On Episode 985 of The Core Report, financial journalist Govindraj Ethiraj talks to Hetal Dalal, President and COO at IiAS as well as Abizer Diwanji, Founder at NeoStrat Advisors.

SHOW NOTES

(00:00) The Take

(04:41) Markets Brace For A Tough Week With War Intensifying In Multiple Theatres

(08:25) Direct Tax Collections Continue To Rise

(09:41) Did The Tata Sons Board Overstep Its Authority In Reappointing Chandrasekaran

(18:18) Which Way Could The Tata Group Battle For Control Evolve And What’s At Stake

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NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.

Good morning, it's Monday, the 21st of September and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital.

The Take

In 2024, Tata Electronics announced plans to build a state-of-the-art semiconductor assembly and test facility in Jagirot, Assam, at a cost of about 27,000 crore rupees or about three billion dollars and projected that it would generate about 27,000 direct and indirect jobs in the region, so a neat 27 for 27. In the same year came an even grander gamble, a mega semiconductor fabrication facility in Dholera in Gujarat, in partnership with Taiwan's Powerchip Semiconductor Manufacturing Corporation, with a price tag of roughly 91,000 crore rupees or about over 10 billion dollars.

Now, complementing these mega projects, Tata Electronics and subsidiaries have executed a string of aggressive alliances, partnerships and joint ventures, acquiring, for instance, the Indian manufacturing arms of Wistron and Pegatron to anchor their iPhone assemblies and other consumer electronics supply chains and manufacturing. And that brings us to the point, so to speak. These high-tech bets sit at the very centre of what is shaping up to be a bitter battle for control at the top of one of India's oldest conglomerates.

Tata Electronics, alongside the loss-making Air India and the e-commerce venture Tata Digital, have emerged as the primary capital sinks for group holding company Tata Sons. Tata Electronics is also a fully owned subsidiary of Tata Sons. So is Tata Digital, owner of Big Basket and 1MG, which has swallowed about 26,000 crores in capital and piled up about 17,000 crores in losses.

So the current boardroom clash, something that we are going to dive deeper into shortly, between Tata Sons chairman N. Chandrashekaran and Noel Tata, who represents the 66% controlling stake held by the historic Tata Trusts, is linked in good part to these massive balance sheet drains. As sources tell us, the core grievance is not merely that these investments were made, but that Noel Tata was denied the depth of information it requested, with major strategic moves and investments being presented instead as a fate accompli. Boardroom eyebrows have apparently also been raised over why capital was partly directed to remote Assam over established industrial ecosystems in Gujarat or Karnataka, where the other investments have gone.

Now there are two distinct trains of thought surrounding the friction that we've been seeing in the last few weeks. Critics of Chandra, as Chandrashekaran is called within the Noel camp, readily acknowledges hard work and extraordinary track record at Tata Consultancy Services or TCS, whereas CEO, he lived on the road quoting global enterprise clients almost every quarter. Yet they legitimately question whether he possesses the same instinct for volatile consumer-facing businesses like Air India or digital retail.

The late Ratan Tata, who anointed Chandra, likely reasoned that a group chairman is not meant to be a hands-on functional CEO of individual units, except of course that these current mega investments sit directly on the Tata Sun's balance sheet. In retrospect, one might ask why TCS, the group's prodigal cash cow, did not simply run these digital and electronics forays. The answer is obvious.

Public shareholders would have baulked and sold off their shares in the IT services company. The second and more important train of thought concerns the geopolitical imperative driving the electronics outlay. The Indian government wants national champions like the Tatas to weigh in on critical capital intensive sectors like semiconductors.

The Tatas undeniably possess the institutional knowledge, technical ambition, and balance sheet capacity to take on the challenge. But the bets are also exceedingly large as we've discussed and the commercial outcomes remain far from clear, at least at this point. Moreover, even when shareholders are conceptually aligned with the national interest, they may not all be on the same page regarding execution and disclosure.

Even as Tata Sun struggles with Air India, over 22,000 crores of fresh investments with 22,000 in losses, the government elsewhere has reportedly been nudging other domestic business groups to start airlines to address the industry capacity and the fact that there is a duopoly there. Now, all of this creates a fraught tension between political mandates and commercial realities. Steering Tata Sun's now or in future will remain a precarious balancing act for precisely these reasons.

And that brings us to the top stories and themes…

The stock markets brace for a tough week with war intensifying in multiple theatres.

Direct tax collections continue to rise.

Did the Tata Sun's board overstep its authority in reappointing Chandrasekharan?

And which way could the Tata group battle for control evolve and what's at stake?

Markets, War, Oil and Direct Tax

Few could predict the second order effects of actions including war. Who could have predicted even six months ago that the Russia-Ukraine war will intensify so suddenly after almost four years with Ukraine now pounding refineries with drones, apparently 1,600 of them in the last day. The Houthis in Yemen taking control of critical territory kicking out Saudi forces and of course that oil prices after showing some promise of retreating are now back to highs and supplies of diesel are running dry in many parts of the world.

Because Russia who is a supplier of crude and refined product never imagined its energy infrastructure would be under such severe attack. Or the Saudis who could have not thought that the Houthis would bomb their land pipeline which helped them root oil following the log jam in the state of Hormuz preventing ships from passing through. And of course most importantly that the US attack on Iran along with Israel seems to be the least thought through military action of this century.

Particularly when it comes to knock on effects on economies around the region including India. Oh yes and that interest rates will rise precisely because of all these misadventures we just spoke of. But that is where we are and will be for some time and of course if you know someone who got even 50% of these events right do let us know.

Not surprisingly JP Morgan the investment bank has said that it's struggling to predict how oil prices will be impacted by the US-Iran war telling investors in an unusually candid note that we simply don't know how to model the end game. The bank said it assumed at the start of the conflict that there would be economic red lines that the Trump administration would be unwilling to cross and therefore it believed a deal could have been struck to open up the state of Hormuz shipping lane back in June. It said that such red lines included oil prices rising above a hundred dollars a barrel, inflation reaching four percent, gasoline topping five dollars a gallon and rates on 10-year government borrowing hitting five percent.

Six months later since the war began says JP Morgan many of these lines have been crossed and yet the exit strategy is less clear not more. And then President Trump has now armed himself with the powers to impose penal tariffs on imports from countries like India and China who buy oil from Russia. Possibly this will only be a negotiating tool though for what is not clear.

There is very little left on the table now and all the talks including for a trade treaty between India and the United States have pretty much gone nowhere. India has rightly pushed back saying it will act in the interest of its 1.4 billion population which means it will continue to buy Russian oil and take on the impact of any additional US tariffs. Better late than never perhaps.

With all this in the backdrop the stock markets saw their sixth straight weekly decline on Friday last week which is the longest losing streak since 2020. The SENSEX swelled about 19 points to 74,294 and the NIFTY 50 was up 75 points to 23,346. In the broader markets the NIFTY mid-cap and small-cap were up 1.2 and 1.7 percent each.

Elsewhere the National Stock Exchange's 2.3 billion dollar IPO was fully subscribed on the second day of bidding and all eyes are now on the listing week next week on the 24th. In the energy space the French are also going back to Venezuela in a sign that the spoils of this new order are not going to be resting only with the American oil majors. Venezuela and Total Energy signed a MOU on Saturday setting up the French company for a return to operations in the South American country according to Bloomberg.

And finally Brent crude prices on Friday were just under $104 a barrel and down slightly though indications are that they could spike this week. The rupee was down for the week last week thanks also to expectations of higher global interest rates while traders kept an eye on oil prices and said that Reserve Bank of India intervention would limit the currency's downside around 96 rupees per dollar said Reuters which added that the rupee ended at 95 rupees 87 paise per dollar up slightly on Friday but down for the week. Meanwhile India's net direct tax collections have risen about 13 percent year on year to about 12 lakh crore rupees or 126 billion dollars between April 1st and September 17th according to the tax department.

On Wall Street the Dow Jones industrial average fell on Friday after a volatile week amidst rising treasury yields high oil prices and the federal reserve's first rate hike in three years. Treasury yields increased weighing on equities the 10-year yield which climbed above five percent and hit its highest level since July 2007 last week also went back above that threshold after falling on Thursday. It was last up about six basis points to 5.006 percent according to a CNBC report.

Did the Tata Sun's board overstep its authority?

Back to the Tata's. Last week directors of Tata Sons voted to extend chairman N Chandrasekharan's tenure and move towards a potential public listing as indicated by the Reserve Bank of India.

Noel Tata chairman of Tata Trusts which controls 66 percent of Tata Sons wants the company to remain private and has called that extension illegal which obviously sets up a potential clash that will go to the courts. A massive legal battle lies ahead which could well be accompanied by some unfortunate washing of dirty linen in public. Now Chandrasekharan of course announced on the 12th of August that he would not offer himself a reappointment and leave when his tenure expired in February 2027.

Now with the latest developments all that has changed. So let's pick up two themes. First is the board itself and what or whether it was empowered to take this decision.

A strongly worded note put out by Institutional Investor Advisory Services or IIAS on Friday last week says Tata Sons board has shown poor judgement in the choices made at its 17 September board meeting by taking decisions not supported by the company's controlling shareholder. The note says these choices also run counter to the intent of Tata Sons articles of association and contravene this group's stated policies. Most of all they have agreed to change the structure of a 100 plus year old group.

All this in a few hours and in one board meeting. Independent of its merits and legality it is unclear how the board expects these decisions to survive a shareholder vote. The note says I reached out to Hetal Dalal, President and Chief Operating Officer of IIAS and I began by asking her how she was reading the next round of moves.

INTERVIEW TRANSCRIPT

Hetal Dalal: Look, the board and the management are effectively agents of the shareholders. Therefore, they have to abide by what the shareholders want. In an instance where the board takes a decision which is against the wishes of a shareholder, essentially, how are they then discharging the fiduciary responsibility which they have to the shareholders, right?

By virtue of the agency itself, they have to focus on what the shareholder wants and therefore implement it. You may counsel and say that this is not in the best interest. And yes, often we say that independent directors should be protecting the promoters from themselves.

But to blatantly go against what the controlling shareholder wants or has a perspective about is not a lasting solution. In India, what happens is a lot of decisions, the shareholders are empowered to make a lot of these decisions, right? Not the boards as much.

And therefore, a lot of these material decisions will need shareholder approval. So once you need a shareholder approval, right, and you're controlling shareholders not willing to support it, it's a short term idea.

Govindraj Ethiraj: Right. And AGMs or even EGMs, Extraordinary General Meetings, don't obviously happen unless they're called for or they don't happen frequently. So there is a time lag or there could be a time lag between, let's say, a decision that's made and the point at which a shareholder group might say that this is not working for us.

So how does that work then? And does a shareholder have the ability to immediately reverse something that a board has done, in theory?

Hetal Dalal: So again, the regulation sort of defines the kind of resolutions that a board can take and what goes to shareholder approval. For example, if there's a director appointment, the director is brought in as an additional director, it goes to shareholder sort of vote within a three-month period. And at that point in time, shareholders sort of defeat the resolution, then the individual sort steps off the board.

So in that three months, yes, the individual was on the board, took a few decisions and therefore those decisions have to be grandfathered by the company. In other instances which are material, like you're doing an M&A or you're doing some kind of material transaction, right, or changing the nature of the company, these require shareholder approval. Unless you get shareholder approval, the transaction doesn't go through.

So there the board can take the decision, get the NCLT approval, do whatever it is, finish the processes, but it can't go through without it. That's the gate. So unless you go through that gate, you can't do anything.

So like I said, it depends on the nature of the resolution and the nature of decisions being taken.

Govindraj Ethiraj: Right. And you've also said that the Tata Sands board has shown poor judgement in the choices made. So are you referring only to the appointment or the reappointment of Chandrasekharan as chairman or is there something else as well?

Hetal Dalal: It's a broader argument to say that if your controlling shareholder doesn't agree and has a very clear, has articulated very clearly their point of view, the choices you make, which are not aligned to what the controlling shareholder wants, are not long lasting. So what are you trying to finally accomplish? Right.

The other pieces, they just, I don't know, it just feels like they've hurried through the entire thing. In one board meeting, you decided to reappoint Chandra for a five-year term. He's violating the retirement policy of the Tata group and Tata Sands is the apex body.

So, you know, it doesn't speak well for the apex body to violate his own processes. I mean, what's the final message that you're sending the rest of the company that it's convenient. And the other piece is again, you know, sort of putting out a response saying that we're now going to implement the RBI guidelines and work with RBI, which effectively means that you're sending a message to the markets and you're open to getting listed.

And this is, again, against what the board had decided itself in the past, what the trusts have very clearly said. And for the past 100 years, they've held that view. So, in one fell swoop, in one board meeting, you made these two material decisions over a couple of hours, which is changing the fundamental nature of a 100-year group.

I mean, I'm asking, have you put in enough thought and have you examined all the options?

Govindraj Ethiraj: Right. And the options flow from the articles of association. Is that right?

Hetal Dalal: Yes. The articles of association, see, the articles of association of Tata Sands are not available on the website. But if you look at that Silas Mistry judgement, right, I think TCS versus Silas Mistry.

I think there, there is an articulation of what the articles hold. And from that, we gleaned that the trusts have board nomination rights. They have quorum rights.

They have veto rights. Also, the chairperson of Tata Sands will be nominated by a selection committee in which there will be three representatives of Tata Trusts, one representative of Tata Sands, and one independent person. So, a five-member body, which is heavily weighed towards the trust.

So, the trusts have entrenched themselves through the articles into Tata Sands, and they are a 66% shareholder. So, therefore, a lot of these decisions which are being taken without the trust having, you know, given a green signal, are basically possibly a violation of what the articles also intend.

Govindraj Ethiraj: Right. And what is the precedent that this sets, if at all, given that this is also one of the prominent business houses in the country? I mean, what we've seen happen in the board and around it, but not just in the last week, but let's say in the last few months?

Hetal Dalal: Look, I think I would say one, succession planning is a lesson from this entire episode, not just this episode, but also, you know, in the exit of Silas Mistry. To groom a successor who is able to take over and, you know, be if nothing else, an interim chair is something that all boards should focus on, not just the Tata group and surely Tata Sands as well. So, I think grooming a successor and looking at succession planning is always on, right?

You have to have it continuously on with someone in mind who can take over at the last minute. So, I think that's something that is a big lesson for a lot of corporate India and certainly for Tata Sands. I think the other piece is really how do a set of directors take a decision which fundamentally compromises the governance principle of shareholder supremacy?

Right? Even when you look at a lot of the judgments, they talk about the fact that shareholder is the final decider of most things and that is how the regulation is also being cast. So, the extreme version now is that, you know, you'll have a set of independent directors who suddenly start taking decisions which the promoter doesn't agree with.

How will it work? At the end of the day, all of these decisions have to be put to shareholder, vote the promoter, vote their shares. It's a waste of time.

So, there's a lot of all of this getting created. I think the third thing, of course, is better control of the narrative. All of this, you know, when you look at the battle of the Tata Trust, you look at now it's come to Tata Sands, who is controlling the narrative?

I think that is where the group needs to do better in terms of communication and that's a lesson for a lot of corporate India as well. And when you have these disputes, there has to be a certain playbook that you use and try and resolve as much as you can rather than having these public spats, which finally for the Tata group are chipping away at the brand, right? I mean, if you look at it for the past couple of months, they've had these commissions with the trust.

They're now having it in Tata Sands, you know, slowly and steadily and now look at the actions, right? So, slowly and steadily starts chipping away at the brand that they've built for so many years.

Govindraj Ethiraj: Got it. Hetal, thank you so much for joining me.

Hetal Dalal: Thank you.

Which Way Could The Tata Group Battle For Control Evolve

The boardroom battle may or may not end soon but a bitter and tough legal battle surely lies ahead with the Chandrasekharan faction and the Noel Tata faction set to go head to head in coming days and weeks. Top tier lawyers have already been brought on board and some of them quite likely have been in attendance for the last few months given how this battle has progressed. Unless of course there is some mediation effort that brings the parties together and hammers out a compromise which of course would be the most desirable given the sensitivities involved in the brand damage that a prolonged legal battle could inflict.

I spoke with Abizer Diwanji, Founder of NeoStrat Advisors and former partner at KPMG and Ernst Young who has worked across finance leadership and governance spaces and I began by asking him what were the possible paths ahead for this confrontation.

INTERVIEW TRANSCRIPT

Abizer Diwanji: From what it appears again, from what one reads in the press, there is a clear verdict or a clear indication that the shareholders, which is both the Tata Trusts, don't seem to want Chandra to continue. And given the fact that Chandra had voluntarily given his resignation or intention not to recontest, they seem to have accepted that and started the search for a new one. So I think that's very clear that they did not want him.

If they wanted him again, I think they would have been supportive of what the NRC said, and they would have possibly got him back. So that's the way I look at the continuation of Mr. Chandra. Very frankly, that's a commercial decision of the board, as well as the shareholders.

And there is a veto that the shareholders have on the appointment. And they could exercise that as things stand today.

Govindraj Ethiraj: Right. And yet, at this point, at least, despite the majority shareholder having a 66%, the decision went against the majority shareholder, at least as far as the reappointment was concerned.

Abizer Diwanji: So the shareholder has a 66% voting right in an AGM, but they are representative of directors on the board. So a board or an NRC can propose something, a board can approve something, but the ratification at the AGM is where the shareholder rights would come into force.

Govindraj Ethiraj: Got it. So, as I understand from people I've spoken to, the next battle really will be fought at the AGM. So how could that go?

And is an AGM, AGMs are usually held only at fixed times in the year. So how will that work?

Abizer Diwanji: So there is a concept called an EOGM, which you can have, but any which way the AGM of this company has been delayed, because one of the trusts is not allowed to participate and hence there is no quorum. So you know, one of the things that is issued does go in there actually forces the charity commissioner to give approval to have the AGM because unless that AGM is had, the decision will remain in limbo. So I guess one of the positives out of this whole fight is that finally the charity commissioner will give permission to hold an AGM.

Govindraj Ethiraj: And they held back the permission to hold the AGM because?

Abizer Diwanji: So there was something filed against the trust in terms of its composition and its powers and that the charity commissioner is looking into. Unless they reach an answer, they had debarred the trust from taking any decisions. So hence their position in AGM was not happening.

Govindraj Ethiraj: Right. So you're saying if the AGM, as and when it happens, will be a clear test of strength on which shareholder has control?

Abizer Diwanji: Absolutely. And this control, mind you, is again linked to the listing issue. Because if the listing does happen, then these powers come into question under SEBI rules, which require these to be ratified by the rest of shareholders every five years.

So ideally, the larger issue here seems to be whether the trust should be controlling Tata Sons or not. And that is governed by the fact whether Tata Sons will get listed or not. So it's a fairly complicated issue.

But you know, the listing is somehow linked to holding of power.

Govindraj Ethiraj: And if you go by precedence, have you seen a situation where let's say a shareholder has majority control and is unable to maybe let's say push through with a certain agenda over a period of time? Has that ever happened?

Abizer Diwanji: Substantive controls don't exist in listed companies. Unlisted companies, of course, there has been enough and more issues. We saw the Z battle being fought out in court.

That was a listed company and ultimately the promoters prevailed. So you know, India is a promoter driven economy and sometimes the promoters do prevail on situations. Now here the situation is a little different because there is a holding company which is not predominantly funded by public funds.

And that holding company has special powers, does not wish to get listed, but has operating companies below it which are listed. Now that's quite indifference to say an Adani model which has a holding company which is also listed Adani Enterprises. They chose to have that model commercially because they want to raise capital at that level and incubate businesses.

The Tata's chose not to list it, but they have got enough internal resources to be able to incubate businesses. They've had them in the past through cash flows coming in from dividends. People have different commercial models of doing things and different commercial ways of driving.

So for example, Tata's for years have driven reputation through Tata Sons. And Tata Sons has been a custodian of the Tata brand and reputation for years. Now that has played out well for them and they hopefully want to continue to do that again.

Now an imposed listing would actually, maybe in some form, is that what they think, tend to compromise that because ultimately this will then become a very public shareholder company. And I appreciate SEBI rules on it because SEBI's rule want parity between controlling shareholders and public shareholders. And that's the reason why they don't want special rights or special rights to be ratified by the public shareholders.

Now that is required if you are accessing public funds. If you're not accessing public funds and are managing out of internal accruals, then you don't need to do that. The fact that if you need public funds for large scale expansion, that's a commercial decision and should not be regulatory driven.

So this is how this paradox fits in, in my opinion.

Govindraj Ethiraj: Right. But strictly speaking, the listing issue and the reappointment of Chandra are two distinct issues. Am I right?

Abizer Diwanji: Absolutely. Absolutely distinct issues. Right.

Govindraj Ethiraj: Okay. So now the Reserve Bank has said that Tata Sons should list. And the reason given is that because they've classified them as a non-bank finance company, upper layer company, which means it's holds public funds, which they don't anymore.

Obviously, the recourse to the Tata's is to go to court. But do you feel that they have a good argument there? And the second part to that is really who's going to drive that decision?

Because at this point of time, the board and its currently nominated chairman want a listing.

Abizer Diwanji: Yes. So ideally, I think this will be driven by Tata Trusts, which would be the impacted entity out of this because they are the ones who would lose the power. They would be the ones who would want to go to the courts and question that decision because they're in a sector party.

And very frankly, they cannot contest it by saying, oh, I'm going to get diluted or stuff like that. They can only go to the courts on the grounds of moral justice to say that this is not equitable to us. And that really is a good enough reason.

I think there is an appeal requirement to the High Court within a stipulated period of time. If they put that appeal in, at least they will be in contention to legally contest the issue. And I think very frankly, the largest issue on this whole current sequence of events seems to be providing liquidity to Shapoorji Pananjali.

They're able to provide liquidity to Shapoorji Pananjali, which in my view is extremely, extremely important from a national perspective because we are facing with a corporate bond default if they're not paid out. And very frankly, if Shapoorji manages to get the liquidity, I think a lot of other issues will ease out.

Govindraj Ethiraj: Right. Again, that's perhaps the third track that's running here. So Shapoorji Pananjali needs, let's say, about 20,000 crores plus.

25,000 crores, yes. 25,000 crores. Now that money is there in the Tata Sun system, isn't it?

I mean, it generates enough profits to do so.

Abizer Diwanji: I'm sure it can raise the money. It can place it with third parties. It can swap with shares of existing listed companies.

I'm sure that available in the Tata Sun's sum of parts market cap is good enough to pay for it for sure. But there could be external capital raise. There could be, you know, transfer of shares to other people.

Many options.

Govindraj Ethiraj: Right. So the option or the opportunity for the Shapoorji Palunjis to find an exit doesn't seem to be the major hurdle or is it a key hurdle in your mind?

Abizer Diwanji: So very frankly, this is again a legacy issue. It stemmed from a past rivalry. But after Ratan Tata, I think that seems not to be an issue.

However, it seems to be made out in the market that listing is the only option to give an exit to the Shapoorjis. And that may or may not be true. There are other avenues available if you want to keep the company intact as an unlisted company.

Of course, you'll have to fight the legal battle with RBI. But apart from that, I think there are enough and more avenues for a company of Tata Sun's expected market cap to be able to raise money, to be able to fund a minority shareholder.

Govindraj Ethiraj: Right. Last question, Abizer. As you see this from outside and maybe even partly from inside, how are you seeing the impact of all of this on the Tata Sons?

I mean, you talked about it as in the context of a custodian of the Tata brand. I'm talking about Tata Sons. How do you see the impact of all of this playing out, particularly to other companies or the external world?

Abizer Diwanji: So other companies, thankfully, within the Tata group are quite autonomous in terms of their operations. But I think this is the time when conglomerates need to play a much larger role. And if you look at what Reliance is doing at their conglomerate level, be it at a geo platforms level, trying to make sure that all the relevant businesses remain interconnected and well run through a common data platform at Reliance geo platforms.

Or you see how Adani is trying to do incubate businesses at the Adani enterprise level and then stream it down into respective companies. I think this is the role the conglomerate holding company needs to play going forward. They need to raise resources.

They need to incubate businesses. The best they can do commercially is what they should think of. And what I'm kind of against is that you do this, but don't do it through a regulatory compulsion.

Do it through a business necessity.

Govindraj Ethiraj: Got it. Abizer, thank you so much for joining me.

Abizer Diwanji: Thank you.