Cyrus Mistry's letter to Tata leadership paints grim picture

I was shocked beyond words at the happenings at the board meeting of October 24, 2016. Apart from the invalidity and illegality of the business that was conducted, I have to say the Board of Directors has not covered itself with glory. To "replace" your Chairman without so much of a word of explanation and without affording him an opportunity of defending himself in a summary manner must be unique in the annals of corporate history. The suddenness of the action, and the lack of explanation has led to all manner of speculation and has done my reputation and the reputation of the Tata Group immeasurable harm.

Prior to my appointment, I was assured that I would be given a free hand. The previous Chairman was to step back and be available for advice and guidance as and when needed. After my appointment, the Articles of Association were modified, changing the rules of engagement between the Trusts, Board of Tata Sons, the Chairman and the operating companies. Inappropriate interpretation indeed followed, and … it severely constrained the ability of the group to engineer the necessary turnaround.

I am not sure if the individual board members and the trustees truly appreciated the extent of the problems I had inherited. I cannot blame them, for I myself, as a non-executive director, did not have a clear grasp of the gravity of the issues involved.

As is public knowledge, the foreign acquisition strategy, with the exceptions of JLR and Tetly, had left a large debt overhang.

Of all the companies in the portfolio, the telecom business has been continuously haemorrhaging. If we were to exit this business vie fire sale or shut down, the cost would be USD 4-5 billion. This is in addition to any payout to DoCoMo of at least a billion plus dollars.

Tata Power aggressively bid for the Mundra project based on low-priced Indonesian coal. As regulations changed, the losses in 2013-14 alone amounted to Rs 1,500 crores. Given that Mundra constitutes Rs 18,000 crores of capital employed (40& of the overall company's capital employed), this substantially depresses the return on capital for Tata Power as well as carries the risk of considerable future impairment.

An even more challenging situation arose in Tata Motors, both on the commercial and passenger vehicles. Before 2013, in order to shore up sales and market share, Tata Motors Finance extended credit with lax risk assessment. As a result, the NPAs mounted to being in excess of Rs 4,000 crores.

Historically, the company had employed aggressive accounting to capitalize substantial proportion of the product development expenses, creating a future liability.

On the performance of the portfolio… if we look at the aggregate data between 2011 and 2015 and limit the analysis to the legacy hotspots (IHCL, Tata Motors PV, Tata Steel Europe, Tata Power Mundra and Teleservices), it will show the capital employed in these companies has risen from Rs 132,000 crores to Rs 196,000 crores (due to operational losses, interest band capex). This is close to the networth of the group which is at Rs 174,000 crores. A realistic assessment of the fair value these businesses could potentially result in a write down over time of about Rs 118,000 crores.

Early in my tenure, our foray into the aviation sector began when Mr Tata ushered me into his office and handed me a report on Air Asia by Bain & Co. He had concluded negotiations to partner with Air Asia and wanted the proposal tabled at the forthcoming Tata Sons board meeting. My pushback was hard but futile.

A few months later, I was surprised to be confronted with a similar situation requiring me to execute a fait accompli JV with Singapore Airlines. Without the benefit of time and experience to fully evaluate the proposal, I had to accept that Tata Sons would take a 51% stake in a USD 100 million joint venture.

The passion for the airlines sector has led Mr Tata to continue his involvement with the strategy of the two airlines. It is on his advice that the Tata Sons board has increased the capital infusion in the sector at multiple levels of the initial commitment.

… the amendments in the Articles of Association, as feared, the inappropriate implementation created a flux in the decision-making process. I have often presented to the trustees, before and after Tata Sons board meetings. This created alternative power centres without any accountability or formal responsibility, invalidating the very governance rule of nominated directors, who I would assume would use their own independent judgement and discharge their fiduciary duties, were reduced to mere postment.

Such a work pattern has also created the added risk of contravening insider trading regulations and exposed the Trust.

I cannot believe that I was removed on grounds of non-performance. As you are aware, the Nomination and Remuneration Committee comprising Vijay Singh, Farida Khambata and Ronnen Sen, independent directors (two of whom have voted for my removal now), had only recently lauded and commended my performance.

I hope you do realize the predicament that I found myself in. Being pushed into the position of a "lame duck" Chairman, my desire was to create an institutional framework for effective future governance of the group.

While I would be lying if I said I am not disappointed, I have a sense of pride and dignity intact in the efforts I have taken to professionalise and institutionalise, regardless of the outcome of effort, I now witness.