Can SP pledge Tata Sons shares? Opinion differs

2021-03-26 22:30:00

MUMBAI: The dust has not yet settled on the Tata Sons-Shapoorji Pallonji Group battle as the two have come up with different interpretations of a crucial point in the SC order: “All interim applications, including the one for causing separation of ownership interests of the SP Group in Tata Sons, are dismissed.”
A Mistry lawyer claimed this includes the dismissal of Tatas’ application seeking to restrain SP from pledging its Tata Sons shares. If the interpretation holds good, it will ensure that SP’s economic interest in Tata Sons is protected and it will not restrict SP from raising capital against its Tata Sons shares. This would come as a relief as SP is in the midst of finalising a restructuring plan for its over Rs 22,000 crore debt under the RBI’s special scheme introduced following the Covid crisis.

A legal expert close to Tata Sons, however, has a different take on the judgment affecting the Tata application. While Tata Sons refused to comment on the issue, sources said the interim application seeking to restrain SP from offering the company’s shares as collateral has been allowed by the SC. The person added that part of the order is, however, “open” to interpretation and is “not settled”.
SP had pledged half of its Tata Sons stake, that is 9.2%, to Axis Bank and IDBI Bank, for Rs 5,074 crore. After this move, Tata Sons filed an interim application to restrain SP from pledging further. Following the court ruling SP, said sources, could revisit plans of raising Rs 3,750 crore from Toronto-based Brookfield Asset Management by pledging a portion of its unencumbered 9.2% Tata Sons stake.
If SP Group is restrained from pledging Tata Sons shares, according to the Tata interpretation, then this would add to its financial woes. It will also have to release the Tata Sons shares it had pledged with Axis Bank and IDBI Bank and offer another asset as collateral.
SC has also dismissed SP’s interim application seeking separation of its ownership interests from Tata Sons. SP had proposed to swap 18.4% in Tata Sons with shares of listed Tata entities, including India’s most valuable IT services player TCS.
The proposed separation is quite different from a buyout under Article 75 of Tata Sons’s Articles of Association. Under this Article, Tata Sons’s majority shareholders by a special resolution could force SP to transfer its shares to them any time. Tata Sons’s Article 57 states that the shares will have to be sold at “fair value”.
SP had estimated its stake in Tata Sons to be worth Rs 1.78 lakh crore. SP’s estimation had included its proportionate share in the Tata brand value, which is worth a little under Rs 1.5 lakh crore, according to Brand Finance’s 2020 ranking. Tata Sons, on the other hand, had valued SP’s stake at Rs 70,000-80,000 crore, which is 55-61% lower than the minority shareholder’s estimation.
The SC said that the valuation of SP’s stake in Tata Sons depends on the value of the company’s stake in listed equities, unlisted equities, immoveable assets, etc, and perhaps the funds raised by SP on the security pledge of these shares. “Therefore, at this stage, and in this court, we cannot adjudicate on the fair compensation (of SP’s stake in Tata Sons). We will leave it to the parties to take the Article 75 route or any other legally available route in this regard,” the SC said.

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