Tata Fin shows need to tighten corporate reporting standards (26 August 2001)  

AS a cub reporter in the eighties, I was checking out some facts with a senior Tata executive; I don’t remember my question, but I can never forget the answer. With great aplomb the executive said—‘if the Tatas have done it, it has to be right’—and that was that. I too was happy to buy this view right until the 1990s when the Tatas themselves began to level serious allegations against several of their renowned and entrenched satraps and later sacked some of them.

Despite this, the Tatas are unarguably India’s most respected business group and only a few other companies have the same commitments to ethical and socially responsible business practices. That is the big picture, but times have changed and growing competition and performance-based incentives are making new demands on managers. Its impact is probably seen in the abrupt and unexplained exits of key Tata executives from many of the group companies—Manu Sheth from Tata Chemicals, DM Raval from Telco, Vinay Rai of Rallis India and the most controversial of them all—the criminal charges filed against Dilip Pendse of Tata Finance.

It is also seen in the lacklustre performance of individual companies within the group and the losses run up by former blue chips. But the Dilip Pendse case is most interesting. For several years, Pendse enjoyed the absolute trust of group chairman Ratan Tata—so much so that he even held Tata’s personal power-of-attorney to conduct certain transactions on his behalf.

Seen in this context, the charges of cheating, falsification of accounts and criminal breach of trust against Pendse are even more astounding and suggest a larger malaise that needs scrutiny. Let me hasten to clarify that this is not the first time that a Tata chairman has had his trust shattered. The legendary JRD Tata too had once trusted Minu Mody—a senior Tata director with his personal power-of-attorney and also named him an executor of his will. But Mody was sacked in the eighties and made a quiet exit following the discovery of financial misdemeanour by him.

But this is a different century and a completely different business environment. JRD’s business empire was built entirely on trust and camaraderie. It was his willingness to give senior executive all the freedom that they deserved that helped create a democratic and highly talented business empire whose top five or ten directors at any point of time were formidable business titans in their own right. During JRD’s lifetime directors such as Ardeshir Dalal, Sir Homi Modi, FE Dinshaw, AD Shroff and John Matthai were business legends in their own right. They made way for another powerful group comprising Sumant Moolgaonkar, Russi Mody, Darbari Seth, Nani Palkhivala, FC Kohli and Ajit Kerkar—and none of these were family members. Today the Tata empire does not boast a single executive or director of comparable eminence.

Ratan Tata acknowledged the difference when he set about consolidating the group and charging a fee for the Tata brand. Apart from his efforts, new disclosure norms and governance rules also place a fiduciary responsibility on the board of directors to be far more alert and accountable to investors. Companies too are subject to greater scrutiny by institutional investors and their analysts and every decision, financial loss, sacking, and allegation is discussed and debated with greater intensity by the media.

Unfortunately, the Tatas seem unwilling to accept this changed reality, or the fact that the group’s blue-chip reputation does not place its actions and those of its directors beyond question. All this and worse is reflected in its handling of the Tata Finance controversy. The Tata group may have filed a criminal complaint against Dilip Pendse and sacked five top executives, but no investigation can be entirely one-sided. The role of Tata directors on the board of Tata Finance is also open to question; as is their personal investment in several scrips that are part of the TFL and Nishkalp portfolio. The charges of insider trading against former Nishkalp chairman JE Talaulicar, who stepped down after Sebi began an investigation, has already made a broader scrutiny imperative.

For instance, it is now known that three scrips caused the debacle at Nishkalp—they were Global Telesystems, DSQ Software and Vakrangee Software. Wouldn’t it be fair to ask all Tata directors and the sacked employees to disclose all or any holding in these scrips over the last 18 months including the timing of their purchase and sale. The same would apply to creeping acquisitions and buy-back offers from the group. After all TFL is India’s largest non-banking finance company with borrowings in excess of Rs 3,500 crore; its chairman Fredie Mehta draws a monthly ‘remuneration’ from the TFL and all its directors were paid a hefty bonus last year when Tata Finance announced excellent results. Did these induce them to keep quiet and allow Pendse to cut corners? Nobody knows.

Unlike Hindustan Lever which when charged with insider trading by the stock market regulator, could demonstrate adherence to elaborate compliance rules by the directors —the Tatas have no reporting requirements regarding individual trading operations. Asked if Tata Sons and TFL have specific rules that prohibit front running and insider trading by directors and employees or if there are reporting and compliance requirements applicable to them, this was their reply: The Tata code of conduct prohibits an employee and his family to derive any benefit or assist others to derive any benefit from access to and possession of information of the company or the group which is not in the public domain and thus constitutes insider information.

The group is proposing to issue guidelines on insider trading and is awaiting the amended issuance of insider trading rules which are to be issued by Sebi shortly. Effectively, this means that nobody has ever checked if the other Tata directors have been doing exactly what Talaulicar had to step down for. Several Tata Finance executives have frankly admitted that they have been big players on the market and were never asked to report their transactions. But this is not an attempt to single out the Tatas—what applies to them is true of most large business groups in the country, especially family managed ones. Clearly it is a lacuna in corporate governance rules, and unless it amends them to incorporate far more stringent reporting requirements, controversies such as the TFL one will surface again and destroy shareholder value and investor confidence.