Why isn’t Ratan Tata the richest businessman of India?

As I begin a series of posts based on my latest book ‘The Tata Group: From Torchbearers to Trailblazers’, which is an outcome of a decade of research, I wish to thank my readers who have much appreciated the book. In the following weeks, I will be sharing several posts that unravel lesser known or hitherto unknown stories about India’s largest, most globalized and most admired conglomerate. 

This post begins with a question that people across the globe often ask. Why isn’t Ratan Tata the richest businessman of India, if Tata Group is the largest and most wealthy conglomerate of the country? The last quarter saw several high-profile weddings in India. The one between the Ambani and Piramal families was the talk of the town with an expenditure of nearly ?700+ crores, at par with the UK royal wedding. In the weeks leading to the wedding, the print and social media was full of articles about the prosperity of India Inc. Several reporters presumed that because Mukesh Ambani was the richest businessman of India, Reliance Industries was the most valued conglomerate. Then there were articles which stated that it was the Tata Group which was the wealthiest. But then why wasn’t Ratan Tata the wealthiest businessman of India? So, let’s venture into understanding the nuance of the ownership of the Tata Group in order to get to the answer.

The scale and size of the Tata Group

Some statistics reveal the scale of the Tata Group of companies. Established in 1868, it is India’s largest conglomerate, with products and services in over 150 countries, and operations in 100 countries across six continents. The Tata Group has over 100 operating companies of which 29 are publicly listed in India. With nearly 700,000 employees, it is India’s third largest employer after the Indian defence forces and Indian Railways. Its total revenues exceed ?6.75 lakh-crore (US$100-billion). By 2018, roughly 67% of the group’s revenues came from international operations, making it India’s largest conglomerate with global exposure. Tata Group’s market capitalization of nearly ?9.45 lakh-crore (US$145-billion) equated to 6.6% of the Bombay Stock Exchange (BSE) [BSE’s total market capitalization in March 2018 was ?142 lakh-crore (US$2182 billion)]. With the highest market capitalization among all business houses in India, the Tata Group enjoys the trust of over 40-lakh shareholders. The group has also been a significant contributor to India’s growth story. In 2018, it contributed about 4% to the country’s GDP [India’s estimated nominal GDP for 2018 was US$2.85 trillion] and paid 2.24% of the total taxation in India, amounting to a whopping ?47,195 crores — the highest by any corporate group. This is almost equal to the total taxes received by the entire state of Andhra Pradesh in 2017.

Now to the core question I raised at the start of this post. The distinguishing factors are not limited to its size alone. In both Indian and multinational conglomerates/businesses, the one who steers the company forward is the one with the maximum personal wealth in the organization—Jeff Bezos, Bill Gates, Warren Buffett and Mukesh Ambani to name a few. Particularly in the case of large businesses, the founders and leaders are among the wealthiest in the world. A major reason being the equity stake they have in the companies they own and run. In case of the Tata Group, neither the Tata family nor chairman emeritus Ratan Tata appear in the list of India’s wealthiest families in India. This is in stark contrast to promoters of Indian conglomerates that rank below the Tata Group in size like Reliance Industries, Aditya Birla Group, Bharti Group and others whose net worth tops that of Ratan Tata. For example, Forbes indicated Mukesh Ambani being worth US$40-billion, Kumar Mangalam Birla US$10-billion and Sunil Bharti Mittal US$8-billion in 2018. Other top Indian businessmen who run large businesses within a particular industry such as Uday Kotak and Azim Premji were worth US$12-billion and US$15-billion respectively.

Image: JRD Tata, former chairman, Tata Group

This wasn’t just the case with Ratan Tata. It was true in the case of former chairman J.R.D. Tata as well. In November 1985, an article in the Bombay magazine reported that J.R.D. Tata’s personal wealth was nearly ?28 crores. J.R.D. remonstrated the publication and placed on record that his wife’s and his personal investments, including an apartment were valued at ?60 lakhs. All other shares in his name were only as a trustee of public charitable trusts in which he had no personal interest. This speaks volumes of the simplicity and transparency of J.R.D., the only businessman to have been conferred the Bharat Ratna, India’s highest civilian award. It also intrigues us as to why the Tatas are not the richest businessmen in India, though the Tata Group is India’s numero uno conglomerate.

Who owns The Tata Group?

The answer takes us back a hundred years, when Sir Ratan Tata, son of Tata Group founder Jamsetji Nusserwanji Tata, donated a sizeable portion of his estate to a trust in his name—Sir Ratan Tata Trust. Jamsetji’s elder son, Sir Dorab Tata followed suit. In 1938, he donated his entire estate and belongings, including his pearl-studded tiepin and his late wife’s jewellery, the Jubilee diamond (twice the size of the Koh-i-Noor) among others, to a public charitable trust — Sir Dorabji Tata Trust. The trustees of these Tata Trusts were empowered to sell all the property and jewellery for funding public welfare projects, but were not permitted to withdraw the shares the Tata siblings held with Tata Sons. Thus, through the Trusts, they sought to ensure the integrity of the parent firm, and ensure corporate perpetuity as a means to wealth creation for nation-building and social well-being. These two trusts own nearly 50% of Tata Sons, the promoting company of the Tata Group and a significant shareholder of over a 100 operating Tata companies in seven major areas, including communications and information technology, manufacturing, services, realty and infrastructure, consumer and retail, defence and aerospace, and financial services.

Image: The founding family of the Tata Group: Jamsetji Tata (seated extreme right) with wife Hirabai (center). His younger son Sir Ratan Tata (seated extreme left). His elder Sir Dorab Tata (seated behind) with wife Lady Meherbai Tata. Lady Navajbai Tata (standing extreme right) is the wife of Sir Ratan Tata.

In 2018, Tata Sons held 73%, 30%, 32% and 31% stake in TCS, Tata Steel, Tata Motors and Tata Power respectively, the biggest companies in the group. Tata Sons held 68% stake in Tata Investment Corporation, an NBFC and investment management company that holds stakes in Titan, Tata Chemicals, Tata Communications, Trent, Indian Hotels and a few others in the Tata Group. Tata Sons’ investments were valued at ?5 lakh-crore, consolidated revenues at ?1.73 lakh-crore, and profits of ?18,431 crores.

Professor Gras of Harvard Business School, founder of the academic discipline of business history, noted in 1949:

‘Tatas have done much to introduce industrial capitalism in India in place of the old mercantile and petty capitalism. As the companies progressed, they socialized the business by transferring much of the ownership to charitable trusts. And we in our time have thought that we [America] were original in some of this socialization from within!’

The Tata Group and Its Structure

The Tata companies are commonly referred to as the Tata Group. The elected chairman of the Tata Sons board is recognized as the Tata Group chairman. Tata Sons became a deemed public company with effect from 1 May 1975 because of a change in law. Since 2013, modified legislation permitted Tata Sons to become a private limited company again. It opted to do so and from 8 November 2017 it became a private limited company. Accordingly, its shares cannot be sold without board approval. In 2018, about 66% of the equity capital of Tata Sons was held by fifteen philanthropic trusts endowed by various members of the Tata family over many generations [i]. The Shapoorji Pallonji (SP) Group held around 18.4% stake in Tata Sons [ii], about 13% by Tata Group companies and the remaining 3% by Tata family members. Of this, Ratan Tata’s holding is a mere 0.83%. The Tata Trusts are mandated to annually spend 85% of their dividend earnings on social welfare projects. From this, one can imagine the substantial amount of money ploughed back into the society by the Tata Group. 

It is this one-of-its kind holding structure of the Tata Group that distinguishes it in the firmament of India Inc. It resembles India’s joint family system where the Tata Trusts are like the grandfather, Tata Sons like the father, and operating companies like dynamic children. Historically, the chairman of Tata Sons and Tata Trusts has been the same person except for a period when Lady Navajbai Tata was the chairman of the Tata Trusts and J.R.D. Tata was chairman of Tata Sons; and from 2012 when Ratan Tata retained the chairmanship of Tata Trusts while Cyrus Mistry (2012–16) and N. Chandrasekaran (2017 onward) were chairmen of Tata Sons. In the years after Ratan Tata took over the chairmanship of Tata Sons, the chairmanship of major operating companies was held by the group chairman. This practice was in vogue until Sir Nowroji Saklatvala was the chairman of Tata Sons (1938). During the period of J.R.D. Tata as chairman, several leading Tata companies had independent chairmen.

Image: Chairmen of Tata Group (1868-present day)

The Tata Sons board consists of managing directors of several leading Tata companies, industry captains from outside the group, leading academics and technocrats. The Tata Group is also very different from its peer conglomerates in the developed world such as Johnson & Johnson or GE, or its peers in India, Reliance, ITC or Larsen & Toubro, where the parent company is publicly listed but subsidiaries are not. In the Tata Group, the operating companies are publicly listed, but the holding company (Tata Sons) is not. Each of the operating companies have an independent board of directors, who collectively take decisions in the best interests of the company, its shareholders and a larger ecosystem of stakeholders.

Tatas’ Governance Model

The Tatas’ governance model identifies three key functions towards operating companies: to provide vision, guidance and perspective; to control the Tata brand; and to allocate resources including funding deals. Tata Sons’ presence on the board of operating companies is usually through the chairman, who facilitates decisions that would create long-term value for its shareholders.

During our conversation, R. Gopalakrishnan, former executive director of Tata Sons, shared an instance that reflected the independence of the operating companies in decision making and the standards of corporate governance practiced within the group. As a group, the Tatas were considering a new business line which was very capital intensive. To fund it, Tata Sons chose three or four group companies who could contribute to the new venture as shareholders of the new company. ‘In any other place, you would say that all these companies belong to the Tatas, and hence we as the Board of Tata Sons are deciding this. While I may think the proposal is in line with the company priorities, but some other director may not.’ Tata Sons consulted the board of directors in each of those four publicly-listed companies. And in one company, an independent director said, ‘Why should we put our money into that new business venture? You may want to do it, you do it.’ Tata Sons agreed with that view and that particular company did not invest in the new venture. ‘I think that was an expression of accepting that the board is supreme. Just because we happen to have the name ‘Tata Sons’, it doesn’t mean we can do whatever we feel like. Even inadvertently, we should not be flexing our muscles,’ he emphasized.

Having gained this background information about the magnificent edifice and of munificence of the Tata Group, it would now be worthwhile to explore how it has been built brick-by-brick over the last 150 years. In my subsequent posts, I will capture several facets of this multi-faceted institution, whose story began on the shores of Gujarat on one fine afternoon in ninth century AD when the first group of native Zoroastrians persecuted for religious conversion during the Islamic invasion of Persia, landed in India...

Notes:

[i] Tata Trusts consist of fifteen different trusts that work in areas ranging from healthcare to education. The largest trust shareholder is Sir Dorabji Tata Trust with 27.98% holding, followed by Sir Ratan Tata Trust with 23.56%. The Shapoorji Pallonji (SP) Group held around 18.4% stake in Tata Sons. About 13% by Tata companies (Tata Motors, Tata Power, Tata Steel, Tata Chemicals, Tata Global Beverages and Indian Hotels) and the remaining 3% by Tata family members.

[ii] In the late-1910s, lawyer-businessman F.E. Dinshaw had lent over ?2 crores to the Tata Group when its major companies were in financial trouble. When the Tatas could not repay the loan, the outstanding amount was converted into one-eighth share in Tata Sons’ commissions. Dinshaw transferred the rights to the commission to his private company, which was acquired in full by the SP Group by 1965. It is reported that J.R.D.’s siblings also sold part of their shareholding to the SP Group. All these amount to their current holding of 18.4%. In quantitative terms, their investments in Tata Sons appreciated from ?70 crores in 1965 to ?58,000 crores in 2016.

Published by Penguin Random House India, 'THE TATA GROUP' is now available at your nearest bookstore and on select metro airports. It can also be ordered on Amazon and Flipkart in Print and Kindle versions. A lot more information is available on my website: shashankshah.com