Obviously no corporate chieftain would wish to stand in the way of incrementing the crorepathi tally in the country as that would be another key marker, along with the record GDP growth, of the nation’s promised march towards the viksit destination.
Still, the Tata Trusts are averse to taking the company public. Is the disinclination solely based on the apprehension that their agenda of philanthropy will be adversely impacted? Many retired senior executives of the group have aired this view- is this the primary concern or, is there an unstated fear of something deeper?
Without having to second guess the possible deeper concern, the recent happenings around the board meeting help better visualise the type of challenges that the Trusts, despite its majority shareholding, may encounter which they have not escaped even with the full protection under the Articles of Association.
The present essay is not based on any factually evidenced material nor, a mere figment of the imagination. What it is, is best understood only by reading it.
Listing Tata Sons may create liquidity for the shares but unlikely to unlock its potential value. The prevalent view is that the share will fetch a price markedly lower than its intrinsic value.
That discount could be significant because Tata Sons may carry not just a holding company discount but also suffer the conglomerate syndrome of a heterogeneous portfolio, including many businesses at very different stages of profitability and capital requirement.
A significant discount in a share’s value is not something that will go unnoticed by value pickers. Taking a significant minority position may be within the reach of investors even outside of pure passive institutions.
Painting this as a corporate raid will be viewed, rightly, as fear mongering. Equally, dismissing the possibility of a disruptive minority stake is naïveté.
In this context, the SP Group’s 18.37 per cent shareholding is a loose cannon. It is a substantial minority stake held by a shareholder with an evident urgency to monetise at least a part of it. At an attractive price, the economic incentive to sell looms large.
This level of inroad may be enough to disturb the rhythm of the group though, by itself, it will not translate into an ability to stall even special resolutions.
The irony is that the danger posed by the 18.37 per cent SP Group’ stake is no longer merely theoretical. They are the ones strongly pushing for the IPO given the prospect of default on their debts.
It is possible someone can appear on the horizon to lend them against a future sale of shares, after its listing. The control architecture in place currently may weaken even before the first move in the listing journey!
Another exposure the Tata Trusts’ shareholding carries which has not surfaced in any discussion, is the locus of the voting rights.
The voting rights that the Tata Trusts currently enjoy did not exist till a law change allowed it a few years back. There was very little explanation behind lifting this embargo. Possibly, these very Trusts secured it by representation to the powers that were!
While there is nothing to suggest that the concept of a ‘public trustee’ voting on behalf of charitable trusts’ will be revived, it is not entirely imaginary.
A reference to the way the Azim Premji’ charitable endowments are structured may illustrate the reason to view this matter with caution. He has only transferred the beneficial interest in the shares dedicated to the charity while retaining the legal ownership.
The 6.48 per cent holding in Wipro Ltd by Azim Premji Trust and the 0.26 per cent by Azim Premji Philanthropic Initiatives Private Limited are still considered as part of the promoter holdings- implying, that the voting rights still stay with the promoter.
Despite, a very significant promoter holding in Wipro which at no stage is expected to face any control threat, this matter has been very smartly dealt with.
The Tata situation is precarious because any change in law, either, restoring the previous dispensation or, putting in place any other impediment in exercising the rights fully by the Trusts, will significantly upset the assumptions that underlie their legal rights today.
The matter of Tata Sons’ IPO and the voting rights on the shares may be seen as two unconnected matters. Somewhere, these issues can meld together and create an incendiary situation.
Imagine, first, the IPO will cause the special rights to lapse; second, a significant minority interest, replacing the SP group, enters the scene; and just to make the scene dramatic, the law relating to the voting rights of the Trusts changes in some manner!
Even while the legal eagles are descending in droves on Bombay House, to make sure that this controversy plays out fully and no legal conundrum is left unexplored and the clients feel that they are getting significant value for the astronomical spends, this column closes this subject for today by speculating somewhat wildly on how Tata Sons can try to come out this imbroglio.
The inspiration for suggesting a solution comes from none other than the TVS group. The two cases may be seen to have a solitary but significant resemblance, and a plethora of, but less important, differences.
The thought process rides on the similarity keeping aside all the dissimilarities as mere distractions.
TVS group had a holding company owning the shares belonging to the group in all their listed entities. Different branches of the families descended from a common progenitor were managing these companies.
The reference to holding company in singular may be contested by persons aware of the case but it is of little relevance. There were three companies (TVS &Sons, Sundaram Industries and Southern Roadways) which actually had a consolidated interest in all the downstream entities.
Under a family settlement the individual family branches decided to take over the respective legal entities managed by each of them.
This was achieved by separating the investments in each of these listed entities and passing it on to each specific family company. The central point is, similar to Tata Sons having multiple investments under its wing, TVS &Sons had multiple investments in listed entities.
Each of these was separated and passed on to the individual family concerned. Tata’s case has no such requirement to cater to multiple families.
TVS case is cited as a precedent to the effect that separating the investments from a central holding company through a demerger has apparently not met with any tax challenge to the extent the information available in public sources show.
The present problem of Tata Sons is the bulging investments causing it to exceed the RBI imposed limit and to provide an exit to the SP group.
Taking forward the TVS example, each of the investment that Tata Sons owns can be separated as done in TVS so that the new structure has only a specific investment attributable to a specific listed entity.
Each of these individual entities will mirror the shareholding of Tata Sons. By merging the new entity into the downstream listed entity, shareholding in illiquid Tata Sons’s shares will be substituted by shares in the listed entities.
The idea is not to advocate a solution which many experts may view as an over simplification of a very complex problem that can only be resolved by retired judges and senior lawyers. It is just to say that this subject has possibly more facets than being debated in the media!