One of India’s oldest and most trusted brands of all time was recently in one of the biggest financial feuds with its life long business partners. I am indeed talking about the Tata vs Mistry dispute. In the last month, Tata Sons and the construction giant Shapoorji Pallonji Group were on the verge of fighting another bitter courtroom battle that would have further strained their relationship. Let’s see where does this dispute originates from and what are the highlights of it.
The Tata empire is massive and its structure is quite complicated. At the top is Tata Sons which is the organization which holds together all of the Tata’s ventures – Tata Steel, Tata Motors, Tata Consultancy Services (TCS), etc.
Tata Sons, in turn, primarily belongs to two large institutions Tata Trusts – a group of charitable organizations set up by Sir Ratanji Jamshedji Tata. They own about 55% of the company and The Shapoorji Pallonji group, who own about 18% of Tata Sons
In summary, Tata Trusts owns a majority stake in the enterprise. And Shapoorji Pallonji (SP) group, a minority stake. When Ratan Tata turned 75, he handed over the reins of his global empire to Cyrus Mistry, son of construction giant Pallonji Mistry. He was impressed with Cyrus’s vision for the future and was further reassured by the fact that he had had a long association with Tata Sons. But this confidence didn’t last long.
On 24th October 2016, four years after Mistry’s appointment, Tata Sons shocked the business community by announcing that Cyrus Mistry had been asked to step down as the Executive Chairman of Tata Sons.
The board threatened to dismiss him through a no-confidence motion if he did not relent. Mistry, for his part, refused to step down and the board members took matters into their own hands. They fired him. Ratan Tata was made interim Chairman. And Natarajan Chandrasekaran finally took over the reins on 21 February 2017. In the meantime, Cyrus Mistry filed a case of oppression and mismanagement against Ratan Tata and several others. The matter is yet to be resolved. But it’s safe to say that there is some bad blood between the SP Group and Tata Sons and that it only grew overtime.
Now, coming on to the current argument for which we will have to move back to March, 2020.
So ever since coronavirus made landfall, the construction sector has had to deal with the huge problem of labour cost. Due to the reverse migration, during the 40-day lockdown, over 10 lakh workers were forced to ditch construction sites and find shelter elsewhere. As a resut, labour costs skyrocketed in many parts of India and developers were left in a lurch.
Also, considering multiple state governments had imposed heavy restrictions on movement and outdoor activities, there wasn’t a lot of construction happening in the first place. Meanwhile, companies also had to contend with cash flow problems. They had idle machinery, unused supplies and vacant facilities just lying around. They couldn’t use this stuff. But they had to keep paying their dues. This added financial burden meant many entities had to reevaluate entire projects even after the lock down restrictions were lifted.
Including the SP Group. The company had to deal with financial problems of its own and it was desperately looking to raise some money in a bid to tide over the crisis. Thankfully, they managed to elicit some interest and rope in a clutch of global investors to raise about ₹11,000 crores in total. On September 4th, they finalized the paperwork and were hoping to access some of these funds.
But almost immediately, Tata Sons intervened. Why?
Well… SP Group was raising money by putting up shares of Tata Sons as collateral. And the board at Tata Sons wasn’t very comfortable with this arrangement. Their contention was simple. Pledging of shares technically amounts to a transfer of sorts. After all, if SP Group fails to repay in full, the borrowers will own these shares by default. And according to the Articles of Association (a document that defines rules for running an organization) that’s a no-go. Because the document clearly prescribes that the board of Tata Sons ought to have the right of first refusal.
Meaning, they get first dibs before anybody else can make an offer. They have a right to buy these shares at fair value before somebody else can walk in. So just one day later, they went to the Supreme Court to stop the company from pledging the shares altogether and the court agreed with their assessment. They barred the SP Group from pledging shares. Until October 28, when the court promised to deliver a verdict on the matter. The SP group, of course, was outraged. They believed Tata was deliberately blocking their efforts at fundraising.
And for a while, it seemed like things were about to get out of hand. But then, there was a truce. Tata offered to buy the 18% stake SP group held in the company (Tata Sons). And SP Group, for its part, saw it best to accept the offer.
This wasn’t the end of Tata’s problem. In-fact, the biggest complication was, how is Tata going to raise the massive sum to buyout the 18% stake?
There is also a debate surrounding the actual worth of the stake. According to reports, SP Group claims the value to be at ₹1.8 lac crores whereas Tata seems to think its only worth about ₹1.5 lac crores. It’s going to be really challenging for Tata to raise this kind of money as most of Tata’s group companies are bleeding cash. And they can’t borrow money either because they only recently promised to reduce debt by the boatloads over the next few years. And that leaves us with one final option – TCS.
Tata’s stake in TCS is worth close to ₹6.7 lac crores. If they were willing to sell parts of TCS to fund this exercise, maybe they could pull it off. But selling TCS also means they’ll have to forego part ownership in their crown jewel. And there are definite downsides here because Tata has used money from TCS to fund some of their other loss-making ventures in the past.
What do you think? How will Tata fund this little program and do you believe they’ll be forced to make some tough choices now?