A 70-year old corporate marriage may be coming to an end. As one lawyer pointed out, that’s more than most partnerships last. Besides, this one soured four years ago, creating quite a stink. The only people not holding their noses were the lawyers. By the looks of it, they now have one last big payday left.
September 22, almost four years to the day the Tata Sons board ousted chairman and substantial shareholder Cyrus Mistry, marks the beginning of the end of the Tata-Mistry relationship.
The day began with the Tata Group offering to buy the Mistry family’s 18.37% stake in holding company Tata Sons. And, ended with the Mistry family telling the court it’s “time to separate from Tata”.
So what does this corporate divorce entail?
Tata Sons’ shareholding in listed companies is currently worth Rs 7.8 lakh crore, most of it contributed by Tata Consultancy Services Ltd. Add to that holdings in unlisted companies, property and the brand value. One private estimate puts the total value of Tata Sons at Rs 10 lakh crore. And hence the value of the Mistry family shareholding at Rs 1.75 -2 lakh crore, or $27 billion.
The amount is large but not insurmountable for a group like Tata. Why, Mukesh Ambani’s Reliance Jio was able to raise over $20 billion in the midst of a pandemic. Surely Tata Sons Chairman N Chandrasekaran can pull off the same.
The question is how?
Two things are clear. The Tata Trusts can’t purchase the shares as the law doesn’t permit such transactions by charitable trusts. Nor can any of Tata Sons’ subsidiaries as per company law. Most are not in any financial condition to do so anyways. TCS is, but can’t.
Tata Sons can buyback its shares provided it has sufficient internal funds as required by company law. One way that can be achieved is via sale of shares of TCS, the group’s most valuable company and the only one that can yield such a large amount. It holds 72% in the company.
Or it can look for a new investor in place of the Mistry family. Maybe, multiple investors, a la Ambani. Or a mix of investors and financiers.
Can Tata Do An Ambani?
Can Tata do an Ambani - sure. But there are a few critical differences between the Reliance Jio fund raise (and now Reliance Retail’s investor parade too) and Tata Sons.
Private Company Status
In the middle of the battle with Cyrus Mistry, Tata Sons converted into a private limited company. Private companies face lighter touch regulation, fewer compliance and governance provisions, limited financial disclosures, and, most importantly, can include all sorts of restrictive provisions in their Articles of Associations. Such as curbs on the transferability of shares. The same provision that Tata Sons has used to block the Mistry family from pledging the holding company’s shares to raise much needed funds for its businesses. It is this legal bind that brought Mistry to the conclusion that this relationship is over. The article also permits the company at any time, by a special resolution, to force a shareholder to sell his shares.
How many investors would agree to living with similar restrictions? Many institutional investors are by charter not permitted to invest in a private company. Of course, Tata Sons can convert back to being a public limited company. Ironically, that will prove Cyrus Mistry right - that the conversion to private was designed only to oppress minority shareholders - him.
Both Reliance Jio and Reliance Retail are public limited companies and are very likely to be listed in the years to come. There’s no such plan articulated for Tata Sons.
Old Economy Group
In a world where data is the new oil, Ambani’s businesses represent both ends of that equation. The objects of recent investor affection are the two new economy ones - Jio and Retail.
The Tata Group is a conglomerate of many old, middle aged and young businesses ranging from steel to watches to IT, several of which are currently in poor financial health. Or as Mistry puts it “Excluding TCS, the last quarter’s losses of all the listed group companies of approximately Rs 14,000 crore causes great concern.”
In his three years in the hot seat Chandrasekaran has been working to reduce debt and consolidate the group’s businesses into key verticals. It’s still work in progress. He has to parley that into a strength if he too wants a moneyed dozen outside his door willing to fork up for a holding company.
The Trust(s) Factor
There’s no doubt that Tata is among India’s best known and most loved brands. As also respected business houses. But the protracted, ugly and vicious legal battle with Mistry, whose family has been a shareholder for seven decades and who was appointed chairman by none other than Ratan Tata as well as deposed by him too, has dulled some of that shine.
Investors may overcome that but they will also want comfort on doing business with Tata Trusts, the majority shareholder in Tata Sons. Currently led by Ratan Tata, 82, succession at the Trusts, and the preservation of their independent character in the future, will be critical to every investor.
New Beginnings?
Assuming both sides are serious and can put the name calling aside to fashion a clean, civilised exit, this end can mark a new beginning for both.
At Tata Sons it is an opportunity for Chandrasekaran to broad base shareholding and prepare an ownership and leadership blueprint for a modern conglomerate that sustains even when no Tata is around. Especially when no Tata is around.
A cornered Mistry has had to choose between a shiny, family jewel and his family’s actively-managed businesses and good borrower credentials. At the very least he will put behind him the ignominy of a public ouster. With a few lakh crore rupees as salve.
It is like he said “a separation of interests would best serve all stakeholder groups”.
Menaka Doshi is Managing Editor at BloombergQuint.