Tata's owners deserve to prevail in power struggle

Indian Hotels

Tue 11:34

The author is a Reuters Breakingviews columnist.  The opinions expressed are her own. Refiles to add missing word "are" in the fourth paragraph.
By Una Galani
HONG KONG, Oct 21 (Reuters Breakingviews) - The chair of Tata Sons spent part of his most recent annual letter to stakeholders reflecting on the importance of building long-term institutions in India. Now N. Chandrasekaran, or Chandra as he is widely known, is locked in a power struggle that will test one of the country's most important institutions: the rights of shareholders to control a private company. The outcome has ramifications far beyond the 158-year-old conglomerate.
The crisis has its roots in a botched succession process at the business empire with sprawling interests from IT services and steel to cars, and annual revenue equivalent to 4% of Indian GDP. For decades Ratan Tata served as the group's patriarch and ultimate arbiter. After his death in 2024, his half-brother Noel Tata was appointed to the role as chair of Tata Trusts, the group of charities which owns 66% of Tata Sons, with Chandra continuing to serve as the holding company's chair, a position he has held since 2017.
Though Noel inherited Ratan's title, he did not retain the same power. After Tata Sons last month reappointed Chandra as chair, Noel publicly slammed the move as "illegal". The dispute leaves a group which has over a million employees and 26 listed group companies with a combined market capitalisation of $260 billion at a crossroads.
The feud hinges on a disagreement over Tata’s future. Chandra and his allies favour complying with a Reserve Bank of India determination that could require Tata Sons to list its shares on the stock market. Noel and the Tata Trusts disagree, arguing that there are ways to avoid a listing. They argue that an initial public offering would weaken the group's ability to provide patient capital to strategic industries, rescue group companies in distress, and maintain the dividend stream that funds the charities' philanthropic work.
Complicating matters further, actions taken by the Charity Commissioner in Tata’s home state of Maharashtra following a complaint from one of Chandra's supporters who is a trustee and director of Tata Sons has delayed the holding company's annual general meeting. That matters because the shareholders would likely oust the chair if given the opportunity to vote.
Tata is vulnerable to a challenge from an emboldened board of directors because it is not a conventional family business. Its majority owner is a group of charitable trusts. So while Noel chairs the trusts he does not own the shares. Even so, the Tata Trusts have quorum rights and veto powers embedded into Tata Sons’ Articles of Association. As Mumbai-based corporate governance research firm IiAS points out, “the board has violated the basic governance principle of shareholder supremacy”.
The twin regulatory disputes have fuelled speculation in Indian financial circles about outside influence. Some observers see the unusual public silence from the government in New Delhi as evidence of creeping official involvement in one of India's most important business groups. Others point the finger at minority investors in Tata Sons or rival factions in corporate India. Whatever the explanation, though, the power struggle has two possible outcomes.
The first is that Noel and the Tata Trusts emerge victorious. This would come at a considerable cost for the group. Chandra's exit would not only leave Tata Sons searching for a new chair but also force a leadership reshuffle affecting 14 of its group companies.
The biggest risk may be at Tata Consultancy Services TCS.NS. Chandra joined the information technology outsourcer in 1987 and served as its CEO for eight years before moving up to the holding company. As the $94 billion giant grapples with slowing revenue from AI disruption, Chandra has become more involved in setting its strategy. His hands-on approach is understandable: the IT company generates most of its parent's dividend income and is one of India’s important contributors of foreign exchange through the services it provides to major multinationals.
The leadership dispute comes as Tata is making some of the largest capital commitments in its history. It has pledged to pour investment into semiconductors, the energy transition and defence manufacturing, as well as turnaround loss-making Air India, all of which New Delhi considers strategically important.
According to one person close to Chandra, he agreed to stay on as chair despite Noel’s opposition to avoid leaving the group in limbo, with action by the Charity Commissioner also preventing Tata Sons from forming a search committee for a successor.
There's some logic there. Tata Sons and its partners have committed over $27 billion of capital to five new industrial ventures since 2017, according to another person familiar with the group's finances, an amount similar to total dividends and buyback proceeds received over the past decade.
The second possible outcome is that Chandra prevails over the wishes of the company's controlling shareholder. That would raise far-reaching questions about the rights of owners across Indian business. If Tata Trusts cannot pick who leads Tata Sons, other business owners will fret about their authority too. Some might then think twice about handing day-to-day control to professional managers, potentially recreating the same succession planning problems now afflicting Tata. That’s significant because the country is undergoing a vast intergenerational transfer of wealth; some $1.5 trillion is expected by Hurun Research Institute to change hands over the next decade.
Chandra's position looks untenable without the support of the company's majority shareholders. And while he would be difficult to replace, he is replaceable. Other possible leaders include Indian executives with global experience like Piyush Gupta, the former CEO of DBS DBSM.SI, Singapore’s largest bank and now non-executive India chair at sovereign investor Temasek. Splitting the roles of chair and CEO at Tata Sons could also allow for the elevation of a veteran insider like T. V. Narendran, the CEO of Tata Steel TISC.NS.
     Tata’s subsidiaries each have their own boards of directors and can withstand a few months of uncertainty about who is in charge. Beyond that, the leadership feud will start to impact decisions about hiring and capital allocation.
The issue will be tested whenever shareholders eventually get to vote on Chandra’s reappointment. Several group companies own shares in Tata Sons, including Tata Steel, Tata Motors Passenger Vehicles TAMO.NS, Tata Chemicals TTCH.NS , Tata Power TTPW.NS and Indian Hotels IHTL.NS. Those units' executives will be under pressure to take sides. The battle will also test the unity of the Tata Trusts. Their boards include not only Noel and his son, Neville, but also trustees who have supported Chandra. In time, more Tata Trusts board members may switch sides.
Chandra wrote in his annual letter that Tata is "building for the India of 2047" so that, when the country looks back after 100 years of independence from British rule, it finds "that the foundations were laid well". It is vital for the company and for India that Tata's owners should decide who lays them.
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(Editing by Una Galani; Production by Aditya Srivastav and Streisand Neto)
((For previous columns by the author, Reuters customers can click on GALANI/  una.galani@thomsonreuters.com))