Marwari model of mismanagement vs the Tata model of getting mismanaged. The resilience of both models of corporate conglomerate structuring are being tested near their limits.
Tata stood for professionally managed, board run companies. They had a three way separation between shareholders, board members and management team. There is nothing professional about a leadership which is culturally non-diverse and single community focused. The independent directors were not independent of each other and do not seem to be independent at all. Bad actors creeped in. But the bigger question that still begs an answer is how the trusts at the highest level are governed. How can you have dynastic family control in a public charitable trust. What is the “public” in public charitable trust.
Mehli Mistry is not wrong in demanding appointment of an administrator to take over the trust. But at the same time, he may not be the right person to be a trustee. Regardless of the end result of the Tata saga – the credibility and more important the viability of the group is finished. If I were auditing Tata Sons, I would question if it can continue as a going concern. And in any case what accounting standard is Tata Sons following. If it is IndAS, you can still hide behind market price of shares, but if it is the old accounting standard, then going concern is an issue. If they go public they have to follow IndAS and they will be ok.
Now come to the Marwari system of mismanagement. I was the consultant to the Disinvestment Commission and spend months studying Hindustan Zinc. The quality of mine was not an issue. The size of mine at Rampur Agucha was not an issue (it is the worlds best zinc mine by any parameter). The issue was cost of power. Rajasthan electricity board was defunct and was charging Rs 8 per unit in the early 1990s. Akin to Rs 150 per kWh today. End result was that we were exporting ore and importing zinc.
The other issue was the rate of mining. The public sector team was misguided by some ancient mining rules of British India. They were mining at a rate to deplete the mine in 350 years. All you had to do was to sort out power cost and mine faster.
I took the deal to the Tatas. They didn’t get it. I took it to the Birlas. They were struggling with similar issues in aluminium. It was a no brainer. Vedanta got it immediately. I recall Kamlesh Mittal burning the midnight oil trying to figure out valuation.
The model was sensitive to just one single parameter – rate of mining. Cut 350 to 35 and the valuation would go up 100x.
Now come to the stupid acquisitions that Tatas made. Jaguar in UK. Corus steel. VSNL. Citicorp software. Tetley tea. Himalayan water. And the most idiotic of all – Air India
Did any Marwari compete in even one of them. Why ? Because they didn’t make sense.
And now Tata wants to do semiconductors. This beats air India on stupidity.
In the meantime – Hindustan Zinc is the largest and most profitable zinc company in the world.