Cash-strapped SP Group may lose bargaining power post SC verdict
The Group can be legally compelled to sell its 18.37% stake at a fair value that may be decided by Tata Sons board
Tata Sons Ltd’s ousted chairman Cyrus Mistry’s family-promoted Shapoorji Pallonji (SP) Group, which controls popular household brand Eureka Forbes and is primarily engaged in the construction business, can be legally compelled to sell its 18.37% stake in Tata Sons at a fair value likely to be decided by Tata Sons if it chooses to invoke Article 75 of its Articles of Association ( AoA).
This puts the cash-strapped SP Group on weak ground when it is desperately trying to monetize the stake to shore up its finances, according to legal experts. The Supreme Court on Friday left it to the two sides to decide on further course of action in the matter, but senior lawyers maintained that Tata Sons can indefinitely stall SP Group’s attempts to monetize its stake by an outright sale or through raising of debt by pledging the stake.
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The SP Group had asked the top court to allow a separation of the group’s ownership interest through the 18.37% stake in Tata Sons by extinguishing the shares held by SP Group in lieu of a fair compensation or equities of listed Tata group companies. Mint had reported last year that SP Group was in talks with several lenders to raise up to $500 million against the shares, and had raised a part of the sum from at least two private lenders. However, Tata Sons, which had opposed the move, had got an injunction from the Supreme Court, barring SP Group from pledging its stake further.
The SP Group had opted to reshuffle its debts of ₹22,183 crore last year and is struggling to immediately repay loans of ₹9,348 crore to banks. The court, however, said the valuation of shares of SP Group depends on the value of the stake held by Tata Sons in listed entities, unlisted equities, immovable assets and the funds raised by SP Group on the security pledge of the shares.
SP Group has three options for its stake sale, according to legal experts. First, SP Group may be forced to sell its stake at a valuation decided by the Tata Sons board if a special resolution is passed for doing so. Second, SP Group may choose an acquirer from the existing board members or associates of Tata Sons, and sell the stake to such an associate at a value mutually agreed upon by the Tata Sons board and SP Group. Third, SP Group may select a third-party buyer for its stake, which has to agree to pay a premium to the Tata Sons board for acquiring the large SP Group stake.
Going by clause 75 of Tata Sons’ AoA, its board can pass a special resolution any time and ask any board member or shareholder of Tata Sons, including the SP Group, to transfer their shares at a “fair value". Tata Sons, founded in 1917, is a private limited company, and in such firms the AoA is the primary contract between the company and its shareholders. When changes were made to the AoA, giving veto powers to Tata Trusts, they were cleared by Pallonji Mistry, the patriarch of the Mistry family, when he was a director in the company.
In 2012 and 2014, when Cyrus Mistry was a director in Tata Sons, fresh amendments were made in the AoA without attracting any objections from the SP Group or any shareholder of Tata Sons. If SP Group proposes to sell its shares to any existing or new member of Tata Sons board it has to follow Article 58 of the AoA, which states that if any person, whether a member of Tata Sons or not, proposes to transfer shares, the person has to state the identity of the acquirer and the “fair value".
If the Tata Sons board agrees with the fair value proposed by the Mistry family for selling their stake in Tata Sons, the issue may get settled amicably between the two warring conglomerates. However, the two groups have been at loggerheads over the valuation of SP Group’s 18.37% stake.
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In September, the SP Group estimated its holding in Tata Sons to be worth ₹1.75 trillion. However, Tata Sons counsel Harish Salve, during a Supreme Court hearing in December, said the value of the Cyrus Mistry family’s shares was between ₹70,000 crore and ₹80,000 crore.
If the SP Group proposes to sell its stake to a third party, it has to secure the consent of the Tata Sons board and proceed according to clause 76 of the AoA. The board approval itself is subject to stringent conditions.
The Article states that the Tata Sons board may, at its sole discretion, refuse to register the transfer of shares in favour of any entity if the total nominal value of the shares to be transferred combined with the value of the existing shares held by such an entity exceeds 5% of the share capital of Tata Sons. Also, if the board feels that as a result of the proposed transfer, a change in the composition of the board or a change in the controlling interest in the company is likely to occur, it may reject the share sale.
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