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Tata Finance: Scripting a public scrap

Tamal Bandyopadhyay

In 1994, it was Rusi Mody. In 1997, it was the turn of Ajit Baburao Kerkar the former supremo of Indian Hotels. Now, in the 21st century the high-flying executive who has fallen from grace is Dilip S Pendse.

And the Tatas are at it once again: washing their dirty linen in full public glare.

It's an irony of sorts. The Rs 40,000 crore (Rs 400 billion) Tata Group has earned a reputation over the decades for integrity and high standards of corporate governance.

Now it is in the dock for throwing these norms to the winds. The Tata Finance affair has turned into a murky battle between the Tatas and former Tata Finance Ltd managing director Pendse.

The Tatas have accused Pendse of fraud and worse, they, in turn, have been counter-accused of malafide action and attempts to pressurize auditors A F Ferguson. Could it be that the Tatas are about to fall off their pedestal?

Do they deserve this dethroning? Or, are they victims of a calumny campaign as their ads proclaimed last week?

The Pendse-Tata Finance affair is a watershed for the Tatas not because this is the first time the Tatas have washed their dirty linen in public, but because they are risking their credibility to paint one man guilty of all the wrongs committed by Tata Finance.

The Tatas have faced public battles during the era when Ratan Tata, chairman, Tata Group, sought to establish his supremacy over the group by easing out powerful personalities like Rusi Mody (Tata Steel), Ajit Kerkar (Indian Hotels), Darbari Seth (Tata Tea and Tata Chemicals) and other Tata satraps.

As those battles heated up there were allegations of wrongdoing and Fera cases. But nothing ever boiled over into the courts and police cases as the Tata Finance affair has.

What's the difference? While the earlier public spats had more to do with internal power struggles, the Tata Finance case puts the spotlight squarely on the Tatas' ability to run a clean business.

Why did the Tatas choose the high-risk option of going after Pendse? In fact, even if the Tatas manage to pin something on Pendse, the question remains: why did the group and the company's board abdicate power in his favour?

Between August 6, 2001 - when the Tatas filed an FIR with the Economic Offences Wing of the Maharashtra government against Pendse and five other senior executives of the company - and now, over a dozen complaints have been filed with the police (in Maharashtra and Delhi), regulatory authorities (Securities and Exchange Board of India and the Reserve Bank of India) and courts (Mumbai High Court).

But Pendse hasn't been nailed yet. The police have virtually given him a clean chit and the regulators have refused to move against him.

What does this mean? Does it signify that the system is so rotten that an individual cannot be taken to task by a large corporate house? Or, is it the Tatas' way of personalising an internal systemic failure?

Is Pendse the David who is challenging the Goliath? Or, a crook with an enormous clout that even the country's second-largest corporate house cannot fix him?

Here is what a Tata insider has to say: "Because we are transparent. We don't believe in hiding skeletons in our cupboards. We refuse to let ourselves get blackmailed by some crooks. That's our culture."

But that seems to be an oversimplification of a complex corporate phenomenon.

Let's look closely at the Tata Finance scandal:

On May 25, 2001, about a week before former Tata Finance managing director and trusted Ratan Tata lieutenant Pendse called it a day (on February 8 Pendse informed the board that he would not seek re-appointment as managing director when his term expired on May 31), the Tatas discovered gaping holes in the TFL accounts.

It had a huge inter-corporate deposit exposure to its subsidiary Niskalp Investment & Trading Company Ltd breaching limits and its capital adequacy ratio (CAR) was propped up by dubious means violating all RBI-laid prudential norms.

To its horror, the Tatas also found that not only the RBI but also Sebi had been taken for a ride as the Tata Finance rights issue document did not disclose the real state of affairs in the company. It made huge losses by playing in the stock market through Niskalp.

Pendse refuted all these allegations. He said the board knew about everything that had been done and that he was now being made a scapegoat.

The twists and turns taken by the TFL episode over the next one year could beat the wildest imagination of a soap opera script writer.

TFL rushed to the RBI with a mercy petition and promised to make good the capital shortfall by pumping in Rs 300 crore (Rs 3 billion) within a certain time-frame. It stopped taking deposits from public, redeemed maturing deposits with interest and decided to sell non-core assets.

Besides that the company also cleaned up its balance sheet by posting a Rs 395.56 crore (Rs 3.955 billion) loss for the year ended June 30, 2001, (TFL follows a July-June financial year) after making a one-time extraordinary provision of Rs 315 crore (Rs 3.15 billion) for loans and investments made in some of its affiliates.

The entire TFL board led by chairman Freddie Mehta also quit accepting "constructive moral responsibility".

As a part of the restructuring exercise, Niskalp - in which TFL held 99.4 per cent - was de-subsidiarised. The promoters also raised their stake in TFL to 63.58 per cent from March this year. It was below 51 per cent last year.

But with every step the controversies also thickened. Niskalp chairman and a TFL director, J E Talaulicar, was found to have indulged in insider trading by selling 100,000 Tata Finance shares on the eve of the company's rights issue.

He had to quit. The first report of A F Ferguson, prepared by managing partner Y M Kale, severely indicted Talaulicar for insider trading.

But it was Ferguson's final report that really set the cat amongst the corporate pigeons. The 904-page report, parts of which were leaked, was particularly critical of corporate governance in Tata Finance and its subsidiaries.

It unearthed several questionable inter-group transactions intended to help various group companies including Tata Chemicals and Telco.

It harped on the lack of "accountability and transparency" in various dealings. To top it all, the report was also highly critical of TFL vice-chairman Kishore Chaukar and blamed him for suppressing information.

Essentially, the Ferguson report made one point: the suggestion to commit irregularities may have emanated from a few but many other agreed to them.

Then came the bombshell. The audit and consultancy firm withdrew the report and sacked its author Y M Kale and his team. It also agreed to prepare a fresh report with a new team.

Did the Tatas arm-twist Ferguson to withdraw the unpalatable report? Nobody knows. Officially, Ferguson found the report faulty and admitted it. The Tatas too had reservations about some observations.

They even accused Kale of withholding crucial information provided by the former company secretary of Niskalp, Prakash B Karyekar. But Karyekar, it seems, retracted his statement as "it was factually incorrect, prepared under tremendous tension, with disturbed frame of mind due to shock and also under the threat of an arrest."

Both the Tatas and Ferguson refuse to comment on the report. But there are too many questions unanswered. Why did the Tatas take more than a month after the report was submitted to register their reservations?

Why did they wait till parts appeared in the media to announce that it had actually been withdrawn?

Similarly, why did former TFL chairman Freddie A Mehta pay a glowing tribute to Pendse at the 16th annual general meeting of TFL (on November 22, 2000) barely eight months before the Tatas filed the FIR alleging criminal conspiracy and falsification of accounts? The smoke screen only thickens.

A close reading of the TFL fiasco leads to three possible scenarios:

Scenario one: Pendse is the villain of the piece. He took all decisions and kept the board in the dark. He played in the market, made huge personal gains and transferred the personal losses to the company. He managed the system so well that the Tatas can do little about it.

Scenario two: The Tatas used Pendse to the hilt. He was encouraged to gamble in the market and the Tatas supported him while the going was good. When the market crashed, the Tatas pulled the rug from under his feet and Pendse found himself isolated. A vilification campaign was launched to destroy him.

Scenario three: The Tatas don't have sufficient internal checks and balances. There are too many subsidiary companies that are being used as investment vehicles to ring fence the market price of the key companies and some group outfits are not necessarily board-managed. The professional managers are given too long a rope.

Only time will reveal the truth. But this could be the toughest challenge that the Tatas have ever faced. At stake is the image of the Bombay House and the image that has been built up over the 20th century.

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