Tata-Mistry: Separation Plan, Waiting Game, Winning Hand

So far Tata Sons Ltd. has maintained silence in the face of Cyrus Mistry’s ‘separation’ announcements. Some lawyers are reading that to mean a staring match. And while its financial troubles suggest that the Mistry-family owned SP Group may be the first to blink, Tata Sons, holding company of India’s largest conglomerate, would also like to avoid a reputational blow by the highest court of the land, said one senior advocate.

After a bruising four-year legal battle, prompted by his unceremonious ouster by Tata Sons, its former chairman and second-largest shareholder Cyrus Mistry has offered to separate from the Tata parent via a share swap. That means, in exchange for its 18.37% stake in Tata Sons, the Mistry family is willing to accept shares of listed Tata Group companies where Tata Sons has shareholding.

For instance, the SP Group proposal illustrates:

72% of Tata Consultancy Services Ltd. is owned by Tata Sons.
SP Group’s ownership of 18.37% in Tata Sons translates to 13.22% shareholding of TCS.
Hence, 13.22% of TCS be transferred to SP Group.

While the pro-rata asset separation proposal may be practical, in that it makes the Mistry investment more liquid or easier to exit, and spares Tata Sons from having to pay a large amount of cash to buy out the Mistry family, there are several reasons why Tata may not find it feasible, said Senior Advocate Tushad Cooper in an interview with BloombergQuint.

Valuation Negotiation
Valuation will be the first and most important point of contention. The SP Group has estimated their stake in Tata Sons is worth Rs 1,75,000 crore. “Obviously, the two groups are going to be at variance about what the valuation should be,” Cooper said.

The pro-rata allocation of assets in listed companies will depend on that negotiation, Rajat Sethi, partner at law firm S&R Associates, told BloombergQuint. “Holding company discount, liabilities at the Tata Sons’ level, there are preference shares. So, a simplistic solution that 18% of Tata Sons translates into 13% of TCS does not make sense even without looking at the Tata Sons’ balance sheet.”

Also Read: How To Value Tata Sons And The Mistry Family’s Stake

Continuing Co-Existence?
Another objection Tata Sons may have is the co-existence of the Mistry family as shareholder in the group’s listed companies. The separation proposal notes that the Mistry family will have less than 10% in listed Tata companies, except for TCS. Yet, this will be a sticking point, Cooper said, “because the whole idea is to put an end to all relationships between the Tata Group and the SP group. If they have to continue holding a 10% stake in the most-d company of the Tata Group, Tatas will definitely put up reluctance to accept such a proposal.”

Also, large blocks of shareholding with the Mistry family might raise concerns about their sale to strategic investors or Tata rivals. That can be mitigated with appropriate covenants, according to both Cooper and Sethi. “It’s possible that they may agree to some kind of a covenant that the SP Group could liquidate that stake by sales in the open market over a period of time so that after a period of three years or four years or whatever it is, they cease to be shareholders of the company,” Cooper said.

The Winning Hand?

Any discussion on the merits or demerits of the proposed separation plan is predicated on the assumption that Tata Sons is also keen to settle the matter. While the company has offered to buy out Mistry in the past as well, no concrete offer has yet been made public.

To be clear, while the SP Group lost its oppression and mismanagement case against Tata Sons at the National Company Law Tribunal and won at the appellate tribunal, the Supreme Court has yet to hear the suit. That could take several months at least.

Also Read: Cyrus Mistry Argues NCLAT Right To Reinstate Him As Tata Sons Chairman

Meanwhile, the Mistry family-owned group, that spans construction, engineering and real estate, is facing a severe cash crunch on account of a slowing economy and impending debt repayments. An attempt to pledge the Tata Sons shares it owns has been temporarily thwarted by the apex court, adding to the financial distress.

Will Tata prefer to settle now or wait and tire out its adversary?

It is in Tata Sons’ interest to wait, said Cooper, pointing to a common negotiating tactic.

When they feel that the SP Group is growing more anxious for a settlement, that is when they (will) come in and make an offer which they feel would be at a substantial discount to what the SP group is asking for.

Tushad Cooper, Senior Advocate

The Tata company could very well wait till a Supreme Court verdict on the oppression or mismanagement case before deciding to settle, but that move comes with two risks. Reputational risk and that the Mistry family may then successfully press for the pledge of their shares, both lawyers opined.

“If the Supreme Court holds that the Tatas are guilty of oppression and mismanagement and particularly on the mismanagement aspects, it would be a strong reputational blow to the house of Tatas which hitherto has enjoyed a rather enviable reputation,” Cooper said.

The trigger possibly is on the pledge of shares and if they (SP Group) are able to leverage that point, then it may well be that they’re able to further expedite the hearing before the Supreme Court.

Rajat Sethi, Partner, S&R Associates

There are legal and tax issues as well pertaining to how such a separation proposal would be given effect to. But for those to come into play, first one side will have to blink.

Which side is currently a 1,75,000 crore rupee question, as Cooper put it. “Whether it will turn into an 80,000 crore question or 50,000 crore question, I don't know.”