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. 80,000 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. However, the views mentioned in the paper are personal.
The Tata Group after the JRD Period: Management and Ownership Structure || “One hundred years from now, I expect the Tatas to be much bigger than it is now. More importantly, I hope the Group comes to be regarded as being the best in India — best in the manner in which we operate, best in the products we deliver, and best in our value systems and ethics. Having said that, I hope that a hundred years from now we will spread our wings far beyond India …” ⎯ Ratan Tata 2 ||
1. IntroductionA 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. This incident was in the year 2005. 4 Names have been changed to protect confidentiality.
XLRI Working Paper: 06-03
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 ReviewIntroduction 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)