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Tata Crisis

Introduction

• In a dramatic development, the Tata Sons board on Monday, 24th October 2016, sacked Cyrus Mistry, less than four years into his term as the chairman of Tata Sons.

• The board gave no reason for the abrupt removal of the 48-year-old Irish citizen and named his predecessor Ratan Tata, 78, as interim chairman.

• On Monday, in a letter to group employees , Tata had termed the decision to replace Mistry as a well-considered but difficult and a serious one which was "absolutely necessary for the future success of the Tata Group".

Ratan Tata • Ratan Tata is the 78-year-old chairman of Tata Trusts, the

charitable bodies that own a majority stake of around 66 percent in Tata Sons, the flagship holding company of the salt-to-software conglomerate.

• Between 1991 and 2012, Ratan Tata was the chairman of Tata Sons as well as of various group companies, many of them listed, in which Tata Sons holds a stake.

• He is widely credited as firmly establishing the business house as a storied institution globally, with a reputation for conducting business in an ethical manner.

• In December 2012, upon attaining the age of 75, Tata hung up his boots at Tata Sons and passed on the baton to Mistry, 50.

Cyrus Mistry

• Mistry is the son of Pallonji Mistry, chairman of construction major Shapoorji Pallonji Group, whose family owns an 18.4 percent stake in Tata Sons.

• Mistry has been a director on the board of Tata Sons since 2006 and was also part of the selection committee that was mandated with the task of finding Tata‟s successor.

• Tata and Mistry are also related since the latter‟s sister is married to Noel Tata, Ratan Tata‟s half-brother.

The Crisis

• Four years later, the succession story has gone all wrong with the board of Tata Sons, on October 24, voting in favour of ousting Mistry as its chairman.

• Ratan Tata is back as interim chairman “in the interest of stability and continuity so that there is no vacuum” in the top management of the group, he told the CEOs of various group companies during a meeting on October 25.

• Ratan Tata has said that he will hold fort for four months, in which time a selection committee is to identify Mistry‟s

successor.

Mistry’s Allegations • Mistry has cried foul. In a letter addressed to Tata Sons‟

directors and members of the Tata trusts on 25th October, Mistry wrote that he was “shocked beyond words” at what had transpired and the treatment meted out to him.

• Mistry has levelled a series of allegations against Ratan Tata in the letter and said he was pushed into a position of a "lame duck chairman". He accused the board members of replacing him without giving him an opportunity to defend himself.

• Mistry then proceeded to outline the various challenges faced by group companies including Tata Steel, Tata Motors, Indian Hotel Co. Ltd, Tata Power and others.

• He also argued that the group‟s global acquisition strategy, barring Jaguar Land Rover and Tetley, had left “a large debt overhang” on it.

• He continued that a realistic assessment of the fair value of the businesses of IHCL, Tata Motors‟ passenger vehicles division, Tata Steel Europe, Tata Power‟s power plant in Mundra and Tata Teleservices could potentially result in a write-down over time of around Rs 1.18 lakh crore.

• In addition, he cited various instances of alleged lack of corporate governance within the group.

• In the face of the above challenges, I had to take many tough decisions with sensitive care to the group‟s reputation as well as containing panic amidst internal and external shareholders,” Mistry said in the letter.

Tata’s Arguments

• On Nov. 10, the Tata Group finally rebutted Mistry‟s arguments. The conglomerate‟s letter came after the group replaced Mistry as chairman of software giant Tata Consultancy Services (TCS), too. Mistry had remained the TCS chairman even after his ouster from the group.

1. No Profits to show :

In its letter, the group said dividends from the group companies declined from Rs1,000 crore in 2012-13 to Rs780 crore in 2015-16. Tata Consultancy Services was the only saving grace when it came to generating profits, it said.

2. Wresting control :

The letter says that Mistry was “consciously” dismantling many of the group companies and reducing Tata Sons‟ control and influence over them.

3. Hurt by criticism of legacy

In his letter, Mistry had raised concerns about his helplessness

over handling many of the “legacy hotspots” at the group.

These included the group‟s decision to launch an airline

business and the Tata Nano car.

Tata group said “Nobody will deny that there were some

problem companies,”.

“The three major problem companies are Tata Steel Europe,

Tata Teleservices/Docomo, and the Indian operations of Tata

Motors.

The fact is that even after four years, there is no noticeable

improvement in the operations of these companies, and in fact

they have got worse as shown by continuing huge losses,

increasing high debt levels and declining share in their

respective markets.”

4. Badly-managed Tata Steel Europe and Docomo

“Critical reports have been received of the handling of the Tata

Steel Europe problems in the UK and the negotiations with

Docomo of Japan in the respective countries,” the letter said.

5. Devious plans

“Having been replaced as chairman of Tata Sons, where the

majority of the board and the major shareholders had expressed

a lack of confidence, Mr. Mistry is trying to gain control of

IHCL with the support of the independent directors of the

board,” the group said.

“He has cleverly ensured over these years that he would be the

only Tata Sons representative on the board of IHCL in order to

frustrate Tata Sons‟ ability to exercise influence and control on

IHCL.”

6. Why raise write down issue?

The Tata group has now asked in its letter whether Mistry

had “informed the boards of these companies at any time in

the past specifically of the above mentioned potential write-

downs?” adding that “surely he could not have „discovered‟

such a large potential liability only a day or two after he was

replaced as the chairman of Tata Sons.

Facts

• While Tata Consultancy Services and Tata Motors outperformed the benchmark BSE Sensex during Mr. Mistry‟s reign appreciating as much as 92 per cent and 81 per cent respectively, four other key group companies underperformed.

• The DoCoMo issue : Mistry‟s handling of the separation of Tata Teleservices‟ partnership with Japanese telco NTT DoCoMo didn‟t go down well with Tata.

• Tata Steel’s European Woes : Another sore point was Mistry‟s intention to pare debt at Tata Steel, by monetising the company‟s loss-making operations in UK. A part of the business, the long products division, has already been divested to Greybull Capital pursuant to a deal announced in April, 2016 and completed in May, 2016; and efforts were underway to find a partner for the rest of the business as well.

FACTS ON

DEMONETISATION

• Many countries have experimented with the process of

demonetization in the past. Some countries benefited

tremendously from the move while some terribly failed at it.

Here is a list of some countries that have implemented the

policy of demonetization:

• France

• US (1969)

• Britain (1971)

• Ghana (1982)

• Myanmar (1987)

• Nigeria (1984)

• Zaire (1990)

• Congo (1990)

• Soviet Union (1991)

Historical Facts about

demonetization in India

• On 12th January 1946, 500, Rs. 1,000 and Rs. 10,000 notes were declared invalid as legal tender.

• New notes of Rs. 1000, Rs. 5000 and Rs. 10,000 came into economy in 1954.

• On 16th January 1978, the Morarji Desai led-Janata Party demonetized banknotes of Rs. 1000, 5000 and 10000. Note that, the finance minister at that time was H.M. Patel.

• RBI introduced a new banknote of Rs. 500 into the economy in 1987 to contain inflation.

• On 8th November 2016, the old banknotes of Rs. 500 and Rs. 1000 were barred from being legal tender and new notes of Rs. 2000 were soon introduced.

Legal Facts about

Demonetization in India

• The legal basis for the order demonetizing currency can

be found in Section 26 of the Reserve Bank of India

Act, 1934. Under sub-section (2) of this Section, the

Union Government is given the power to declare that

any notes issue by the Reserve Bank will no longer be

legal tender.

Role of Government & RBI in

Demonetization

• The introduction of Pradhan Mantri Jan Dhan Yojana

(PMJDY) and Income Disclosure Scheme (IDS) were

done to ensure that everyone has a bank account and gets

ample time to declare their incomes.

• Before the Prime Minister issued an order to demonetize

certain currency, he consulted the RBI and the Finance

Minister.

Here is a list of the rules set in place continuously over a time

of 20 days since the PM announced demonetization:

Events

• 8th Nov: PM declares the Rs. 500 & Rs. 1,000 notes invalid.Exchange of

cash up to Rs. 4,000 allowed at banks, ATM withdrawal limited to Rs.

2,000.

• 9th Nov : Banks remain shut for a day.

• 10th Nov : Banks open. Massive queues ensue as millions line up to

exchange old currency or deposit their money.

• 12th Nov : Reports come in that people died waiting in the queues.

The Sensex registers the biggest single-day fall in 9 months.

• 13th Nov : ATM withdrawal limit raised to Rs. 2,500. Cash exchange limit

raised to Rs. 4,500.

• 15th Nov: Banks are asked to apply indelible ink marks on people

exchanging money. The election commission raises concerns

regarding this.

• 16th Nov: Parliament session begins; opposition parties up the ante

against the

government over the suffering of the poor.

• 17th Nov : Currency exchange limit lowered to Rs. 2,000.

• 18th Nov : India‟s Supreme Court says many are “frantic” over

demonetisation.

• 22nd Nov: RBI says banks have received Rs. 5.3 lakh crore in

deposits since Nov.08.

• 24th Nov: Old notes can now only be deposited at banks and not

exchanged.

• 27th Nov: RBI governor Urjit Patel justifies demonetisation, says the

new notes are difficult to counterfeit.

IMPACT

• Deposits rose 13.9% or Rs 12.7 lakh crore to Rs 105 lakh crore against a

10% rise last year, according data released by the Reserve Bank of India.

• The surplus liquidity in the banking system, created by demonetisation, will

lower borrowing costs and increase the access to credit. This will boost

economic activity with multiplier effects,“ said Arun Jaitley, finance

minister, during the Union Budget speech on Wednesday.

• While deposits grew, credit growth didn't pick up as it remained muted at

around 5% with total outstanding bank credit standing at Rs 74 lakh crore.

• Since Modi's announcement, Paytm, a popular e-wallet, has seen a threefold

increase in new sign-ups, while Oxigen Wallet‟s daily users spiked by 167%

• India‟s finance minister claimed that direct tax collection has increased

14.4% and the federal government‟s indirect tax collection rose by 26.6%.

Business world

Mergers and Acqusitions

• The $28.1 billion acquisition of LinkedIn by Microsoft

• Cyient Inc has acquired a 100% equity of Certon Software Inc.

• Cognizant acquired Australia based consulting, business transformation and IT services provider Adaptra

• A new European eyewear giant is set to emerge as Italian frames maker Luxottica - maker of brands like Ray-Ban and Oakley joins with French lens manufacturer Essilor in a multibillion-euro merger.

Major news around the

globe

• Pressure on free trade. A decades-long movement toward free trade

and globalization appeared to stop in its tracks as presidential

candidates Donald Trump and Hillary Clinton both vowed to

withdraw from the Trans-Pacific Partnership, which would have

relaxed trade restrictions with Asian nations. Trump threatened to

pull out of the North American Free Trade Agreement if Mexico

doesn‟t renegotiate the deal and to slap Mexico and China with tariffs

of 35% and 45%, respectively. His aim: to partly reverse the millions

of layoffs at U.S. factories as jobs were offshored to China, Mexico

and other countries. But many economists say those jobs aren‟t

coming back and tariffs risk retaliation that could ravage U.S. exports

and jobs.

Major news around the

globe

• Wells Fargo's scandal. In September, the San Francisco-based bank agreed to a $185 million settlement with federal regulators after an investigation showed Wells Fargo had secretly opened millions of unauthorized deposit and credit card accounts that weren‟t authorized by customers

• Unemployment rate falls. The unemployment rate, which hit 10% in 2009, continued its remarkable descent, falling to 4.6% in November from 5% early in the year. Many economists believe that rate, the lowest since August 2007

• Fake news fears. Fake news bubbled up during the political campaign and became a business issue for the place where many people get their news: Facebook. A post-election analysis by BuzzFeed found that fake stories shared on Facebook outperformed real news stories during the final three months of the campaign cycle.

Digital Payments in

India

CASHLESS INDIA

The Digital India program is a flagship program of the Government of India with a vision to transform India into a digitally empowered society and knowledge economy. “Faceless, Paperless, Cashless” is one of professed role of Digital India.

Definition

•Digital payment is a way of

payment which is made through

digital modes. In digital payments,

payer and payee both use digital

modes to send and receive money.

It is also called electronic payment

Different Types of Digital

Payments

UPI apps:BHIM, SBI, HDFC, iMobile, PhonePe

AEPS

USSD

Cards: Credit cards, Debit cards, Prepaid cards

E-Wallets: State bank buddy, ICICI Pockets, Freecharge,

Paytm etc.

POS

Micro-ATMs

Advantages of Digital

Payments

• Easy and convenient

• Pay or send money from anywhere

• Discounts from taxes

• Written record

• Less Risk

Drawbacks of Digital

Payments

• Difficult for a non-technical person

• The risk of data theft

• Overspending

Future of Digital

Payments:

• In 2015-16, a total of Rs. 4018 billion transacted through

mobile banking as compared to Rs. 60 billion in 2012-13

• There are many factors which are affecting the future of

digital payments.

Digital revolution : India has more than 100 crore

active mobile connections and more than 22 crore

smartphone users as of March 2016

Government’s support

• https://upipayments.co.in/digital-payment/

IMMIGRATION BAN

IMMIGRATION BAN

• Suspended the entire US refugee admissions system for 120 days.

• Suspended the Syrian refugee program indefinitely.

• Banned entry from seven majority-Muslim countries – Iran, Iraq,

Libya, Somalia, Sudan, Syria and Yemen – for 90 days.

• Temporarily banned entry of dual-nationals who are from those

seven countries but have an additional passport for 90 days

following the signing f the order.

• Prioritized refugee claims on the basis of religious persecution.

• Lowered the total number of refugees to be accepted from any

country in 2017 to 50,000, down from 110,000.

H1B Reforms

H1B

• Non-immigrant visa in the United States which allows U.S. employers to

temporarily employ foreign workers in specialty occupations.

• The duration of stay is three years, extendable to six years

• 65,000 foreign nationals are issued a visa in a fiscal year

• “Minimum wage" guaranteed to an H1B holder is USD 60,0000

established in 1989 and unchanged since then.

• Top H1B employer of in terms of Visas approved is CTS with 15680

visas followed by Infosys (8,991) and TCS(6,339) in 2015

Proposed reform

• Bill on High-Skilled Integrity and Fairness Act of 2017 has been

introduced in the US House of Representatives

• Seeking to double the minimum salary of H-1B visa holders to

US$130,000

• Was introduced by California Congressman Zoe Lofgren

• The legislation also seeks 20 per cent of the annually allocated H-1B

visas for small and start-ups.

• According to a study by the Bank of America Merrill Lynch, every

10% hike in H1B visa holder abroad would amount to 5% negative

impact on an average on a company‟s earnings.

IMPACT

• Indian IT stocks went into a tailspin

• BSE IT index cracked 4 per cent

• TCS, the largest IT player by sales, saw its stock tumble 4.61 per cent

• Infosys, the second largest IT firm, declined 3 per cent

• Shares of HCL Technologies were trading 4.85 per cent lower

• Tech Mahindra slumped 4.12

• IT midcaps Mastek and MphasiS fell 4 per cent each

• Wipro slumped 2.89 per cent

UNION BUDGET 2017

HIGHLIGHTS Budget agenda - transform, energise and clean India - TEC India.

Foreign investment promotion board (FIPB) to be abolished .

Allocation for infrastructure stands at a record rs 3,96,135 crore.

Government to set up strategic crude oil reserves in Odisha and Rajasthan.

Defence expenditure excluding pension at rs 2.74 lakh crore.

Fiscal deficit for 2017-18 pegged at 3.2 percent of GDP.

Fiscal deficit target for next three years pegged at 3 percent.

1.25 crore people have already adopted bhim app for digital payments.

Aadhaar pay- an app for merchants- to be launched' 20 lakh aadhaar-based pos by september 2017.

One crore houses for poor by 2019.

Safe drinking water to cover 28,000 arsenic and

Fluoride-affected habitations in the next four years.

For senior citizens, Aadhar cards giving their health

condition will be introduced .

Two new All India Institute of Medical

Sciences(AIIMS) to be set up in Jharkhand and

Gujarat.

Food subsidy estimated at Rs 1.45 trillion in 2017/18

versus Rs 1.35 trillion revised estimate for 2016/17

Railways

3500km railway lines to be put up.

Service charge on rail tickets booked through IRCTC to be withdrawn.

Rail safety fund with corpus of Rs 100,000 crore will be created over a period of five years.

500 rail stations to be made differently abled-friendly by providing lifts and escalators .

A new metro rail policy will be announced, this will open up new jobs for our youth.

Rural Economy

The approach in preparing the Budget has been to spend more on

rural areas, infrastructure and poverty alleviation with fiscal

prudence .

Agriculture sector is expected to grow at 4.6%, agriculture

expenditure targeted at Rs 10 lakh crore.

Total allocation for rural, agricultural and allied sectors for 2017-

18 is Rs 187223 crore, which is 24% higher than last year .

133-km road per day constructed under Pradhan Mantri Gram

Sadak Yojana as against 73-km in 2011-14 .

Allocation under MNREGA increased to 48,000 crore from Rs

38,500 crore. This is highest ever allocation

Taxation and Banking

India's tax-to GDP ratio is very low. We are largely a tax non compliance society,

when too many people evade taxes burden falls on those who are honest.

Out of 3.7 crore who filed tax returns in 2015-16, only 24 lakh persons showed income above Rs 10 lakh.

Of 76 lakh individuals who reported income of over Rs 5 lakh, 56 lakh are salaried.

Small firms with turnover up to Rs 50 crore to pay 25% tax now, instead of 30%.

Black money SIT has suggested no cash transaction above Rs 3 lakh. The government has accepted this recommendation.

Maximum cash donation any party can receive will be Rs 2000 from one source.

Political parties will be entitled to receive donations by cheques or digital modes.

An amendment being proposed to RBI Act to enable the issuance of electoral bonds for political funding.

Jaitley reduces income tax rate from 10% to 5% for tax slab of Rs 250,000 to Rs 500,000.

Surcharge of 10% for those whose annual income is Rs 50 lakh to 1 crore.

15% surcharge on incomes above Rs 1 crore to continue.

Government is considering introduction of new law to confiscate assets of offenders who escape the country.

Opinion Budget aims at the underprivileged section of the society and

it lays out a series of steps that should incentivize the creation of markets that can provide the goods and services the marginal segments of the population need. For e.g. – Affordable housing has got infrastructure status. Thus instead of providing doles and freebies the government focuses on mechanisms to enable all wage earners to buy goods and services at affordable rates.

On the corporate front, budget brings reduction in corporate tax rate only for the MSMEs while on the personal income tax front, large swathes of the middle class have been left untouched while the rich bear the cross.

Few persistent demands of India Inc., like lowering the headline corporation tax rate and eliminating Minimum Alternate Tax (MAT) were not considered, giving little incentive to the corporate sector.

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