Ratan Tata tribute: When Tata Finance kept a helicopter on standby to return investors' money

Ratan Tata (right) with JRD Tata in Pune in the early 1990s. Ratan Tata joined the Tata Group in 1961, and became its chairman in 1991. (Image source: Instagram/Ratan Tata)

In 2001, Tata Finance found itself in the middle of a crisis. A letter from Shankar Sharma and a subsequent investigation showed that some people in the management team had invested company money in dubious shares for personal gain. The company had also loaned over Rs 500 crore to subsidiaries. Tata Finance was on the brink of insolvency. When the fraud came to light, then-chairman Ratan Tata asked parent company Tata Sons to step in and secure the investments - beyond what was legally required of the company or of the Tata Group as a whole. Recounting the incident in 'Jamsetji Tata: Powerful Learnings for Corporate Success' (Penguin, 2024), Tata Group veterans R. Gopalakrishnan and Harish Bhat explained how Ratan Tata roped in help from Tata Sons and helicopters to repay investors asap in the pre-netbanking, pre-UPI era. Excerpted below is a segment from the section titled "Tata Finance Runs into Trouble", which Gopalakrishnan and Bhat filed under the 'Principles' chapter of their book:

In April 2001, a letter written by a person who called himself Shankar Sharma reached the offices of many top officials of the Tata Group. The recipients of the letter included the directors of Tata Finance Limited, India’s stock market regulator, the Securities and Exchange Board of India (SEBI) and several leading newspapers.

The letter levelled serious allegations against Tata Finance and its erstwhile managing director Dilip Pendse. It charged the company with publishing falsified information in its prospectus for a rights issue of preference shares. It also alleged that a large fraud had been committed in the company.

Tata Finance Limited was a company with big ambitions. At that time it was the Tata Group’s flagship platform for growth in the financial services industry. It had built a good presence in several areas, including hire and purchase of commercial vehicles, and financing of cars and consumer durables. The company accepted fixed deposits from the public, offering a good rate of interest.  Tens of thousands of Indians had invested their life savings with Tata Finance, primarily driven by their trust in the Tata name. Dilip Pendse, the managing director, was the chief architect of many of these plans and was considered a financial whiz kid in many circles.

The letter from Shankar Sharma therefore came as a rude shock to the Tata top brass. An audit of Tata Finance was carried out immediately, to ascertain whether there was any truth in the allegations. Ishaat Hussain, who was the finance director at Tata Sons at that time, says, ‘That letter alerted us, and further investigations revealed that there had indeed been some serious irregularities. We were all taken aback.’

The investigations threw up some painfully clear facts. Because of some dubious investments by the management, the company had become almost insolvent. It had significant borrowings, of about Rs 2,700 crore. Of this, Rs 875 crore represented money belonging to 4 lakh small depositors. For many of them these were savings of a lifetime, funds kept aside for retirement, children’s marriages and medical emergencies. Now Tata Finance was not in a position to repay these depositors.

The cause of this crisis also soon became clear. Tata Finance, led by Dilip Pendse, had lent approximately Rs 525 crore to some of its own subsidiary companies and affiliates, including a company called Nishkalp. A large part of that money had been invested in the equity market, in scrips of poor and speculative quality. In fact, some of these transactions had been carried out to earn personal profits. When the value of these scrips crashed, the original investments vanished, leading to a gaping hole in the books of the company.

This was a moment of reckoning for the Tatas, a group which was considered the gold standard for integrity in the country. How would they deal with a fraud of this magnitude?

The response to this crisis was steered by Ratan Tata, chairman of Tata Sons, himself. He led from the front. The matter was discussed with the board of Tata Sons, the parent company of the group. Ishaat Hussain recalls, ‘Mr Tata recommended to the Tata Sons board that they stand behind the Company and make available funds to meet all its financial commitments, and the Board fully endorsed this.’

The quantum of money involved—over Rs 500 crore—was a very large sum at that time. Meeting this entire liability created by the fraud exceeded the limited legal responsibilities of Tata Sons, because Tata Finance had many other shareholders as well. Tata Sons was indeed the promoter shareholder, but its liability was limited, as laid out under the law.

This did not constrain the response of Ratan Tata and the leadership at Tata Sons, because they were clearly focused on what was morally right to do rather than what was legally necessary. In fact, Ratan Tata defined two clear principles that would guide the Tata Group’s response to the crisis.

First, the interests of every depositor would be fully protected so that no one who had trusted the Tata name lost on account of the wrong actions of the management of Tata Finance. To do this, Tata Sons would make available the necessary funds, as approved by its board of directors.

Second, a thorough investigation would be undertaken so that the people who were guilty could be pursued legally
and punished for their actions, regardless of how senior or well-connected they were.

Both these actions were implemented swiftly. On 25 July 2001, an extraordinary public statement was issued admitting that Tata Finance was in distress because of a fraud committed upon it. This statement went on to
say that the Tatas would ensure that no depositor in the company lost any money.

To ensure this, the holding company of the Tata Group, Tata Sons, and its sister company Tata Industries, quickly
provided Tata Finance with cash and corporate guarantees amounting to Rs 615 crore so that funds would be available to repay each and every investor, as and when required. It was of paramount importance that every investor should feel safe and sleep peacefully.

In addition, plans were put in place to ensure that every depositor who wanted his money back was repaid immediately, at every branch of the company across India. As you read this, do bear in mind that in 2001, electronic
fund transfers and digital money were not yet in vogue. Tata Finance actually kept a helicopter on standby so that
funds could be transported urgently by air, if necessary.

Excerpted from 'Jamsetji Tata: Powerful Learnings for Corporate Success' by R. Gopalakrishnan and Harish Bhat, with permission from Penguin.