In early 2000, Tata Tea Ltd. acquired the Tetley Tea Company, a British company, for USD 450 million. AT that time, this was the largest amount that an Indian company paid for acquiring a foreign brand. A little while after this acquisition, Tata sold the majority of its plantations located at Munnar. Munnar was an economically underdeveloped area, where the biggest employer for over a 100 years was Tata Tea itself.
However- this was not a routine transaction. Instead of trying to get a lucrative deal with some of the biggest investment banks in the world, Tata sold 17 plantations of the total 25 to its former employees. The layoffs were not more than 1 per household, and a section of voluntary retirees were given with sufficient cash to buy equity in the new A. Tata is one of the few companies that thrive on social capital. Social capital refers to the value generated by investing in human relationships and good community.
While Tata continues to remain one of the most respected names in India and over the world, things are much different now. At present, just one company accounts for over 61% of Tata group’s total market valuation- Tata Consultancy Services. Tata Steel, Tata Power and quite a few other companies pay a large share of their earnings (as much as 3/4ths for some) in interest. The implication- they are close to falling in a debt trap.
The only way left for Tata to reduce the mounting debt is to sell of a part of their assets for cash-, which means that there is a need for them to downsize. However, this is not just limited to Tata only- the Birlas, and many other over-indebted companies in India Inc. are in the same boat. Tata Steel has already begun downsizing in its European Operations. This includes selling off its European construction-based assets. This downsizing would be directly affecting around 6,500 people.
The picture is somewhat similar across other Tata Companies as well. TCS is expected to go through a mass layoff, with over 30,000 employees likely to be affected. Tata Group, being one of the largest employers in India, is sure to affect a large section of the population. This situation is indication of the fact that debt is in fact killing corporate India- and not just slowing it down. It can be stated that the slowdown is a consequence of companies having too much debt.
The potential downsizing of Tata group in the future will have implications that will be seen through corporate India. With a number of other companies, including Apollo, DLF, GVK and others doing all they can to bring down debt, there is a lot that has to be done to revive the situation. With the rise in bank loans, banks too are finding the need to recapitalize or conserve some capital.
Thus, despite of what it may have appeared earlier, Tata Group and India Inc. overall have a lot more to be concerned about- and debt is the basis of it all.