Tata Sons Resorts To Short-Term Borrowing As Investor Pool Narrows

In the last two years, the holding company of the salt-to-software Tata Group has started borrowing via short-term borrowings. Prior to turning a private limited company, it raised funds through long-term instruments such as redeemable preference shares or non-convertible debentures.

The company has Rs 13,500 crore worth of rated short-term commercial paper programme, with Rs 7,400 crore outstanding as of Aug. 30, 2019, according to data disclosed by ICRA Ltd. At the time, such borrowings with tenures of 54-364 days contributed 24 percent of Tata Sons’ total net debt.

In June, the central bank’s data shows, Tata Sons also raised $500 million for four years through external commercial borrowings—the first time it tapped overseas markets.

The parent of salt-to-software Tata Group is a core investment company that usually raises funds through long-term instruments such as redeemable preference shares, non-convertibles debentures and bank debt to invest in group firms and new businesses. The shift towards short-term debt came after conversion from a public to a private firm in 2018, following the bitter public and legal feud with Mistry. That barred certain categories of investors like insurers from investing in Tata Sons debt.

WATCH | Going Private Changed Tata Sons’ Fundraising Pattern

Insurance companies are not permitted by the regulator to invest in paper issued by private companies. The Tata Group holding company was forced to redeem Rs 3,000 crore worth of non-convertible debentures issued to Life Insurance Corporation of India in June 2019, the Economic Times reported. LIC, according to the report, also complained to Tata Sons that its permission wasn’t taken before conversion to a private firm.

ICRA said in its August note that Tata Sons’ avenues of funding have become restricted since Insurance Regulatory and Development Authority guidelines restrict insurers from lending to private limited companies. Tata Sons, however, has partially mitigated the restriction by tapping the overseas market, it said.

Meanwhile, the National Company Law Appellate Tribunal, while restoring Mistry as chairman, ruled that conversion of Tata Sons from a public to a private firm was illegal. Tata Sons is likely to challenge it in the Supreme Court.

Insurance companies won’t invest in Tata Sons debt paper until the Supreme Court hears the appeal, the fixed income head at one of India’s largest private insurers said on the condition of anonymity as the person is not allowed to speak on investments. If the court reverses the NCLAT judgment, then regulations anyways bar insurers from investing in a private company debt.

The last time insurance companies had to liquidate all Tata Sons paper—to adhere to IRDAI regulation by March 2019—at a loss as the yields were high, the person said. Since these instruments were sold via private placement, Tata Sons had to buy them back at the prevailing valuations. Moreover, the company’s NCDs are not listed on an exchange and are not freely traded.

Curbs On Mutual Funds Too

To be sure, Tata Sons has raised long-term debt since going private. It borrowed Rs 13,007 crore via non-convertible debentures in the last two years, according to ICRA.

But its investor base will further narrow as June guidelines by the market regulator also restrict mutual funds from investing in unlisted paper issued by private companies.

Asset managers are required to invest only in the listed NCDs and Tata Sons’ debentures are not listed.

The market regulator allowed unlisted non-convertible debentures to contribute up to 10 percent of the debt portfolio provided they are rated, have simple structures with monthly coupons. According to the market regulator’s data, mutual funds have very little exposure to such rated, unlisted NCDs. Most instruments they invest in under this category are bank fixed deposits, discounted bills, repo of corporate bonds and units of real estate and infrastructure investment trusts.

Moreover, Securities and Exchange Board of India also mandated listing of commercial paper for mutual funds to invest.

Listing of commercial paper would require better disclosures and reporting standards, Lakshmi Iyer, chief investment officer (debt) and head of products at Kotak Asset Management Company Ltd., said commenting on the new norms.

So, conversion of Tata Sons to a private company has created two issues: reliance on short-term paper and the need for additional disclosures if it wants to list that paper.

The other available avenues to raise long-term debt are banks and non-bank lenders, according the head of fixed income at a private insurer quoted earlier.

While overseas borrowing is one option, Tata Sons doesn’t have a natural hedge against it as its revenues are primarily from dividend income and sale of shares, the person said, adding that the company would be exposed to currency risks.

No Doubts Over Debt Servicing Ability

That doesn’t suggest that Tata Sons is facing any financial challenges.

“Over the past two-and-a-half years, Tata Sons has invested over Rs 78,000 crore in order to: resolve outstanding debt related to Tata Teleservices; drive growth; unwind crossholdings; and increase our stake in various Tata Group companies,” said a Tata Sons spokesperson in an emailed response BloombergQuint queries. “Given our net asset base of over Rs 6,50,000 crore, Tata Sons is more than comfortable for future fundraising.”

Still, in the last few years, Tata Sons has been heavily dependent on its flagship Tata Consultancy Services Ltd. for cash flow through dividend, share buybacks and sale of shares. TCS returned Rs 29,148 crore to shareholders in 2018-2019—Rs 13,148 crore as dividends and Rs 16,000 crore through the buyback. More than 70 percent that went to the parent on account of its shareholding.

Reliance on dividend income and profit from sale of investments renders its operational inflows volatile, ICRA said in the August note. The ratings agency also flagged that higher investments pushed up Tata Sons net debt.

• Net debt rose from Rs 27,870 crore on March 31 to Rs 30,488 crore on July 31.
• Net debt-to-market of investments rose to 4.4 percent as of March 2019 from 3.7 percent a year earlier.
• Interest coverage ratio declined from 3.9x to 3x, though it continues to be within comfortable range.

Scheduled debt repayments for 2019-20 amount to Rs 3,333 crore according to ICRA, of which the company had repaid Rs 520 crore as on July 31.

One of the sources for raising funds is selling stakes in group companies such as TCS. Volatile stock market conditions may reduce Tata Sons’ financial flexibility in terms of monetising investments, ICRA said.

But Crisil Ratings, in its August report, said Tata Sons remains adequately resourced. Regular dividend income primarily from the information technology company provides high cash flow adequacy for debt servicing, it said.