Why Mistry is right, and why you should buy Indian Hotels today
The Chairman of the most iconic business group in India is sacked unceremoniously. He responds with a letter trashing the very group he was heading, and still holds 18 percent shares in.
The previous Chairman comes back, at 78, as 'interim' chief. He is the person instrumental in sacking the current incumbent, since he holds unquestioned control over all decisions in the group, by virtue exercising the authority of Tata Trusts' 66 percent stake, an absolute majority.
The rest of the directors of Tata Sons are like extras in the movie. They do the bidding of the main actors, and it has always been so. Whoever thinks independent directors are independent is naïve.
Mistry took over about five years back, to helm the group in which he has (along with his family) an 18 percent stake, hence, one would presume, a vested interest in its welfare, going well beyond the fact that he is Chairman.
As any new incumbent would do, he started going over the entire group portfolio and taking some hard decisions. A few write-offs here and there; the decision to cut back dividends in some cases to conserve cash; talking about huge write-downs in Tata Teleservices (everyone knows that company is a cash-guzzling dud, and will never improve) and playing tough with DoCoMo, Tata Power for a project based on projections of world coal prices which came unstuck (presumably no one to blame for this, but then right now it is a drag), Indian Hotels for ill-advised acquisitions abroad and removing its chief executive who was close to Mr. Tata; deciding to brexit Tata Steel, which the ex-Chairman had bought into with much fanfare; horror of horrors, questioning the white-elephant-holy-cow Nano, which due to Mr. Tata's ill-advised comments to start with about being a 'poor man's' car could never position itself properly; and questioning the group's two forays into aviation, a-business-of-carrying-bums-on-seats-don't-know-why-it-is-glamorous, maybe because Tata-fancies himself as an aviator and the family legacy of Air India; and I am sure sundry other questions on governance practices.
What Mistry perhaps lost sight of was the fact that through the Tata Sons board Mr. Tata controls the company totally. And Mr. Tata certainly was not amused. It is also reported that the old Bawas whose grandfathers bought the Tata shares which they will pass on to their grandsons (if any) raised a stink on reduction of dividends.
Apparently the board members had a chat with the Pallonji scion asking him to step down. Which it appears he refused to do. Being a man of principle, he said Nada, nothing doing.
Now Mr. Tata is also a man of principle. He is reputed to be one who sticks to his guns and keeps his word, in fact there have been instances where he has insisted that the group keep its word and go ahead on commitments made even if not contractually obliged to in order to keep his and the group's word. Mr. Tata's word is bond, and even his rivals in business will readily concede that he plays fair when it comes to business dealings with others. Several of Mistry's decisions seem to have gone against commitments implicitly or explicitly provided in that past.
Mr. Tata can also be extremely adamant. Once he decided that he would not get along with Mistry, it was unlikely that Mistry would stay. At this stage it becomes irrelevant who is right and who is wrong. Principles among highly principled people, also mean not being willing to look at and acknowledge past mistakes and rectify them. Mistry had to go, and he went. Since he was not willing to step down, the group, in classic Tata style goes to a battery of eminent lawyers, the more eminent the better, and takes an opinion on whether it would be possible to sack Mistry. Why not do it in a more dignified manner by giving enough due notice – Mr. Tata still controls the majority and he will be able to do what he wants? But this is where principles comes in, he needed to be sacked on a matter of principle.
What happens to corporate governance in all this? The minority shareholders of all the group companies and the sundry other stakeholders, where are they in the picture? Now we are being naïve if we ask that question. Corporate governance means the Boss governs. The Board has no say, except in acquiescing with what the boss wants; that is the way it has always been, and that is the way it shall continue to be; and this is not just in the Tata Group, it is pretty much a universal truth. You don't really have much to say against a 66 percent owner. That it is the trusts who own the 66 percent and not Mr. Tata in his personal capacity is neither here nor there.
So Mistry goes. Unceremoniously. Creating a flutter. All the news channels and journalists have a gala time, while the board members and everyone who matters hail the returning emperor. Who was of course the best choice while they look for a successor.
Now our man Mistry also seems to be a man of principle. He could have quietly exited; after all, his family has an empire that he can go back to managing, an empire that is not small by any yardstick. He still holds 18 percent stake in the company; that should be incentive enough for him not to throw any muck around that will damage the group's reputation. The letter that of course was deliberately leaked to all and sundry, that he has written to the Board of Tata Sons and the Trusts, throws enough muck around and some of it will stick. The problem with men of principle is they sometimes act against their own interests.
Meanwhile, some of the group company shares have taken a beating in the markets. Most of the muck that has been raked up is of a nature that should have already been discounted by the markets. No one in the market is naïve about corporate governance; the Indian Hotels acquisitions and their non-performance was already known; the coal price issue, Corus problem, and Nano non-performance are already old hat. So any sudden fall as a result of this incident should correct itself by the time the month is out. It is also likely that Mistry will back off now, he has already made his point, and anyway there is nothing he can do against a 66 percent shareholder; also he has his 18 percent stake to take care of.
Buy Indian Hotels. It looks good as a short term play.