The big irony of Mistry’s small stake in Tata Sons

3 min read . Updated: 28 Mar 2021, 10:03 PM IST Livemint

Armed with a legal victory, Tata Sons can set the terms of a divorce with the SP Group. But the Tata brand, whose values call for a fair exit for SP, may be the most contentious part of it

It is over, but not quite. On Friday, India’s Supreme Court (SC) upheld as legally valid Tata Sons’ decision to oust Cyrus Mistry as its executive chairman in 2016 and subsequently convert itself into a private entity. The apex court’s ruling overturned an order of the National Company Law Appellate Tribunal in 2019 that had asked for Mistry’s reinstatement as Tata Sons’ chief, casting a cloud on N. Chandrasekaran’s 2017 elevation to the top of the conglomerate’s main equity-holding company, almost two-thirds owned by various Tata Trusts and 18.4% by Mistry’s Shapoorji Pallonji (SP) group. As Mistry had been appointed as a professional manager rather than stake-owner, he could also be ejected from that role and his charges of unfair treatment of a minority shareholder failed to hold up. A fuzzy aspect of this case was the validity of a clamp on SP’s shares placed long ago by Tata Sons’ Articles of Association (AoA). Our judiciary found no reason to intervene and refused to be drawn into the details of a split-up, leaving it for Tata and SP to resolve the vexed question of how they will undo their equity tangle and go their separate ways.

The existence of the AoA clutch, by which Tata had sought to restrain SP last year from pledging any further shares of Tata Sons after it pledged half its lot, means that the chips are stacked in the majority owner’s favour. Not only is SP strapped for cash, it has little wiggle room: It can only sell its stake back to Tata or an entity approved by it. Even if the SC did not explicitly deny SP the option of using its shares as collateral for credit, given that it could result in a transfer of ownership, Tata could possibly invoke the AoA’s assent rule to stymie SP. Yet, Mistry may have an irony to count on. Founded on a code of ethics, Tata’s brand values call for a divorce deal that is publicly viewed as fair. This, in turn, would depend partly on that very brand’s financial value. As the SC noted, “The valuation of shares of the SP Group depends on the value of stake of Tata Sons in listed equities, unlisted equities, immoveable assets etc., and also perhaps the funds raised by the SP Group on the security pledge of these shares." A gaping divergence in estimates of what SP’s stake is worth points to the wrangle ahead. Last year, the SP Group had valued its stake in the unlisted company at ₹1.75 trillion, a figure that Tata insiders brushed aside as exaggerated. The value of Tata Sons’ slices of listed group firms is easily obtained from market prices. Price tags for its closely-held businesses can also be crunched out by a formula for the present value of future cash flows that both sides agree upon. It is the other assets that will likely see hair tugged apart—and split. Of these, the Tata brand could prove the most knotty.