The Tata Group after the JRD Period: Management and Ownership Structure
by Ram Kumar Kakani & Tejas Joshi XLRI, Jamshedpur 831001, India E-Mail:
kakani@xlri.ac.in
Last updated in Feb. 2008
Electronic copy available at: http://ssrn.com/abstract=889394
XLRI Working Paper: 06-03
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The Tata Group after the JRD Period: Management and Ownership Structure1
Ram Kumar Kakani & Tejas Joshi E-Mail: kakani@xlri.ac.in
Abstract
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 countrys
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.
1
Electronic copy available at: http://ssrn.com/abstract=889394
XLRI Working Paper: 06-03
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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 … *Ž¯ Ratan Tata 2 ||
1. Introduction
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.
2 3
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
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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)
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XLRI Working Paper: 06-03
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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
