Tata-Mistry tug of war puts foreign lenders in a spot

Tata Sons shares have been held for decades by the Mistry group. They have been held by entities that have been lying dormant for long and came to life essentially to raise funds for the group. The Mistrys’ have sought to raise liquidity against Tata Sons shares by pledging them to the foreign investors, including foreign banks, so that they will be able to tide over the cash crunch their businesses have been facing for quite some time. This is just the start. The Shapoorji group may have to continuously and aggressively leverage these shares (or alternatively dispose them) to raise additional thousands of crores in the immediate near future to repay gregarious debts that are coming for repayment.

Legal experts contend that since 18.4% shares in Tata Sons are owned by Mistry group, they are free to encumber them and raise money against their property. This is a right incidental to the ownership of the shares. One’s gaze is directed towards the fact that the Tata Sons articles particularly restrict transfer of shares, and that the articles neither impede nor inhibit their pledge.

Even after shares are pledged the Mistry group will continue to retain the ownership of shares, and that their name will continue to be reflected as a member in the register of shareholders. Some other scholars in the field of law argue that a share represents a stake in the share capital of a company, and alludes to all or every single right yoked together with it severally. Tata Sons is a private limited company, thus given its character and constitutional documents, its shares (including any right of ownership or interest conjoined with it) cannot be transferred unless approved by the board of Tata Sons. Pledge of these shares creates rights in favour of these foreign investors and banks, which has been vehemently opposed by the Tata group.

Tata Sons has argued that three three uttermost relevant property rights associated with a share, i.e. right to transfer ownership, right to vote and right to receive dividend, are therefore getting vested into people who are not a shareholder in the record of the company. Even if Tata Sons technically continues to recognise the Mistry group entities whose names appear in the register of shareholders as the holder of such share, it is intended that the company will be obliged to give effect to the separate and distinct rights bestowed and exercised pursuant to such pledge and the irrevocable authority given to the lenders.

As between Mistry group and such foreign investors, the transaction’s morphology will ensure that the investor alone will be entitled to exercise all these material property rights. Issue being raised is whether Mistry group can do things indirectly that they are not permitted to do directly.

Tata group argues that if this is allowed then it will not only militate against the general ethos of Tata Sons and its shareholders, the purpose with which Tata Sons was created and the common object that brought the shareholders together, but violently contravene Tata Sons constitutional document in its letter and spirit. Tata Sons maintains that it has an independent and perspicuous right of first refusal if a shareholder intends to transfer its shares. Mistry group claims that Tata group remains unaffected since whenever the foreign investors will exercise the right to sell the shares they will be obliged to comply with and offer these shares first to the other members of Tata Sons.

The transferability of shares (or any interest therein) of a private company corroborates the indubitable avouchment that a private company is formed by a close-knit kindred group of individuals and entities that share common ethos and philosophy of thoughts and in deeds and has the right to retain, protect and maintain its character.

Furthermore, the legal eagles also suggest that, since articles have to be strictly observed and compiled, unless creation of a pledge is explicitly recognised and approved by the articles or the board, the exercise of the right of transfer under the constitutional document is contemplated to be executed exclusively by a member who is a shareholder (out of its free will and determination), i.e. by a person whose name appears in the register of shareholders of Tata Sons. Whereas if the shares are pledged, a pledge when invoked, results in the transfer of pledged shares being made by a lender, who is not a member, in its own right and not by the Mistry group entities.

If a shareholder desires to liquidate its stake (or any right connected with the ownership thereof), then such shareholder is enjoined to follow the due process for such disposal as prescribed in the articles of the private company. This may be given effect to if ab intio transfer provisions are resorted to by such shareholder, which may give Tata Trusts and other Tata shareholders the right of first refusal to such shares or enable the board to decide on transfer of such shares (or any ownership rights).