Corporate governance

The Statesman, 27 January

Te was an interesting, investigative report in The Statesman of 20 January concerning a deal between the Tata Group and the West Bengal government arising from the allotment of Singur land to Tata Motors for their small car project.

Apparently, some of the Opposition parties have demanded a CBI probe. It is a sad reflection on Indian journalism that I could not find a reference to the demand for a CBI probe in any other newspaper, probably for the reason that it arose out of an exclusive report in The Statesman.

While the CBI probe may look into the political aspects of the matter, I am interested in the issues relating to corporate governance. According to the Statesman report, the West Bengal government has made a “virtual gift” of 650 acres of prime land in the Rajarhat area to the Tata Housing Development Company (THDC).

The point which arises with reference to corporate governance is that the risk of the small car project in Singur is taken by Tata Motors, whereas, the “consideration” goes to another company in the Tata Group ~ namely, THDC. This would not matter if both these companies had the same, common shareholders.

But that is not so and, therefore, minority non-group shareholders in Tata Motors will be taking a risk for which the benefit will go to shareholders in another company of the Tata Group.

According to the report, arrangements may be made to ensure that the benefits flow back to Tata Motors. That would, however, involve some degree of manipulation on the erroneous assumption that two wrongs would make one right.

The Statesman report also indicates that there is a commitment by the West Bengal government to provide “upfront, infrastructural assistance to Tata Motors”. Again, according to the report, budgetary support to Tata Motors would be out of the question because it would attract legislative scrutiny and scrutiny by the CAG, which are best avoided since government assistance to a company in the private sector may be considered unethical and discriminatory.

Indeed, according to the report, the “gift” of the Rajarhat land has been made with the idea that the profit therefrom would be used for subsidising the manufacturing cost of the small car. The report emphasises that the Tatas had sought this “gift” so as to enable themselves to provide a cross subsidy for keeping the cost of the small car within the price target of Rs 1 lakh.

Also, this “gift” is over and above the infrastructure support of Rs140 crore promised from the state’s exchequer to pay compensation to the displaced farmers.

Once again, I am not concerned with the political implications of such arrangements. But I wonder whether the financial statements of Tata Motors can be said to be truly transparent if significant support considerations are off the balancesheet because they arise from secret arrangements.

I wonder whether all the facts relating to the arrangement between the West Bengal government and the Tata Group were brought to the notice of the Board of Tata Motors when the small car project was sanctioned by the board.

It is the function of the independent directors to ensure that there is reasonable transparency in accounting for the cost of a project and to ensure that the risk taken by a particular company is compensated by benefits to the same company. Now that the secret deal between the government and the Tatas has been brought to light, I wonder how the independent directors of Tata Motors fulfilled this responsibility.

The position is that an independent director is the director of a particular company. He cannot look to the benefit of the group as a whole since his obligation is restricted to the company on whose board he sits and his responsibility is to the shareholders of that single company.

Confused and conflicting objectives can affect the functioning of the board and threaten its independence more than any other single factor.

Confused and conflicting objectives are often at the basis of many boardroom decisions. There was a hint to this effect in an editorial of The Economic Times of 14 December, 2006 which hinted at the possibility that the Tatas may make a revised higher bid for the Corus acquisition to counteract the CSN bid.

The danger is that the Tatas could get drawn into a price war which would make the acquisition unviable. So great is this danger that Tata Steel prices fell by 18 per cent after the announcement of its interest in Corus, and CRISIL was obliged to put Tata Steel on credit-watch with negative implications. (I am quoting from the statements made in the aforesaid Economic Times editorial).

Once again, this points to the danger of conflicting objectives and confused thinking in boardroom decisions.

The decisions made in the boardroom of a particular company should be related exclusively and entirely to the interest of that single company and its shareholders. The director’s duty is to look at the interests of the entire body of shareholders and not only the controlling group. Considerations of prestige to the group as a whole are irrelevant.

If I may borrow from a perceptive distinction made by the Union finance minister, Mr P Chidambaram, in his last year’s Budget speech, “Prestige of the promoters and advantage to the group may be the outcome of boardroom decisions of a single company but should not be the objective of those decisions.”

It is unfortunate that a significant example highlighting this lesson in corporate governance should have been provided by a group with the prestige and status of the Tatas.