Complex ownership structures are a common phenomenon across Asian business groups. There has been a large amount of international work focusing on the various aspects of ownership structures and strategies adopted by international business groups. In the Indian literature, we found little work, especially with respect to case studies. In this paper, we use public information of a well known business group (the Tatas) passing through a major restructuring and document the development of ownership structure.
The country’s second-largest conglomerate, the Tata group, with year 2005 revenue of over Rs. 0,000 crores (US$ 20 billion) and core interests ranging from steel, cars and telecommunications to software consulting, hotels and consumer goods, ¬has come a long way since JRD Tata passed the leadership mantle to Ratan Tata, in 1991. We examine the interrelation of ownership structure, corporate strategy, and external forces for one of the largest conglomerate from India. In all Tata group affiliates, control is enhanced through pyramidal structures, and cross-holdings among affiliates.
This case study on the oldest business empire also explores the rationale behind these moves and examines the tensions and complementarities between stronger ownership ties among group affiliates. While bridging ties among group affiliates does benefit the new leadership in creating a more cohesive business group yet the findings hold enough water to conclude that these moves are contradictory to the interests of the minority shareholders in the individual operating companies (i. e. , its own affiliates).
Key Words: Business Groups, management control, conglomerates, ownership structure, cross ownership, cash flow rights, corporate governance, agency costs, India, and pyramids. The authors would like to express that the discussion and analysis mentioned herein is purely for academic purposes with no other intentions whatsoever. The author wishes to acknowledge the feedback from S Rajagopalan, Dr. Jittu Singh, Dr C Krishna Kumar, Dr Pingali Venugopal, Dr. Parthasarathi Banerjee, and Dr. Rajeev Sharma. The views from seminar participants (at XLRI Jamshedpur and IIM Kozhikode) have also helped.
A pleasant December evening breeze blew through the Jubilee Park of Jamshedpur3. Reputed businessman, Mr. Satyanarayana Bansal4 was on his usual evening walk, part of his life style for over four decades. Bansal, a retired Tata Steel employee had come to Steel City after graduating in Metallurgy from the illustrious Indian Institute of Technology (IIT) Kharagpur. Thus, began his life long stint with the Tata Group, and his affection for Steel city which made him take a decision to settle here.
Bansal was a member of the old guard and had seen winds of change at the helm and across the group during his career. He had seen the successes, failures, achievements and controversies that had encircled the group for over half a century. During the walk, Bansal was chatting and the discussions spanned a array of topics ranging from politics to the Tata Group. Invariably, Bansal was a storehouse of insights into the Group, its culture, its philosophy and anecdotes of course. But this December evening was slightly different, in the sense of the experiences Bansal was sharing.
His voice had a serious and nostalgic undertone to it. He was sharing his perspective on the transition of the Tata Group; on what he felt was not the same about it as before. As the sun set past the horizon, Bansal smilingly said, “The Tata Group has just started doing business” Perhaps this statement had a deep rooted meaning that probably S. Bansal put forward in a very subtle manner. Did he mean that the group had started deviating from its corporate values and ethical standards for which it was respected for over a century?
We had been reading news articles about the Tata Group changes for quite a few years now. There was definitely something more to it than met the eye. We decided to take this in more detail especially at the changes the group had undergone in the last decade. From the website, http://www. tata. com/0_about_us/management/chairmans_chamber/index. htm (Dec. 2007) Jamshedpur is a beautiful city in the eastern part of India, created by the Tata group.
We use the following path to discuss our case analysis based research work: In section 2, we review the existing literature on ownership structure of business groups with respect to cross ownership and pyramids. Section 3 gives an overview of the Tata group; it also describes the recent changes and the restructuring exercise under the new leadership. In Section 4, we present the empirical data and an analysis-cum-discussion of the findings. The data and information we use has been obtained from very reliable sources such as CMIE-PROWESS package, websites of stock exchanges5 and the Tata Group.
To draw inferences we also make use of the interviews and articles on the Tata group in reputed Indian magazines such as Business World, Business India, and Business Today. All these data sources have been used extensively by researchers in India and hence are highly trustworthy. We end our paper in Section 5 with our conclusions and limitations of the study. 2. Literature Review Introduction to Cross Holdings Sinha (1998) argued that cross holdings have economic significance and must be taken into account in both equity investment and lending situations.
Cross holdings and the stability of relationships that result, probably allow Japanese and Korean companies to adopt a longer-term perspective in their decision making, than is possible in the US. They concluded by stating that cross holdings increase the debt bearing capacity of firms and should not be completely eliminated during credit analysis. Khanna and Palepu (2000) presented an empirical analysis of diversified Indian business groups in relation to corporate scope and institutional context.
The performance of firms affiliated with diversified business groups with unaffiliated firms in the emerging economy of India is compared. The authors interpret their findings to suggest that concentrated owners generally do not seem to affect performance positively, as evocative evidence that groups might have settled into quiet life equilibrium. Commenting on Japanese keiretsus, Tam (2001) stated that the new accounting standard puts a dent in corporate cross holdings – the glue holding many of them together.
It mentions how cross holdings have traditionally provided companies with a base of stable shareholders; preventing takeovers and shielding management from shareholder pressure. This has contributed to Japanese companies’ low emphasis on dividends, shareholder meetings and investor relations in general along with less float (in their securities) leading to illiquidity and price volatility. Companies are now under pressure to revalue cross holdings and sell off those cross holdings whose stock prices have underperformed in order to improve their balance sheets.
Using a twelve year empirical study on 240 Indian business groups, Kakani (2002) found that diversified Indian conglomerates destroy shareholder value and have poor financial performance compared to the focused business groups. The work commented on the complex web of cross Websites of the National Stock Exchange (www. nseindia. com), the Mumbai Stock Exchange (www. bseindia. com), and the securities regulator, SEBI website (www. sebi. gov. in) XLRI Working Paper: 06-03 5 holdings of diversified conglomerates and resulting lack of transparency being one of the prime drivers behind the results.
Patel et. al. (2002) studied the relationships between Transparency & Disclosure scores and crossholdings for 19 emerging markets including India. For most of the countries including India, correlation between cross-holdings and Transparency & Disclosure (T&D) score is negative, whereas correlation between price-to-book ratios and T&D scores is positive. This might imply that groups with complex cross holdings are not as transparent in their dealings and so their stocks may be lower priced in the marketplace by the investor community as compared to those of independent firms.
Clark and Wojcik (2005) using German corporate data found a significant negative relationship between ownership concentration and the average daily rate of return (as measured by closing stock market prices). A reason mentioned in the paper for this was that the portfolio investors are concerned about the potential for exploitation – that is, the likelihood that their place as minority shareholders and largely passive owners at that may be exploited by other better placed owners with greater access to private information.
One can conclude the above literature discussion has an overwhelming support on the negative effects of Cross Holdings. If we combine the above literature review with the statement made by S Bansal then it raises a storm of questions in ones mind. Suspicions on the concurrency between the words and actions of the most revered business house in India need a very objective method of evaluation. The Tata Group The House of Tatas is one of the oldest business groups in India. Not many Indians would need an introduction to the House of Tatas.
The group is largely operated through a holding company, namely, Tata Sons. We provide a brief historical overview and then proceed with describing the recent restructuring exercise and other changes made. Established by Jamsetji Tata in the second half of the 19th century, the Group has grown into one of India’s biggest and most respected business organizations, largely due to the entrepreneur’s vision, their commitment, and its fortitude in the face of adversity (Lala, 2004). Of the ventures that did bear fruit while Jamsetji was alive, the Taj Mahal Hotel in Bombay has to rank highest.
Legend has it that Jamsetji set his mind on building it after being denied entry into one of the city’s hotels for being an Indian. His sons, friends and business associates were sceptical. His sisters chided him by asking, “Are you really going to build a eating house? ” The Taj turned out to be a bit fancier than that. Soaked in luxury, it was the first building in Bombay to use electricity One also needs to appreciate the researchers’ constraint regarding access to information and data. Usually the data and information available within the public domain about such controversial issues is very limited.
In fact, a similar work on other major groups (say, Reliance group) would be much more difficult as most of the data is kept in a veil of secrecy. A large amount of literature work in Indian business history and corporate strategy has researched into the Tata group. For an excellent reading on the Tata groups, see, Khanna and Palepu (1998), Lala (1995), and Piramal (1998), 6 XLRI Working Paper: 06-03 6 and the first hotel in the country to have American fans, German elevators, Turkish baths, English butlers and whole lot of other innovative delights.
In 1938, JRD Tata was elevated to the top post in the Tata Group, taking over as chairman from Sir Nowroji Saklatvala. He was the youngest member of the Tata Sons board. Over the next 50odd years of his stewardship the group expanded into chemicals, automobiles, tea and information technology. Breaking with the Indian business practice of having members of one’s own family run different operations, JRD pushed to bring in professionals. He turned the Tata Group into a business federation where entrepreneurial talent and expertise were encouraged to flower.
JRD Tata9 JRD Tata was born in Paris in 1904, the year Jamshetji died. JRD’s education was constantly interrupted and at twenty-one when he came to settle in India, his father, a director of Tatas, took his son to the room of John Peterson, who was then director in-charge of Tata Steel. Thus began JRD’s training and his tryst with business. At the age of thirty four, he was made chairman of Tata Sons. Right from the beginning JRD stamped his style of working on the organization. He started the process of devolution of power for the democratization of the Tatas.
JRD hand picked many of the Tata company chairmen. He was also at the helm during the nationalization of many Indian businesses like Tata Airlines (1953) and the insurance arm of the Tatas, the New India Assurance Company (1971). Even as the Tata companies became legally independent under the dismantling of the managing agency system in 1970, a semblance of unity was maintained by a network of intercorporate shareholdings, weekly cross-company directors’ meetings and JRDs dynamic personality and moral force.
JRD once commented after the abolishment of the managing agency system, on his role as chairman of the company: “My being chairman (of Tata Sons) today is very different from what it was before 1970, when the managing agency system operated … Today the companies are free to operate independently and in fact they do. Today, except in Tata Sons I do not wield any kind of executive authority. But because I am senior in age, I operate more on the basis of influence and confidence. There is something absurd in so far as we have no more interest than any other shareholder in most of the companies.
We get nothing extra for managing them. For example, till 1978, 90 percent of my time went between Air-India and Tata Steel as the chairman of both, and what did Tata get out of it? In Tata steel we are only shareholders like any other and … we get nothing. ” JRD encouraged his hand picked chairmen to operate their companies autonomously within the perimeters of the Tata philosophy of professionalism and ethical business practices.
Although these affiliate commanders all traded on the Tata name – one of the most respected brand names in India – they cherished their independence and vehemently protected their empires. Under JRD Tatas leadership the group professionalized management to a degree that a few other indigenous business houses had done. JRD Tata was a consensus man, and the emotional glue which held all the group companies together. Ratan Tata10
Ratan Tata, the son of one of JRDs cousins was an open trusting man and a shy soft spoken individual. He was called back from the US in 1962, where he worked as an architect, in order to work for the Tatas. In 1981, he was elected as chairman of Tata Industries Ltd (TIL), which he was to turn around from a small company into a group strategy think tank. Ratan’s 1983 “Tata Strategic Plan” would place TIL as the group’s vehicle for growth in high technology businesses in four areas (advanced electronics, biotechnology, advanced materials, and alternative energy) and would gradually phase out ‘sunset’ businesses like textiles and cooking oil.
Other goals included increasing Tata ownership in group companies, and exploring joint ventures in the government. However the implementation of the “Tata Strategic Plan” was held back by the Tata culture of independence – the various Tata company chairmen, who collectively held TIL’s entire share capital, were unwilling to fully support Ratan’s plans. In March 1991, Ratan was nominated by JRD to the Tata Sons chair.
Ratan found himself as the head of a conglomeration of companies, that were described by one Tata director as “no longer existing as a group except in their culture and name. It is only because of the financial institutions which are the major shareholders that Tata management is allowed in these companies. ” Ratan’s first major challenge was to consolidate a group of individual companies which, under powerful chairmen or managing directors were going their own way.
Ratan changed the retirement age for the chairmen and managing directors to tackle this issue. His victory against Russi Mody reinforced his position as the man in command of the situation and won him the respect and trust of many of the group company’s stalwarts. We shall have a brief look at five significant strategies: The revival of Tata Administrative Services (TAS) TAS, a department of Tata Services Ltd. had been recruiting talented individuals for management career acceleration in group affiliates since the 1950s. TAS had been successful compared to other domestic companies in retaining people but the prestige had waned somewhat in recent years.
New TAS recruits (mostly MBAs) were to work in a range of industries in the group. The compensation packages offered to TAS recruits were also redesigned to match the market rates. These efforts to revive TAS and make it a destination of choice for talent paid off well for Tata Sons and all the group companies which opted to participate in the TAS program. The Jardine Matheson deal Ignoring the concern of many experts over the entry of foreign firms into the Indian industry, Ratan sold a 20% stake in Tata Industries Limited (TIL) to the colossal Hong Kong based Jardine Matheson group for Rs. 1. 6 billion.
Ratan planned to use this capital influx to fund venture start ups promoted through TIL. Although Jardine probably would not receive a dividend for 5 years it had the same rights as the other Tata companies: to occupy a TIL board seat, to be involved in project planning and to invest in new projects promoted by TIL. Ratan anticipated that Jardine would contribute expertise in a wide range of businesses activities, such as retailing and distribution, real estate, hotels, engineering, construction, and financial services. A Jardine associate described Ratan as a careful planner and thinker.
The Tata Brand Ratan Tata decided that the group needed a stronger collective identity. The principal move Ratan considered was to undertake the responsibility of promoting a unified Tata brand which could be used by all companies which would subscribe to the Tata Brand Equity scheme. Each company that subscribed to the scheme would derive the benefits of the centrally promoted Tata brand. Ratan proposed that the subscribing Tata companies each pay a contribution, the amount of which would depend upon each company’s association with the brand.
Contribution would range from 0. 0% to 0. 25% of each company’s net income excluding taxes and non-operating. Participating companies would require subscribing to a code of conduct ensuring uniformly high standards of quality and ethical business practices. Tata Sons planned to use the fee money to build a national and later international group brand image by emphasizing on the core values and ethics, largely through advertising. Tata Sons estimated that meaningful domestic brand promotion would cost around Rs 300 million per annum, much more than the commission collected.
The board of directors of various Tata companies passed a resolution in 1995 in accordance with this arrangement. However the scheme generated debate in the media. Some Tata shareholders resented Tata Sons’ attempt to assert itself beyond the limits of an ordinary shareholder; and a few others went so far as to say that the Tata name had not necessarily been the reason for the success of their companies.
Fee schedule: right to use the Tata name in both company banner and products, 0. 25%; right to use the Tata name in either the company banner or products, 0. 5%; right to be perceived as a Tata company, 0. 10%. 14 Inclusion under the Tata Brand Equity Scheme was subject to two qualifiers wherein the company must be a signatory to the group’s code of conduct and comply with the Tata Business Excellence Model (TBEM). Group firms would reportedly be evaluated on the seven critical criteria that comprise the TBEM – leadership, strategic planning, customer and market focus, information and analysis, process management, human resource focus and business results.
Participating companies would be eligible for recognition with the JRD Quality Value award modeled after the Malcolm Baldrige National Quality award in the USA. XLRI Working Paper: 06-03 9 Restructuring Ratan’s views on restructuring, shortly after taking over, “I think we were in many more areas than we should have been in and we were not concerned about our market position in each of those businesses. I think the needs today are that we define our businesses much more articulately and that we remain focused rather than diffused, and that we become more aggressive than we used to be. The objectives for restructuring were defined clearly. These included:
- Returns must be greater than cost of capital;
- Each company must be the industry leader occupying one of the top three positions;
- The business identified must have potential for high growth and should be globally competitive.
Having decided on these objectives, there were clear strategies for exits and entries. There was a break from the earlier sentimental approach to businesses that have been built over decades. Ratan Tata decided to exit the businesses of soaps and toiletries, cosmetics, consumer electronics, pharmaceuticals, computer and telecom hardware, branded white goods, paints, oil exploration services, cement, textiles … equally fervent was his expansion/entry into businesses identified as having high growth potential. These included passenger cars, auto components, retailing, telecom, power and insurance.
Injecting Capital in Tata Sons Through its primary holding company i. e. Tata Sons, the Tatas held minority shares in group companies ranging from 0. 01% to 15%. In order to increase its stake in its affiliates, Tata Sons determined that they would need to raise a total of Rs. 7 billion in 1995-96, to realize a 1 percent increase in stake in each of the major Tata companies. To raise the necessary funds Tata Sons invited subscriptions to a Rs. 3 billion rights issue on September 1995.
The shares were made available to Tata group affiliates (at a premium) through the renunciation of shares by various charitable trusts (having the rights). The additional money would be raised by internal generation, debt, and other strategies. While it was legal for Tata group companies to purchase Tata Sons shares and vice versa, collusion between the companies to exchange shares would be a violation of law.
The media queried Ratan’s plans; concerns stemmed partly from debate that the selling price of Tata Sons shares had been overvalued. From an analyst’s point of view, the deal seemed to lack any benefit for the investing companies. It was estimated that the interest cost on the Rs 3 billion investment would be Rs. 50 million, whereas even a 100% dividend declaration by Tata Sons would yield only Rs. 30 million. Ratan argued that the shares would appreciate immensely if Tata Sons were to go public, and no shareholders had yet officially complained of the illiquid nature of the Tata Sons investment.
Although information about exactly how many companies invested in Tata Sons and to what extent was difficult to get, but we have enough data to conclude that the major companies did subscribe to the rights issue as can also be seen from the tables 1 and 2 above. The route followed by Tata Sons to increase their shareholding was the creeping acquisition20 route from the market. The rights issue followed by a creeping acquisition of shares in group affiliates was a crucial step in the overall strategy to increase the cross holdings between Tata Sons and group concerns.
As per BSE Official Directory, the Tatas combined shareholding in March 1991 in Tata Steel was 7. 5%, Tata Motors was 15. 3%, and Tata Power (erstwhile Tata Electric Companies) was 1. 7%. Worse was the situation in 1988 when the stake of Tata group in Tata Steel was a mere 3% (Khanna, 2001). 20 Creeping Acquisition is a process in which the promoters of a company who hold less than 50% of its shares, increase their stake by buying 2% of the company’s equity (the maximum permissible) each year, until they have acquired a majority stake, either by making an open offer to the share holders, or buying from the open market.
In 1998, the securities regulator, SEBI decided to increase the creeping acquisition limit of promoters to 5% and also allowed promoters to increase their stake using this route to a maximum of 75% (earlier 51%) in a company. In 2002, SEBI decided to curtail the availability of the creeping acquisition route to promoters who hold more than 55 per cent in a company (from the earlier 75%). 21 One way to argue in favor of cross holdings is to state that this benefit will give access to the affiliate company shareholders by giving them access to the upside of high growth Tata affiliate concerns such as Tata Consultancy Services.
This they would receive by way of dividends declared by Tata Sons in future (after the rights issue). But, the counter argument would remain that portfolio diversification of assets and investment management can be done by an individual/institutional investor on their own (or by investing in the mutual funds). XLRI Working Paper: 06-03 12 Group Companies Increasing Investment Activities Now we go through related financial numbers of major Tata group affiliates over the past fifteen years.
Restructuring efforts in India usually involve issues related to managing the ownership structure for having good management control and also it involves building enough defenses to avoid possible hostile takeover battles. We undertook to study the Tata group as probably the best example of a large Indian business group that has gone through a great deal of restructuring and changes in ownership pattern over the past few years. We were primarily interested on looking at the changes in cross holding pattern and its influence on various issues related to management control and corporate governance.
The Tatas used to manage their companies with very small equity stakes. 30 Prior to restructuring, in 1991, the Tata group was a loose confederacy of 300 companies having sales of around Rs 86 billion and controlling an asset base totaling more than Rs 85 billion with minor ownership stakes. As a consequence the chairmen of larger affiliates had grown accustomed to ruling their domains without interference from the Tatas and once in a while competing with each other in a similar line of business.
Ratan Tata decided to change all of this and have more control. The Tata group restructuring involved various steps such as building Tata brand, reviving its managerial recruitment and retaining practices (through, reviving TAS), changing the portfolio of business lines, and most importantly making the group more cohesive, and controllable. Using various published information, we looked at the changes in their corporate characteristics of various Tata group companies.
While the brand name of the Tatas would have ensured that there would be little risk to loss of management control still the group decided on increase its ownership stake in its affiliates. Surely, a stake of at least 26% would have made it morally and legally easier to manage them. An increase in the cross holding structure of group companies combined with pyramid structures provided a mechanism for the Tata group to control firms within the group without necessarily having significant equity investment.
We found that the group has indeed achieved higher control. For example, the number of internal battles played in the media has gone to zero. We also observe that in their quest to increase stakes in group companies, the Tatas can be said to have hurt the investor’s interests. In the last ten years, we observe that using crossholdings the Tata Sons, other investment companies and other major affiliates have increased their shareholding in major companies beyond the required 26 per cent. This 26% stake was a limit required to protect against hostile takeover bids.
An increased complexity in the cross holdings among group companies is a classic counter takeover defense strategy. There is nothing illegal about it but there are many other ways in which it could have been done with safeguarding the shareholders interests. For example, we observe that most of the well to do Tata group companies have increased their investment in other group companies at a rapid pace compared to the slow rise in their dividend payments raising issues of misusing the trust placed by other investors in them.
A divergence in cash flow rights and control rights may exacerbate agency costs as it provides incentives and opportunities for controlling shareholders to expropriate wealth from minority shareholders of firms in which they have low cash flow rights to firms in which they have higher cash flow rights (see, Marisetty, 2005). This can be done by tunneling/ transfer of assets and earnings. There are many business groups which have adopted crossholdings and intra-group transactions. In Asia Pacific countries it is a common practice. We would like to mention that this study on the Tata Group is part of a larger study on Indian business groups.
The work on other business groups is on going. Some of the Indian groups worth mentioning are Reliance, Thapar, and RPG. One has to look at other groups crossholdings to come out with stronger conclusions. Limitations and Further Scope Our study has all the limitations which a case-based study normally carries. To our knowledge, in India, this is one of the few case studies in this direction attempting to link crossholdings, with control and governance. One can take the research further. A deeper analysis would need a higher level of quality and quantity of data. One can isolate and see the effect of increase in shareholding alone.
One can also look at the other alternate strategies that could have been adopted by the group. One can probe the findings by looking at the strategic intent for the long term in mind and for which sometimes short term shareholder interests need to be sacrificed. For example a company might reduce its dividend payments or forgo collections from group companies and invest the funds for expansion only to give shareholder higher returns in the future. We observe the popular media stating that some of the larger business groups (such as Aditya Birla, and Bajaj) have adopted a different position and they have been untangling their cross holdings.
