All you wanted to know about the COAL SCAM but didn't know where to ask…


Vivek Kaul

What is the basic issue?
Between 1993 and 2011, the government of India gave away 206 coal blocks for free to government and private companies.
So if these blocks were being given away free from 1993, why so much commotion now?
The Comptroller and Regulator General(CAG) in a recent report estimated that the losses due to the policy of the government giving out coal blocks for free, amounted to Rs 1.86lakh crore.
Why is the Congress led UPA government being blamed if the policy started in 1993?
Estimates made by stock brokerage CLSA suggest that only 41 out of the 206 blocks given away for free, were allocated before the end of 2003. This means that 165 blocks were allocated between 2004 and 2011. The Congress led UPA government has been in power since May 2004. This amounts to nearly 14% Hence, a major number of coal blocks were given away free during the UPA rule.
And how is Prime Minister(PM) Manmohan Singh involved in all this?
The PM also happened to be the coal minister between 2006 and 2009. During this period 134 coal blocks were given away for free. Estimates made by Nomura Equity Research suggest that between 2006 and 2009 the coal blocks given away for free had geological reserves of around 40 billion tonnes. India has around 286billion tonnes of geological reserves of coal. This means that around 14% of total geological reserves of coal was given away free during the period Manmohan Singh was the coal minister.
What was the purported reason for giving the coal blocks for free?
This was done in order to increase the total coal production in the country. The government owned Coal India Ltd which accounts for 80% of the total coal production in the country hasn’t been able to produce enough to meet the growing energy needs of the country. Between April 1, 2004 and March 31, 2012, the production of coal by Coal India has increased by just 65million tonnes to 436million tonnes. This means a growth of a mere 2.3% per year on an average.
What is the reasoning behind CAG coming up with the Rs 1.86lakh crore number?
The CAG reasonably assumed that the coal mined from the coal blocks given away for free could have been sold at a certain price in the market. Since the government gave away the blocks for free it lost that opportunity. This lost opportunity is what CAG has tried to quantify in terms of a number.
So what were the assumptions that the CAG worked with?
While calculating the loss the CAG did not take into account the coal blocks given to the government companies. Only blocks given to private companies were taken into account. Further only open cast mines were included in calculating the loss. Underground mines were not taken into account.
How were the numbers worked out?
The total coal available in a block is referred to as geological reserve. Due to several reasons including those of safely, the entire geological reserve cannot be mined. The portion that can be mined is referred to as extractable reserve. The extractable reserves for the blocks (after ignoring the blocks owned by government companies and underground mines) came to 6282.5million tonnes. This is equivalent to more than 14 times the annual production of Coal India Ltd. And this is the amount of coal the government would have been able to sell if it had not given the blocks away for free to private companies.
But that’s just coal in tonnes, how did CAG arrive at a loss of Rs 1.86 lakh crore?
The government gave away 6282.5million tonnes of coal for free. It could have sold it at a certain price. Also mining this coal would have involved a certain cost. The CAG first calculated the average sale price for all grades of coal sold by Coal India in 2010-2011. This came to Rs 1028.42 per tonne. Then it calculated the average cost of production for all grades of coal for the same period. This came at Rs 583.01. Other than this there was a financing cost of Rs 150 per tonne which was taken into account, as advised by the Ministry of Coal. Hence a benefit of Rs 295.41 per tonne of coal was arrived at (Rs 1028.42 – Rs 583.01 – Rs 150).
The losses were thus estimated to be at Rs 1,85,591.33 crore (Rs 295.41 x 6282.5million tonnes) or around Rs 1.86lakh crore, by the CAG.
But isn’t Rs 1.86 lakh crore a very big number?
Yes it is a very big number. But still a conservative estimate. The CAG does not take into account the losses on account of blocks given away free to government companies. As I had mentioned on an earlier occasion in this newspaper, the transaction of handing over a coal block was between two arms of the government. The ministry of coal and a government owned public sector company (like NTPC). In the past when such transactions have happened revenue earned from such transactions have been recognized. A very good example is when the government forces the Life Insurance Corporation (LIC) of India to buy shares of public sector companies to meet its disinvestment target. One arm of the government (LIC) is buying shares of another arm of the government (for eg: ONGC). And the money received by the government is recognized as revenue in the annual financial statement. So when revenues for transactions between two arms of the government are recognized so should losses. Hence, the entire idea of the CAG not taking losses on account of coal blocks given to pubic sector companies does not make sense. If they had recognised these losses as well, losses would have been greater than Rs 1.86lakh crore.
So this number could have been bigger?
Yes. The other point to remember here is that the CAG had assumed extractable reserves of a conservative 73% in case of mines were mine plans were not available. Typically extractable reserves are around 80-95% of geological reserves. The CAG has also been very conservative in calculating the benefit per tonne of coal by taking the average price of coal sold by Coal India Ltd. This price is typically the lowest in the market. Coal from other sources is very expensive. Coal India also sells coal through an e-auction. The price of coal sold through this route is higher than the normal Coal India price. As the CAG has pointed out in its performance audit of ultra-mega power projects, the average e-auction price for Coal India coal was Rs 1782 per tonne in 2010-2011. Imported coal sells at an even higher price. The landed cost of imported coal was Rs 2874 per tonne (based on NTPC data for November 2009), reports CAG. If these prices had been taken into account or a weighted average price would have been created using these prices as well as the average Coal India price of Rs 1028.42 per tonne, the loss number would have been higher than Rs 1.86lakh crore.
If all this is true, so what was that Chidambaram said about zero losses?
The union Finance Minister P Chidambaram wanted us to believe that almost all companies which have been given free coal blocks have not started to mine coal till date. Hence there are no losses. This is like saying that I gave away my house for free, but since the person I gave it away to is not able to sell it, hence I did not face any losses.
What about the argument that coal is a natural resource and hence should not be auctioned?
People who have come up with this argument also need to realize that coal like air is not an unlimited natural resource. So air need not be priced because it is unlimited, but coal needs to be priced because it is limited. And if that had not been the case the government would be giving away all the coal that Coal India produces for free.
(The article originally appeared in the Daily News and Analysis on September 3,2012. http://www.dnaindia.com/india/report_all-you-wanted-to-know-about-the-coal-scam_1735936))
Vivek Kaul is a writer and can be reached at [email protected]

Canaries and coal mines


Vivek Kaul

Music has got its share of one hit wonders. Delhi born singer and musician Peter Saerdest fits that category. His most famous claim to fame being the 1969 hit “where do you go to (my lovely)”.
The song is about a fictional girl called Marie Clare. There is a paragraph in the song which brings out the unhappiness in her life. Here is how it goes:
But where do you go to my lovely
When you’re alone in your bed
Tell me the thoughts that surround you
I want to look inside your head, yes i do
.
Now this is a question that I have been wanting to ask the Prime Minister (PM) Manmohan Singh as the country moves from one scam to another. What are the thoughts that go inside his head? The forever quiet PM finally obliged us when he issued a statement on the coal gate scam and put the blame on his predecessors and the Comptroller and Auditor General(CAG) of India, for coming up with a loss number of Rs 1.86 lakh crore.
The policy of the government allocating coal blocks for free was introduced in 1993, and so it was not right to blame the Congress led United Progressive Alliance (UPA) felt the Prime Minister. Fair point, one must say.
But as the numbers calculated by the international stock brokerage CLSA show a major part of the coal blocks were given away for free only after the Congress led UPA came to power in May 2004. Of the 100 coal blocks given away free to government companies between 1993 and 2011, 83blocks were handed over after 2003. The same stands true for private sector companies where 82 out of the 106 blocks were allocated after 2003.
So while it might be true that UPA did not start the policy but what Manmohan Singh cannot deny is that they went around implementing it with a vengeance. The geological reserves of the coal blocks given away for free amounted to around 41billion tonnes. The total geological reserves of coal in India amount to around 286billion tonnes which means 14% of it was given away for free.
Hence, the question that the PM still needs to answer is that why was there a sudden increase in the allocation of blocks between 2004 and 2009, and especially during his tenure as the coal minister between 2006 and 2009?
The answer might most probably lies in the price of coal which started to shoot up around the time UPA first came to power. Prices shot up from around $30-40 per tonne to around $190 per tonne internationally in mid 2008. The conclusion that one can draw from this is that before 2004 it was cheap to just buy coal off the market. But after that things changed and it made more sense for companies to have direct access to coal.
The PM in his statement has also claimed that the loss number of Rs 1.86 lakh crore arrived at by the CAG can be questioned on a number of technical points.
The CAG has calculated the loss number based on certain assumptions. It has only taken into account mines given to private sector companies for free. Those allotted to government companies have been ignored. Underground mines have also not been taken into consideration.
So these assumptions work in favour of the government. If the government blocks had also been taken into account the loss number would have dramatically shot up. It need not be said that the PM does not talk about this anywhere in his statement.
The extractable reserves of these private sector coal blocks come to 6282.5million tonnes of coal. This is the amount of coal that the CAG feels could have been mined and sold and has been given away for free. The average benefit per tonne of this coal was estimated to be at Rs 295.41.
As Abhishek Tyagi and Rajesh Panjwani of CLSA write in a report dated August 21, 2012,”The average benefit per tonne has been arrived at by first, taking the difference between the average sale price (Rs1028.42) per tonne for all grades of CIL(Coal India Ltd) coal for 2010-11 and the average cost of production (Rs583.01) per tonne for all grades of CIL coal for 2010-11. Secondly, as advised by the Ministry of Coal vide letter dated 15 March 2012 a further allowance of Rs150 per tonne has been made for financing cost. Accordingly the average benefit of Rs295.41 per tonne has been applied to the extractable reserve of 6282.5 million tonne calculated as above.”
Using this method CAG arrived at the loss figure of Rs 1,85,591.33 crore (Rs 295.41 x 6282.5million tonnes) or around Rs 1.86 lakh crore. Analysts who track coal believe that assuming a profit of Rs 295.41 per tonne is a fairly conservative estimate.
In fact as has been reported elsewhere, if the e-auction prices of coal would have been considered, the losses would have been at Rs 11.2lakh crore. And if the calculations had been done using the imported coal prices the losses would amount to Rs 18lakh crore. These are huge numbers. The total expenditure of the government of India for the year 2011-2012 was estimated to be at around Rs 13.2lakh crore.
Another bogey that has been raised by the sympathizers of the Congress party (not by the PM) is that coal is a natural resource and hence cannot be “auctioned” or sold at a market price. What they forget to tell us is that coal is a limited natural resource and hence it needs to be priced correctly and not given away for free. If that was not the case why does the government price products like petrol, diesel, telecom spectrum etc? These products are also either natural resources or derivatives of natural resources. Why does Coal India Ltd sell coal at a certain price? Why not give it away for free?
By giving away coal blocks for free the nation has faced huge losses. Whether its Rs 1.86 lakh crore or Rs 18 lakh crore is a matter of conjecture, but that does not take away the fact that losses have been huge. Given this, the PM and the Congress party, are just trying to practice the old adage: “if you can’t convince them, confuse them”.
(The article originally appeared on Asian Age/Deccan Chronicle on September 2,2012. http://www.deccanchronicle.com/editorial/dc-comment/canaries-coal-951)
(Vivek Kaul is a Mumbai based writer. He can be reached at [email protected])

CAG was over-conservative in its Rs 1,86,000 cr loss number


Vivek Kaul

The Congress party seems to be hell bent on discrediting Vinod Rai, the Comptroller and Auditor General(CAG) of India, who has put the estimate of the losses on account of coal-gate at Rs 1.86 lakh crore.
The latest Congress politician to join the “pull Rai down” bandwagon is Digvijaya Singh.
Singh told The Indian Express that “the way the CAG is going, it is clear he(i.e. Vinod Rai) has political ambitions like TN Chaturvedi (a former CAG who later joined the BJP). He has been giving notional and fictional figures that have no relevance to facts. How has he computed these figures? He is talking through his hat.”
Let’s try and understand why what Singh said is nonsense of the highest order and anyone who has read the CAG report wouldn’t say anything that was as remarkably stupid as this. But before I do that let me just summarise the coalgate issue first.
Between 1993 and 2011, the government of India gave away 206 coal blocks for free to government and private sector companies. The idea being that Coal India Ltd wasn’t producing enough coal to meet the growing energy needs of the nation. So free coal blocks were given away so that other companies could produce coal to meet their own coal needs.
Of these blocks given away for free, 165 blocks were given away free between 2004 and 2011. The Congress led United Progressive Alliance(UPA) has been in power since May 2004. Hence, 80% of the coal blocks have been given away for free during the reign of the Congress led UPA government.
This explains to a large extent why the Congress leaders are trying to discredit the CAG. Before Digvijaya Singh, the Prime Minister Manmohan Singh broke his silence for once, and said that the CAG report could be questioned on a number of technical points. The finance minister P Chidambaram said there had been no losses because of free coal blocks allocations and then denied making the statement a little later.
The CAG report on the coalgate scam explains in great detail the method they have used to arrive at a loss figure of Rs 1.86 lakh crore. Hence Singh’s question “how has he computed these figures?” is sheer rhetoric and nothing else.
As is the case with any estimate the CAG made a number of assumptions (for those who have a problem with this, even the government’s annual budget is an estimate which is replaced by a revised estimate a year later, and the actual number two years later). The CAG started with the assumption that the coal mined out of the coal blocks has been given away for free. This coal could be sold at a certain price. Since the government gave away the blocks for free, it let go of that opportunity. And this loss to the nation, the CAG has tried to quantify in terms of rupees, in its report.
There were other assumptions that were made as well. Only the coal blocks given out to private companies were taken into account while calculating losses. Blocks given to government companies were ignored. Personally, I would have liked CAG to take the government companies into account as well while calculating the losses, because a loss is a loss at the end of the day. Also, transactions happen between various sections of the government all the time and the money earned on account of these transactions is taken into account. So should the losses. Out of the 165 blocks allocated since 2004, 83, or around half were allocated to government owned companies.
The amount of coal in a block is referred to as the geological reserve. The portion that can be mined is referred to as the extractable reserve. The CAG calculated extractable reserves of the private coal blocks to be around 6282.5million tonnes. This is the amount of coal that could have been sold.
The second part of the calculation was arriving at a price at which this coal could have been sold. For this the CAG looked at the prices at which Coal India, which produces 80% of India’s coal, sells its various grades of coal. Using these prices it arrived at an average price of Rs 1028.42 per tonne of coal. Obviously there is a cost involved in producing this coal as well. The average cost of production came to Rs 583.01 per tonne. Other than this a financing cost of Rs 150 per tonne was also taken into account.
This meant a profit of Rs 295.41 per tonne of coal (Rs 1028.42 – Rs 583.01 – Rs 150). Hence the government had lost Rs295.41 for every tonne of coal that it gave away for free. Hence, the losses were estimated to be at Rs 1,85,591.33 crore (Rs 295.41 x 6282.5 million tonnes).
This brings me back to Digvijaya Singh. “He has been giving notional and fictional figures that have no relevance to facts,” a part of his statement said. The numbers are not fictional at all. They are backed by hardcore data. If you don’t use the numbers of Coal India, a company which produces 80% of the coal in India, whose numbers do you use? That is a question that Singh should answer.
Also, the price at which Coal India sells coal to companies it has an agreement with, is the lowest in the market. It is not linked to the international price of coal. The price of coal that is auctioned by Coal India is much higher than its normal price. As the CAG points out in its report on the ultra mega power project, the average price of coal sold by Coal India through e-auction in 2010-2011 was Rs 1782 per tonne. The average price of imported coal in November 2009 was Rs 2874 per tonne (calculated by the CAG based on NTPC data). The CAG did not take into account these prices. It took into account the lowest price of Rs 1028.42 per tonne, which was the average Coal India price.
Let’s run some numbers to try and understand what kind of losses CAG could have come up with if it wanted to. At a price of Rs 1,782, the profit per tonne would have been Rs 1050 (Rs 1782-Rs 583.01- Rs 150). If this number had been used the losses would have amounted to Rs6.6lakh crore.
At a price of Rs 2874 per tonne, the profit per tonne would have been Rs 2142(Rs 2874 – Rs 583.01 – Rs 150). If this number had been used the losses would have been Rs 13.5lakh crore. This number is a little more than the Rs 13.18 lakh crore expenditure that the government of India incurred in 2011-2012.
Even a weighted average price of these three prices would have implied a loss of Rs 7.3lakh crore. And this when the coal blocks given to government companies haven’t been taken into account at all.
So the point is that the CAG like a good accountant has worked with very conservative estimates and come up with a loss of Rs1.86 lakh crore. It could have easily come up with substantially bigger numbers as I just showed.
Now coming to the final charge of Vinod Rai having political ambitions. “The way the CAG is going, it is clear he(i.e. Vinod Rai) has political ambitions like TN Chaturvedi (a former CAG who later joined the BJP),” said Singh. Well just because one former CAG joined politics does not mean that every other CAG will follow him.
Singh should well remember the old English adage: “one swallow does not a summer make”.
(The article originally appeared on www.firstpost.com on September 1,2012. http://www.firstpost.com/business/cag-was-over-conservative-in-its-rs-186000-cr-loss-number-439355.html)
(Vivek Kaul is a writer and can be reached at [email protected])

Why the poor are willing to hand over their money to Sahara


Vivek Kaul

Abhijit V Banerjee and Esther Duflo in their book Poor Economics – Rethinking Poverty & the Ways to End It write a very interesting story about a woman they met in the slums of Hyderabad. This woman had borrowed Rs 10,000 from Spandana, a microfinance institution.
As they write “A woman we met in a slum in Hyderabad told us that she had borrowed 10,000 rupees from Spandana and immediately deposited the proceeds of the loan in a savings bank account. Thus, she was paying a 24 percent annual interest rate to Spandana, while earning about 4 percent on her savings account”.
The question of course was why would anyone in their right mind do something like this? Borrow at 24% and invest at 4%? But as the authors found out there was a clear method in the woman’s madness. “When we asked her why this made sense, she explained that her daughter, now sixteen, would need to get married in about two years. That 10,000 rupees was the beginning of her dowry. When we asked why she had not opted to simply put the money she was paying to Spandana for the loan into her savings bank account directly every week, she explained that it was simply not possible: other things would keep coming up…The point as we eventually figured out, is that the obligation to pay what you owe to Spandana – which is well enforced – imposes a discipline that the borrowers might not manage on their own.”
The example brings out a basic point that those with low income find it very difficult to save money and in some cases they even go to the extent of taking a loan and repaying it, rather than saving regularly to build a corpus.
This includes a lot of very small entrepreneurs and people who do odd jobs and make money on a daily basis. Such individuals have to meet their expenses on a daily basis and that leaves very little money to save at the end of the day. Also the chances of the little money they save, being spent are very high. As Abhijit Banerjee told me in an interview I did for the Economic Times “The broader issue is that savings is a huge problem. Cash doesn’t stay. Money in the pillow doesn’t work.”
Hence, as the above example showed it is easier for people to build a savings nest by borrowing and then repaying that loan, rather than by saving regularly.
Another way building a savings nest is by visiting a bank regularly and depositing that money almost on a daily basis. But that is easier said than done. In a number of cases, the small entrepreneur or the person doing odd jobs, figures out what he has made for the day, only by late evening. By the time the banks have closed for the day.
The money saved can easily be spent between the evening and the next morning when the banks open. Also, in the morning the person will have to get back to whatever he does, and may not find time to visit the bank. Banks also do not encourage people depositing small amounts on a daily basis. It pushes up their cost of transacting business.
But what if the bank or a financial institution comes to the person everyday late in the evening, once he is done with his business for the day and knows exactly what he has saved for the day. It also does not throw tantrums about taking on very low amounts.
This is precisely what Subrata Roy’s Sahara group has been doing for years, through its parabankers who number anywhere from six lakh to a million. They go and collect money from homes or work places of people almost on a daily basis.
The Sahara group fulfilled this basic financial need of having to save on a daily basis for those at the bottom of the pyramid (as the management guru CK Prahalad called them). The trouble of course was that there was very little transparency in where this money went. The group has had multiple interests ranging from real estate, films, television, and now even retail. A lot of these businesses are supposedly not doing well.
Over the last few years, both the Reserve Bank of India (RBI) and Securities and Exchange Board of India(Sebi), have cracked down on the money raising schemes of the Sahara group. In a decision today, the Supreme Court of India has directed that the Sahara group refund more around Rs 17,700 crore that it raised through its two unlisted companies between 2008 and 2011. The money was raised from 2.2crore small investors through an instrument known as fully convertible debenture. The money has to be returned in three months.
Sebi had ordered Sahara last year to refund this money with 15% interest. This was because the fund-raising process did not comply with the Sebi rules. Sahara had challenged this, but the Supreme Court upheld Sebi’
The question that arises here is that why has Sahara managed to raise money running into thousands of crores over the last few decades? The answer probably lies in our underdeveloped banking system. In a November 2011 presentation made by the India Brand Equity Foundation ( a trust established by the Ministry of Commerce with the Confederation of Indian Industry (CII) as its associate) throws up some very interesting facts. A few of them are listed below:
– Despite healthy growth over the past few years, the Indian banking sector is relatively underpenetrated.
– Limited banking penetration in India is also evident from low branch per 100,000 adults ratio – – Branch per 100,000 adults ratio in India stands at 747 compared to 1,065 for Brazil and 2,063 for Malaysia
– Of the 600,000 village habitations in India only 5 per cent have a commercial bank branch
– Only 40 per cent of the adult population has bank accounts
What these facts tell us very clearly is that even if a person wants to save it is not very easy for him to save because chances are he does not have a bank account or there is no bank in the vicinity. This is where Sahara comes in. The parabanker comes to the individual on a regular basis and collects his money.
As a Reuters story on Sahara points out “Investors in Sahara’s financial products tend to be from small towns and rural areas where banking penetration is low. “They see Sahara on television everyday as sponsor of the cricket team and that leads them to believe that this is the best company,” said a spokesman for the Investors and Consumers Guidance Cell, a consumer activist group.”
Sahara has built trust over the years by being a highly visible brand. It sponsors the Indian cricket and hockey team. It has television channels and a newspaper as well. Hence people feel safe handing over their money to Sahara.
The irony of this of course is that RBI which has been trying to shut down the money raising activities of Sahara is in a way responsible for its rise, given the low level of banking penetration in the country.
(The article originally appeared on www.firstpost.com on August 31,2012. http://www.firstpost.com/business/why-the-poor-are-willing-to-hand-over-their-money-to-sahara-438276.html)
(Vivek Kaul is a writer and can be reached at [email protected])

Ta-ta: How Ratan rebuilt the house that JRD left him


Vivek Kaul

Among the many tourist attractions of Mumbai are homes of famous people. The Ambanis used to live in Sea Wind building at Cuffe Parade till Mukesh Ambani built the 27-floor Antilia on Altamont Road. Kumar Mangalam Birla’s bungalow is very close to Mukesh’s Antilia. So is the Jindal Mansion of the Jindal family.
Lata Mangeshkar’s flat in Prabhu Kunj building is not too far off. Recent news reports suggest that industrialist Gautam Singhania is building a 40- storeyed building, JK House ,on Warden Road, which again is in the vicinity of Ambani’s Antilia.
For those who are historically inclined, there is Jinnah House (originally referred to as South Court), the erstwhile residence of Muhammad Ali Jinnah, which is very close to the residence of the Chief Minister of Maharashtra.
The other famous residences in the city are Amitabh Bachchan’s Jalsa and Pratiksha, Shahrukh Khan’s Mannat, the late Rajesh Khanna’s Aashirwad and Salman Khan’s one-bedroom-hall-kitchen flat in Galaxy Apartments.
Before you start wondering why I am giving you all these titbits that you may already be aware of, let me tell you, dear reader, that I have always wondered where Ratan Tata lives.
Where is his Anitilia and his Jalsa? Is it as posh as the other residences I have mentioned above? And given the fact that Tata is an architect by qualification, did he design it himself?
The point is that unlike a lot of other industrialists, Tata is very low key. You won’t find him hosting a Page 3 party or even attending one for that matter. His reclusiveness is famous. No wonder The Economist magazine, in a January 2007 profile of him, called him the “shy” architect.
But, as it turns out, he has designed only two houses till date. As the Guardian newspaper wrote in a 2008 profile of his “He only designed two houses: his mother’s and his own beach-house off the Arabian sea.” (You can read the complete profile here)
Ratan Tata took over as Chairman of Tata Sons in 1991, just as the Indian economy was opening up. “His uncle (JRD Tata), who had run Tata for more than 50 years, had started Tata Airlines (which became Air India)…He was a good-looking philanthropist with a French wife and held the first pilot’s licence to be issued in India.His shy and unglamorous nephew, in contrast, trained as an architect at Cornell University, slipped quietly into the family firm and was not marked out for the succession even when his uncle was due to bow out,” wrote The Economist in the 2007 profile. (You can read the complete profile here)
Ratan Tata took over as Chairman of the group from the great Jehangir Ratanji Dadabhoy Tata, or JRD Tata, of Jeh as he was known to friends. JRD had been Chairman of the group for more than 50 years starting in 1938. He took over the reins after the untimely death of Sir Nowroji Saklatvala.
JRD Tata’s father RD Tata was the first cousin of Jamsetji Tata, the founder of the Tata group, and had been a partner in the original Tata & Sons. As Morgen Witzel writes in Tata —The Evolution of a Corporate Brand: “He (RD Tata) had been a partner in the original Tata & Sons, but then moved to Paris, where he set up in business on his own account…He married a Frenchwoman (Suzanne Briere), and JRD their eldest son was born in 1904…He grew up and was educated in France; years later, some Indians remarked that he still spoke with a French accent.”
JRD was surprised at being appointed Chairman of Tata Sons and, as Witzel points out, he “once described the decision of the directors to appoint him as chairman as a ‘moment of mental aberration’”. But the group did rather well under him despite the setbacks it received in the way of its companies being nationalised by the government now and then. In 1939, the group had 14 companies with total sales of Rs 280 crore. By the time JRD retired and Ratan took over, the group had more than 50 companies with sales of around Rs 15,000crore.
JRD was a visionary and a lot of labour reforms that Indian corporates had to carry out over the years where envisaged by him and first implemented within the Tata group. “Tisco (Tata Iron & Steel Co, now Tata Steel) was…probably the first company in India to have a dedicated human resources department, a practice followed by other Tata companies,” writes Witzel.
JRD was also a great believer in letting his managers do what they wanted to do. This was one of the reasons why the Tata group reached the size that it did under JRD. “Russi Mody…was exceptional in the way he steered Tata Steel through difficult times; Darbari Seth built Tata Chemicals and Tata Tea from scratch; Ajit Kerkar was instrumental in turning a one-hotel company into a 1,000-room hospitality giant. And, of course, there was the indomitable Nani Palkhivala, who served on the board of many Tata group companies,” an Outlook Business story on the Tata group points out. (You can read the complete story here)
But what this freedom did was that it made the entire group very unwieldy. “JRD had a clean, uncomplicated portfolio of businesses when he took over in 1938. There was textiles, the group’s first business, steel, power, cement, insurance, and, of course, JRD’s first love—aviation… In 1991, the Tata business structure was quite complicated. Till then, the group was not run as one business group.
Each company was led in the direction that each of the mercurial chairmen chose. JRD allowed them to give full vent to their managerial entrepreneurialism. The result was a maze of businesses. Three companies were making cement and at least five were in the pharmaceutical business in some form or the other,” points out Outlook Business. Other than making the group unwieldy different managers ran different companies within the group as their own personal fiefdoms.
What also did not help was the fact that JRD did not bother much about ownership. As Witzel points out, “By the 1980s Tata Sons held a smaller share of steel-maker Tisco than did their rivals the Birlas. Tata Sons’ share of…truck maker Tata Engineering & Locomotive Co (Telco, now Tata Motors) had declined to 3 percent, and its share of Indian Hotels, the parent company for many of the Taj Hotels, was now just 12 percent…The family’s own stake in Tata Sons had shrunk to just 1.5 percent,while construction magnate Pallonji Mistry owned 17.5 percent… ‘There was a question,’ says Ratan Tata, ‘as to whether we had the right to claim to manage these companies. In fact we didn’t have the legal right or even the moral right, to manage them.’”
What also did not help was the fact that JRD had left the appointment of Ratan as Chairman till very late in the day. Speculation had been rife on who would succeed JRD since the mid-1980s, when JRD had crossed the age of 80. JRD it is said to have made up his mind to pass on the baton either to Russi Mody or Nani Palkhivala.
Palkivala’s political views worked against him. And Russi Mody did not do his chances much good by criticising the performance of other senior leaders within the group. So it was left to JRD to pass on the baton to another Tata.
Ratan Tata was born to Naval and Soonoo Commisariat in 1937. Ratan’s father Naval Tata was the adopted son of Lady Navajbai, who was the wife of Sir Ratan Tata, one of the sons of the group founder Jamsetji Tata. Sir Ratan Tata died of a heart attack at the age of 47 in 1918. He and Lady Navajbai did not have any children. Neither did his elder brother Sir Dorabji Tata.
So it was decided that Lady Navajbai would adopt Naval, who was an orphan and the son of Sir Ratan’s favourite cousin.
As business historian Gita Piramal told the Guardian newspaper a few years back: “The Tatas are a reconstructed family who adopt and cobble together people to make a family. That way they do promote talent rather than blood relations.”
Ratan Tata completed his graduation in architecture from Cornell University in the United States in 1962. It is said that he had a job offer from IBM but he came back to India and was put to work at Tisco, what was then the biggest group company.
His first independent assignment was in 1971 as the director of National Radio and Electronics (Nelco) which was in dire straits. As soon as Tata had managed to turn the company around, Indira Gandhi declared emergency and Nelco was in dire straits again.
Tata was then asked to turn around Empress Mill, which was one of the three businesses started by the group founder Jamsetji Tata (the other two being the Taj Mahal hotel and Tata Steel)). Tata managed to turn around the sick mill but was refused an investment of Rs 50 lakh that was needed. Soon the mill workers’ strike led by Datta Samant hit Bombay (now Mumbai), and the mill had to be shut down in 1986.
In 1981, Ratan Tata was appointed as the Chairman of Tata Industries. “Ratan helped draw up a group strategic plan in 1983. Among other things, it emphasised venturing into hi-tech businesses; focusing on select markets and products; judicious mergers and acquisitions; and leveraging group synergies.
Accordingly, Ratan promoted seven hi-tech businesses under Tata Industries in the eighties: Tata Telecom, Tata Finance, Tata Keltron, Hitech Drilling Services, Tata Honeywell, Tata Elxsi and Plantek,” points out another Outlook Business story on the Tatas. (You can read the complete story here).
But outside Tata Industries, the blueprint did not achieve any success with various CEOs and managing directors continuing to run their individual fiefdoms. Given this, Ratan Tata’s career within the Tata Group hadn’t been great shakes and his appointment as Chairman was as big a surprise for others as it was for himself. This is something that Ratan Tata admitted to in an interview later. He had believed that Palkhivala and Mody were the main players in the race.
So it remains a mystery as to why Ratan Tata was appointed as the Chairman of Tata Sons by JRD. One version is pointed out by Tata group historian RM Lala in an interview to Outlook Business.
“RM Lala recalls speaking with JRD some 10 days after the announcement and asking whether Ratan had been chosen because of his integrity. ‘Oh no, I wouldn’t say that; that would mean the others did not have integrity,’ JRD replied. ‘I chose him because of his memory. Ratan will be more like me.’” Was this JRD’s way of saying that Ratan Tata was chosen because he was a Tata at the end of the day? He probably felt that only someone with the Tata name could hold a group built by various satraps independently together. But we will never know for sure.
The first few years of Ratan’s tenure as the Chairperson were spent fighting the leaders within the Tata group and the fiefdoms they had built. And the fight with Russi Mody got very ugly with JRD having to fire Mody in 1993.
Ratan Tata, on that occasion, had said that Tisco would not be affected by Mody’s exit. To this Mody had replied “Ratan is quite right. No one is indispensable. My disappearance from Jamshedpur may not be felt, but the arrival of Ratan Tata and (JJ) Irani will certainly make a difference. It’s all like a circus — the serious acts of entertainment are always shown first. Then come the clowns and the animal trainers. That may well be the case with Tisco.” (quoted in Russi Mody: The Man Who Also Made Steel, written by Partha Mukherjee and Jyoti Sabharwal).
That was uncharitable, but Mody was quite off the mark on this.
Ill-health forced Nani Palkhivala to leave (he was later affected by Alzheimer’s disease). Other biggies like Darbari Seth and Ajit Kerkar were forced out by implementing a long dormant retirement rule. It is the same retirement rule that Tata has now implemented for himself and appointed Cyrus Mistry in his place.
The other thing that Ratan Tata did was increase the holdings of Tata Sons in all group firms to 26 percent, the level which allows a shareholder to block resolutions at the board level. As Ratan Tata told Witzel in Tata – The Evolution of a Corporate Brand: “Then we set ourselves the task of seeing how we could put ourselves together as a more meaningful and recognisable group of companies with more central control.”
The money required for increasing stakes in various group companies came from Tata Consultancy Services (TCS) which had become the largest software company in Asia and was generating a phenomenal amount of cash for Tata Sons. TCS was a success story that had come out of JRD’s philosophy of allowing his managers to do their own thing. And since the company was unlisted back then, Tata Sons owned it fully.
The other thing that Ratan Tata did was to make the Tata brand more visible and uniform. “One of the first steps in the establishment of the Tata corporate brand was the harmonisation of the brand mark as it was used. As Ratan Tata says, ‘You could fill a wall with the different symbols used by the companies’. These were now swept away and a uniform style was introduced,” writes Witzel.
Also company names like Tisco and Telco were changed to Tata Steel and Tata Motors to make the Tata connection more explicit. Strong brand names like the Taj Mahal hotel were not changed. The group companies were also made to sign the Tata code of conduct. This also meant paying Tata Sons a subscription fees of 0.25 percent of their annual sales, if the companies used the Tata brand name directly.
The other big decision of Ratan Tata was to get Tata firms to go global. When Ratan Tata took over only around 5 percent of the group’s revenues used to come from overseas operations. Now the number is at 58 percent.
A 2007 story by Business Week magazine best describes Tata’s international forays. “Since 2003, Tata has bought the truck unit of South Korea’s Daewoo Motors, a stake in one of Indonesia’s biggest coal mines, and steel mills in Singapore, Thailand, and Vietnam. It has taken over a slew of tony hotels, including New York’s Pierre, the Ritz-Carlton in Boston, and San Francisco’s Camden Place. The 2004 purchase of Tyco International’s undersea telecom cables for $130 million, a price that in hindsight looks like a steal, turned Tata into the world’s biggest carrier of international phone calls. With its $91 million buyout of British engineering firm Incat International, Tata Technologies now is a major supplier of outsourced industrial design for American auto and aerospace companies, with 3,300 engineers in India, the US, and Europe.
The crowning deal to date has been Tata Steel’s $13 billion takeover in April of Dutch-British steel giant Corus Group, a target that would have been unthinkable just a few years ago. In one swoop, the move greatly expands Tata Steel’s range of finished products, secures access to automakers across the US and Europe, and boosts its capacity fivefold, with mills added in Pennsylvania and Ohio.” (You can read the complete story here).
If all that wasn’t enough in 2008 Tata Motors also bought iconic British car brands the Jaguar and the Land Rover.
This strategy of Tata has come in for some criticism given that a lot of companies were bought during 2003-2008 when prices were at their peak. While this is correct with the benefit of hindsight, it also needs to be pointed out that it is easier to carry out big deals in a bull market when people are willing to sell and finance is easier to raise.
On the home front the group has entered newer business like Tata Sky (direct-to-home television) and Ginger Hotels (budget hotels). But Ratan Tata’s big dream has been the Tata Nano, an affordable car for the average Indian. He had the idea to build a car like Nano when he saw a family of four struggling on a two-wheeler on a rainy night in Mumbai.
The car has run into a spate of controversies. The Tatas had to pull out of West Bengal where the Nano was originally supposed to be made after political trouble erupted there. They have since moved manufacturing to Gujarat. Other than that, the quality of the initial batch has been criticised with some cars catching fire. But more than anything the car which was supposed to cause traffic jams all across India isn’t really selling too well. Nevertheless it is too early to write off the Nano. (You can read the complete story here). Ratan Tata, for one, believes there is life to the Nano and he could be right.
Ratan Tata’s stint at the Tata group is now coming to an end. He is set to retire in December when he turns 75. As he attends his last annual general meeting of Tata Global Beverages today (31 August 2012 in Kolkata), he can look bank in wonder at what he has created over the 20-and-odd-years he has captained the group. The total revenues of the Tata Group in 2010-2011 were around $83 billion,many more times what it was when Ratan Tata took over the group way back in 1991.
Tata has remained a bachelor all his life though, in an interview to CNN in April 2011, he admitted that he came close to marrying four times. “When you asked whether I’d ever been in love, I came seriously close to getting married four times and each time it got close to there and I guess I backed off in fear of one reason or another,” he said.
The most serious affair was when Tata was in the United States. “Well, you know one was probably the most serious was when I was working in the US and the only reason we didn’t get married was that I came back to India and she was to follow me… and that was the year of the, if you like, the Sino-Indian conflict and in true American fashion this conflict in the Himalayas, in the snowy, uninhabited part of the Himalayas, was seen in the United States as a major war between India and China and so, she didn’t come and finally got married in the US thereafter,” he had told CNN.
Tata, like his uncle JRD, is an avid pilot and is known to fly the Falcon 2000 business jet on his own within India. In the Aero India 2007 air show Tata co-piloted the fighter jets Lockheed F-16 and Boeing F-18.
He has a younger brother Jimmy about whom not much is known. He also has one step brother Noel (who heads the retail business of the Tata group) and three step sisters, one of whom is married to the next Tata Sons Chairman Cyrus Mistry.
Mistry also happens to be the son of Shapoorji Pallonji Mistry, the largest individual shareholder of Tata Sons. Given this, chances are that Ratan Tata may be the last Tata at the helm of the Tata group.
However, as Gita Piramal noted earlier, one needn’t be born a Tata to be its head. Tata is about a state of mind, not just being born in India’s most respect business family.
(Vivek Kaul is a writer and can be reached at [email protected])

(The article originally appeared on www.firstpost.com on August 31,2012. http://www.firstpost.com/business/ta-ta-how-ratan-rebuilt-the-house-that-jrd-left-him-437593.html)