Investor confidence may be hurt over legal tussle

Tatas could slow down capital allocation to various businesses

MUMBAI: With the appellate tribunal ruling in favour of ousted Tata group chairman Cyrus Mistry on Wednesday, the odds have changed dramatically for the diversified conglomerate.

This is likely to show in weakened investor confidence and potentially higher cost of capital until there is clarity on the final outcome of the ongoing legal tussle.

Several large investors and lenders close to the group who spoke to Mint requesting anonymity said the overhang of the legal tussle could slow down the Tata group’s business transformation plans laid down by current chairman N Chandrasekaran.

This, in turn, could slow down the group’s planned capital allocation to various businesses such as steel and consumer goods, which are clear growth areas, as well as into loss-making businesses such Tata Motors Ltd that require periodic doses of capital to stay afloat, according to the investors and lenders.

“What’s particularly worrisome to investors is that NCLAT (National Company Law Appellate Tribunal) has termed Chandrasekaran’s appointment as illegal” said a senior banker with a large private sector bank. “It remains to be seen whether and to what extent the NCLAT order is stayed by the Supreme Court on appeal. But in the absence of a full relief, Chandrasekaran’s position could become somewhat of a lame-duck executive chairman.”

Less than a year after taking charge, Chandrasekaran had outlined a plan to rationalise the group’s portfolio of companies from the existing 110 to a maximum of up to five, six or seven, Mint reported in October 2017.

Since his appointment as the chairman, he has embarked on a much-touted strategy to transform the more than 150-year-old salt-to-software group into a more efficient and leaner organisation by cutting down on overlapping business and bringing them under common clusters to harness their full potential.

The legal war on multiple fronts between group holding company Tata Sons Ltd and Mistry, who was fired as chairman by its board on October 24, 2016, meanwhile, had gone to the backburner, as Mistry failed to garner any legal reprieve until the Wednesday order of the NCLAT.

Chandrasekaran also began an aggressive capital allocation drive to bolster businesses in the sectors which the group has identified as growth areas.

For instance, in May this year, Tata Global Beverages Ltd signed an agreement to acquire the branded food business from Tata Chemicals Ltd in an allstock transaction that is aimed at creating a consumer business company with revenue of ₹9,099 crore.

Chandrasekharan also took it upon himself to take tough calls on non-performing, debt-laden companies in the group and introduce greater financial discipline. The efforts were bearing fruit.

According to available data, the net worth of 28 listed Tata group companies has jumped 24% between 2016 and 2019.

The group’s debt profile has also improved during the period, with overall debt declining more than 37% from ₹4.99 lakh crore in 2016 to ₹3.12 lakh crore currently.

In contrast, Mistry’s less than four-year reign as chairman of Tata Sons was underscored by his focus on divestments.

The approach of Mistry was in sharp contrast with that of his predecessor Ratan Tata, under whom the group was one of India’s most aggressive acquirers of assets, especially of overseas ones.

Under Mistry, Tata group sold a host of assets across businesses to improve the return on capital for the group. In doing so, however, Mistry, according to Tata group insiders, earned Ratan Tata’s disapproval—eventually leading to his ouster.