of the promoters who wanted the trusts to engage in charity that truly impacts society. Besides the charitable trusts, some public listed entities in the group hold shares in Tata Sons. If the boards of these companies care for their public shareholders, they should clamour for listing and encash this to pay off their debts.
As mentioned by Mr Mistry-
“Therefore, the very vision of the Founders could be under threat unless governance of the Tata Trusts is reformed and subjected to a compliant and transparent process of checks and balances.”
Following the international examples, the Tata Trusts should stay completely independent of the businesses of Tata Sons or the other group entities and, over time, reduce its stake in Tata Sons to allow a wider public holding and an improved accountability for that company.
The group has an image far bigger than any individual, however important.
The article closes with a pertinent observation made nine years back that seems to equally resonate in today’s context:
Indeed, a retired chairman can always feel that his 'legacy' is under threat. But a retired chairman can also move on without feeling insecure about his legacy and have the emotional stature to know that what was once a right decision at one point in time may not be a right decision at another point in time. Acknowledging that change is a constant in the dynamic business world and gearing up to adapt to change is what business leadership is made of.
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as a senior advisor post-retirement, handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
ts recd 32000 cr dividend from tcs as per 24-25 annual report of tata sons. bulk of money of dividend /buyback shifted for air india acquisition or loan repayment during last few years
and what trusts got is very little dividend as solace for philanthropy.
long wait for justice for mistrys
trusts have become strangulating appartus to be used against minority shareholder without board seat in the name of philanthropy
Yes, I would tend to agree with Ms. Meenal Mamdani that "Tatas are unlikely to get impartial advice from the current politicians at the center. BJP will find a way to use this to its own advantage." Probably, this will always be the case for any body by anybody at the helm.
This does diminish the halo around the Tata name.
Looks like this maneuvering began with Ratan Tata who did little himself except appoint good managers to run the Tata companies.
Now it seems that Noel Tata is carrying out the same modus operandi to keep all decisions with himself.
This article also explains the poor record of creating and endowing additional entities like TIFR, TISS, etc. which were established by previous chairmen, Sir Dorabji and Jamshed Tata.
Tatas have been sailing on the image created by previous chairmen, while Ratan Tata has done zilch except sail on the good will created by the previous chairmen. This has not been difficult as the other business groups like the Birlas, Kirloskars, Bajaj, etc have done little in comparison to Tatas.
Tatas are unlikely to get impartial advice from the current politicians at the center. BJP will find a way to use this to its own advantage.
Just when India needs to bury differences and pull together, Tatas will be given advice by those who want to splinter the country apart to promote their divisive ideology.
mistrys wait for justice, reasonableness