After an association of close to 84 years, the Shapoorji Pallonji Mistry (SP) Group has offered to exit from Tata Sons as protracted litigation with the Tatas has affected the business expansion plans of the SP Group, which has a debt burden of over Rs 30,000 crore.
The market value of SP Group’s stake in the listed entities of Tata Group is estimated to be over Rs 148,000 crore, going by the market capitalisation of all listed group firms. It remains to be seen how the Tatas will raise the cash to acquire SP Group’s stake.
What is the latest case all about?
Earlier this month, Tata Sons moved the Supreme Court seeking to restrain SP Group firms from raising capital against security of their shareholding in Tata Sons. The Tatas argued that the articles of association (AoA) stipulate that shares cannot change hands, including to lenders or other parties, and the right of first refusal rests with Tata Sons. The SP Group was planning to raise funds for real estate expansion by pledging Tata Sons shares. The Tatas and the SP Group have been fighting various legal battles ever since Cyrus Mistry was removed as Chairman of Tata Sons four years ago.
In the Supreme Court on Tuesday, the SP Group said “a separation from the Tata Group is necessary due to the potential impact this continuing litigation could have on livelihoods and the economy”. The Tata Group is open to buying the shares in Tata Sons held by the SP Group to aid the latter’s fundraising efforts. The Supreme Court restrained the SP Group from transferring or pledging Tata Sons shares.
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When did the SP Group acquire a stake in Tata Sons?
Shapoorji Pallonji Mistry, Cyrus’s grandfather, bought a 12.5% stake in Tata Sons in 1936 from the heirs of F E Dinshaw, a close friend and associate of the Tatas. After the rights issue in 1996, the stake went up to 18.5%. The Tata and Mistry families have maintained cordial relations that have extended to marital ties over the years: Ratan Tata’s half-brother Noel Tata is married to Cyrus’s sister Aloo.
How much does SP Group own in Tata Sons?
It owns an 18.37% stake in Tata Sons, the holding company of Tata Group, while the majority 66% is controlled by Tata Trusts headed by Ratan Tata. While the total market capitalisation of 17 listed entities of Tata Group amounts to Rs 12.96 lakh crore, the valuation of SP Group’s holdings in listed entities of Tata group companies comes to around Rs 1.48 lakh crore. Since Tata Sons is also the holding company of unlisted entities of Tata Group, the SP Group would also have stake in the valuation of these; this will have to be worked out separately.
Who can buy SP Group’s stake?
While the SP Group has said its separation from the Tata Group is necessary, the latter has said it is willing to buy the former’s stake. It is reliably learnt that the Tata Sons Articles of Association states that if any shareholder of Tata Sons wants to sell his/her shares, then he has to first offer it to Tata Sons. Tata Sons will then decide a fair market value and offer it.
How easy will it be for Tata Group to buy this stake?
Investment bankers and finance experts say Tata Group’s offer to buy back SP Group’s shares involves various layers of complications. The first issue that will crop up will be the valuation that both parties will agree on. Another issue is that over the next one month, Tata Group will have to work out a financing plan to show how it will fund that acquisition and what will it put as lien for that borrowing.
“Except for TCS, not many Tata Group companies are in great shape — especially their steel and auto and power business having huge debt,” said an investment banker who did not wish to be named.
On the other hand, if Tata Group plans to bring in some global investors to buy these shares, market participants say such investors would want to know how Tata Sons would provide them an exit 7-10 years later as Tata Sons is an unlisted entity.
When was Cyrus Mistry removed as Tata Sons Chairman?
On October 24, 2016, the board of Tata Sons removed Cyrus Mistry as its Chairman, nearly four years after he had taken over. Mistry, who was a director on the board, had been appointed Deputy Chairman of the group in 2011 and then been promoted to Chairman in 2012. Mistry effected several changes in business practices, due to which capital expenditure increased but returns to shareholders decreased. His proposed sale of Tata Steel’s Port Talbot plant in the UK was seen as harming the goodwill earned by the Tatas abroad. A dispute with Docomo Group of Japan, problems in Air Asia and Tata Motors, and some acquisitions reportedly upset Ratan Tata.
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