Ta-ta to the bad times?

Raghu Mohan

Smiling again: Tata group chairman Ratan Tata

VENUE: The Taj Chambers. Time: 9 pm. Tata Sons director Ishaat Hussain and Tata Industries managing director Kishore Chaukar hold a hurriedly called on-record, but an embargoed-for-the-night media briefing. The following dawn, Mr Hussain says, will see wholesale changes at Tata Finance: both at the board and business level.

Mr Hussain and Mr Chaukar proceed to share the big picture in Bombay House after the Tata Finance fiasco. They want the media to get the perspective right before they finally put it out officially. And, therefore, the overnight briefing. Unusual, yes. Why? Bombay House was firm that life cannot go on “as usual” at Tata Finance! As a visibly affected Mr Hussain quipped: “Laws were not broken. They were raped.”

Next evening at the Taj Princess Room, it is made official. In a single fell swoop, the entire board of Tata Finance resigns for what Mr Chaukar lyrically puts as “collective moral responsibility”; and is reconstituted.

Old-hand Dr Fredie Mehta, stands down as chairman; is replaced by Mr Hussain. So is the company’s managing director Subodh Shah, who incidentally took centrestage to clean up the mess, which Bombay House alleges was created by former charge de affairs, Dr Dilip S Pendse. Others who go out are BL Passi and B Ramakrishna. Mr Chaukar stays, and to keep him company, Tata Sons vice-chairman NA Soonawala; Francis J da Cunha; and U Mahesh Rao, formerly of General Insurance Corporation, come on board.

Then come the numbers. It is a whopping Rs 395.56 crore net loss for the fiscal ended June 30, 2001, compared to a net profit of Rs 56.77 crore in the preceding fiscal. There is a one-time extra-ordinary provision of Rs 315 crore on transactions relating to loans and investments in its problem affiliate: Niskalp Trading and Investment Company. This company alone accounted for Rs 266.67 crore by way of a hit. Exposures in associate companies stood at Rs 44.04 crore and provision for estimated permanent dimunition in value of long-term investments at Rs 24.97 crore. The company’s net loss before extraordinary one provisioning and contingencies stood at Rs 80.21 crore. It also reported a net loss of Rs 17.27 crore (Rs 8.52 crore) for the first quarter ended September 30, 2001.

And just how bad did Niskalp’s deals affect Tata Finance? The parent company had lent about Rs 469 crore to Niskalp through the inter-corporate deposit (ICD) route. Out of this, Tata Finance provided for Rs 205 crore and also wrote down Niskalp’s equity share capital of Rs 57 crore.

The makeover is to cost money as well. The Tata group will pump in Rs 250 crore through equity or quasi-equity. These are matters of detail, which have to be worked out. And where will the money come from. “The Tata group is fully behind Tata Finance. For a group of its size, Rs 250 crore is not a big amount,” says Mr Hussain.

And while on details: the Rs 250 crore to be pumped is in addition to the Rs 90 crore subscribed to by Tata Industries to the company’s rights issue and an additional Rs 100 crore already extended by way of ICDs by Tata Sons. In sum, the Tata group has pumped in over Rs 500 crore to resurrect Tata Finance. Post-infusion of the additional Rs 250 crore by way of capital, the company’s capital adequacy will meet the regulatory norm of 12 per cent. “We are in single digits,” says Mr Chaukar. Closer to 1 or 10 per cent? “Median,” Mr Chaukar says with a straight face.

The business strategy that was revealed had a simple underlying philosophy: that the dollops of capital infusion does not mean that the party will continue at the business level.

“We had sound business plans. The problem lay in its execution. We wanted to be a virtual universal bank, but capital is not virtual,” observed Mr Hussain, adding: “Businesses that will guzzle capital is not for us. Take housing finance. Who can compete with the HDFCs of this world? Or for that matter credit cards?... it is not that these activities are not sound or our partners are not good enough. Just that we cannot afford these kind of capital-linked activities.”

With Tata Finance deciding to stick to its core business auto financing, a review is now on of all its peripheral businesses. This includes the co-branded credit cards with American Express and Tata Housing. Says Mr Hussain: “The company has traditionally enjoyed a premier status in the commercial vehicles and auto finance markets. We would continue to strategically focus on these segments with a view to further consolidate our share in these markets.” Tata Finance has nearly Rs 1,500 crore or so of assets in the auto-sector. The renewed focus on these segments will mean that the company will grow this aspect of the balance sheet, and less on the capital intensive one like in credit cards and housing finance. Mr Hussain said that if the company got a good deal, it will exit these businesses or sell down the portfolio even on a selective basis.

It is being surmised that the present round of restructuring at Tata Finance is a clean-up act and a precursor to a strategic, if not outright sale, to a potential acquirer.

Grapevine has it that GE Cap and Citicorp, are in the race to pick up a strategic stake. Mr Hussain, while confirming that a strategic partner will be looked at, did not reveal any names, but says that multi-lateral agencies were also potential candidates.

“We are talking to a few interested parties. But no names have been shortlisted,” Mr Hussain said. However, Mr Hussain ruled out Toronto Dominion as a potential partner. “They are not interested,” Mr Hussain said. Toronto Dominion currently partners Tata Finance in the debt business.

And if you though that reconstituting the board, capital infusion, hunt for a strategic partner and a business review will mean that all will be hunky-dory at the company, there are other worries too. Hard questions.

Outsiders, however, still find it hard to swallow that Dr Pendse led the company astray. Ever since the fiasco came out in public, Bombay House has painted Dr Pendse as a Nick Leeson. Speculation did bring riches to the company. Dr Pendse was widely regarded as Tata group chairman Ratan N Tata’s blue-eyed boy. He was seen as being part of the inner Bombay House sanctorum; and one point in time, tipped to be a Tata Sons director. The last mentioned might have been indulgent speculation, but the point is that it gained currency; considered very much in realm of the possible, and underscoring Dr Pendse’s standing in the pecking order.

In private conversations, senior officials like Mr Hussain and Mr Chaukar as well as Bombay House media machinery went all out to make it clear that Mr Pendse was guilty of criminal conduct. That, however, raises many disturbing points.

Even if one were to give Bombay House the benefit of doubt, coming into sharp relief is the issue of internal controls in key Tata group companies; the fiduciary responsibility of their respective boards; and the repeal of usage of brand “Tata” by Tata Finance.

Mr Hussain is very categorical that Dr Pendse was a Nick Leeson. On board responsibility: “None of the board members were responsible for those acts.” All concerned with Bombay House maintain that it was Dr Pendse all the way; that he misled the board, fudged accounts.

In the immediate aftermath of things blowing up at Tata Finance, the group’s otherwise patronising media managers were all “cheers” for the fourth estate: the media put out very accurate stories. No clarifications from Bombay House!

There is no question of pulling out the usage of brand “Tata.” It is pointed out that what happened was extraordinary; that Tata Finance will get a second chance. Bombay House watchers are uncharitable.

“The extraordinary standards set by the group can only be violated in extraordinary situations or by such persons,” said a rival non-bank player’s CEO who wishes to be unnamed.

The biggest by far has been the attention of regulators. Bombay House took exception when this paper mentioned in passing that Mr Tata was on the Reserve Bank of India’s (RBI) board. “Please do not drag Mr Tata name in all this. He has been hurt,” said a Tata media manager.

At the central bank, officials in the department of non-bank supervision point out that it has been a huge embarrassment to all concerned.

Sample this. On the RBI board is Mr Tata and YH Malegam. The second mentioned is with SD Billamoria & Co, the auditors of Tata Finance! RBI inspectors knew of the goings on in Tata Finance, and had mentioned this explicitly in their correspondence with Tata Finance. But they had not bargained for the media limelight. In the interim, RBI deputy governor with portfolio charge of the Department of Banking Operations and Development, as well as Department of Supervision, retired. In came, GP Muniappan, from the cold.

“It is trying. The names are all big. It is very embarrassing as you cannot treat the case like a CRB group thing. There you had the privilege of treating Mr Bhansali as an upstart. Whoever thought that it will be bad at Tata Finance,” a senior RBI official said. The RBI too has been kind. “No curbs have been placed on us. In any case we are not going to raise public deposits like in the way we did,” says Mr Chaukar.

Tata Finance though will indeed review its auditors, SD Billamoria & Co, now that a full-fledged reshuffle of the company’s board has been announced. Mr Hussain is explicit that a review of the company’s auditors “may be taken up,” but declined specific comment on the issue.

One thing is very clear. Bombay House wants to clean up. The Tata group will take a strategic review of all group companies subsidiaries’ functioning in the light of the fiasco at Tata Finance with regard to its erstwhile subsidiary Niskalp Investments.

And just how keen the Tatas are to set things right at Tata Finance can be gauged from the fact that the press statement to announce changes was delayed because the bourses were yet to be informed! “We will be responsible for insider trading. Wait a bit,” quipped Mr Hussain. Was it intended to be black humour?