Tut Tutting Over Tata's Way Of Doing Business

Some investors are edgy about its financial maneuvers

Foreign money managers looking for the best way to invest in India's murky but promising markets often end up buying shares in the various Tata companies. An empire of some 85 separately traded businesses all founded and run by Sir Jamsetji Tata and his descendants from 1868 until today, the Tata companies have combined revenues of $8.3 billion. They include some of the biggest names in corporate India: Tata Iron & Steel (Tisco), truckmaker Tata Electric & Locomotive (Telco), and premier watchmaker Titan. (The McGraw-Hill Cos., parent of BUSINESS WEEK, also has a publishing venture with a Tata company.) Foreign investors, who have sunk $1 billion into the shares of Tata companies, like their dominant market positions and appreciate the honest reputation the Tata family has cultivated.

But now, some of these foreign investors are having second thoughts. They are puzzling over the recent financial maneuvers of family leader Ratan N. Tata, who is chairman of the operating companies and the holding company Tata Sons Ltd. These outside shareholders fear that Ratan is shifting capital from the operating companies to Tata Sons--just at a time when the companies need all their funds to build their businesses and go head to head with new competitors as India deregulates. Tata and its managers would not respond to repeated requests for interviews.

Here is what's behind the flap: Although the Tatas started all the various companies that carry their name, the family, through Tata Sons, holds only minority stakes ranging from 3% to 15% in these companies. Under India's restrictive securities laws, the family did not previously need large stakes to ward off hostile takeovers. But it may need them in the future. Like many other Indian business dynasties, the family rules its empire through personal connections and goodwill, not through large stock positions.

NAME GAME. In his latest financial scheme, Ratan Tata, who has run the group since 1991, decided that the operating companies should pay for the right to use the Tata name, which has tremendous brand equity for consumers and investors. So in October, he suddenly ordered all the companies in the group to pay an annual fee of 0.25% of revenues. This would bring in an estimated $10 million annually to Tata Sons, and Ratan Tata has said he would use the funds to promote the family name for the good of all the companies. But he declines to spell out his plan. He argues that such promotion is an important task to counter increasing competition.

Some big investors, especially foreign ones, are unmoved by Tata's explanation. They note that the decision to levy the fee follows the recent liberalization of India's takeover laws and a Tata Sons rights issue last year, which they also consider controversial. In the issue, Ratan sold $73 million worth of rights in Tata Sons to the Tata operating companies. Since Tata Sons is a private company, its shares do not trade publicly.

Some outside shareholders suspect Ratan Tata could use the offering's proceeds to buy more shares in the operating companies, thus tightening the family's control over its empire--at no expense to his family. Indeed, some of the Tata companies had to borrow to participate in the rights issue, fund managers say. That's a mistake, argues one foreign investor, who demands anonymity for fear of alienating a company that pervades every aspect of Indian life. "Industrial companies in India will need capital to invest to compete over the next decade," he says. "This [diversion of capital] won't do the Tatas any good [long term]." Similarly, many of the foreign shareholders consider charging the operating companies a fee for use of the Tata name to be a waste of precious funds.

But the managements of Tata group companies apparently support the new measures. And, so far, the share prices of Tata companies have held their ground, indicating that shareholders still have confidence in the Tata name. But some institutional shareholders worry that Ratan Tata's financial maneuvering might eventually compromise the trust the company has established in the market. If so, they fear it could pare the Tata companies' traditional multiple of 10 to 20 times earnings down to the more typical Indian multiple of 3 to 10. Tata's chairman may well use the new fees to promote the Tata name. It would be ironic if he ends up damaging it instead.

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