Mumbai: Less than a year after it received Rs1,000 crore as investment from its parent, Tata Realty and Infrastructure Ltd is refunding Rs800 crore to Tata Sons Ltd at a time when the group is hard-pressed to raise funding related to past acquisitions and expansion.
The decision, taken after Tata Realty decided to pull back some of its planned projects amid a downturn in the real estate market, will reduce its paid-up capital to Rs925 crore from Rs1,725 crore.
Tata Sons, the group holding company, had invested Rs1,000 crore in its closely held realty unit in March through a 5% non-cumulative convertible preference share issue of Rs10 for cash at par.
Some respite: Ratan Tata, the chairman of Tata Sons. Abhijit Bhatlekar / Mint
Convertible preference shares differ from ordinary shares in that they do not normally come with voting rights, but promise a dividend until conversion into ordinary shares. The dividends in the case of non-cumulative preference shares are not accumulated in arrears.
“At the moment, we are well capitalized,” said Sanjay G. Ubale, managing director and chief executive officer of Tata Realty, confirming the refund, which was approved by the Bombay high court earlier this month. While seeking approval from shareholders for the refund, the firm had said, “In view of the significant downturn in the real estate markets, the company has now decided to shelve/reduce the size of some of its proposed projects, resulting in reduced fund requirements.” Tata Realty had embarked on major projects, including information technology parks and so-called special economic zones. It also planned to jointly develop real estate with group firms such as Tata Consultancy Services Ltd and Indian Hotels Co. Ltd.
Ubale said some of these projects would be financed through the $750 million (Rs3,690 crore) offshore fund, Tata Realty Initiatives Fund-I, that the company is managing.
For Tata Sons, the refund comes at a time when it is trying to raise money to fund the expansion and acquisition costs of its group firms. Brokerage India Infoline Ltd last week estimated the Tata group needs $3 billion over 18 months, mainly to refinance a bridge loan taken by Tata Motors Ltd for its purchase of Jaguar and Land Rover, or JLR. “In the worst-case scenario, if the group needs a large cash infusion at JLR and funds equity requirement for growth plans of some its operating companies, the cash required could jump to $5.5 billion,” analyst Bijal Shah wrote.
Mint reported on 3 October Tata Sons’ plans to raise its authorized capital by 30% to Rs4,335 crore. The closely held firm had also increased its borrowing limit by one-third to Rs20,000 crore.
Decapitalizing, as the exercise Tata Realty is going through is called, is rare among Indian companies. In recent times, only Colgate-Palmolive (India) Ltd made a similar move when it returned Rs9 a share from the face value of Rs10 through a Rs122 crore dividend to shareholders. The toothpaste maker had said it was “paying off excess capital”.
Tata Realty’s move comes in the wake of contracting demand for housing and commercial realty in the country after interest rates climbed in mid-2008, driven by a surge in inflation that has now begun to ease. In an 8 January report on the real estate sector, analysts Siddharth Bothra and Satyam Agarwal of Motilal Oswal Financial Services Ltd said an expected shift in the balance of power from real estate developers to home-buyers was becoming apparent.
“Global and domestic events since September 2008 have worsened the outlook for real estate,” Bothra and Agarwal wrote. “In September 2008, it appeared that price cuts by developers along with (a) drop in mortgage rates could revive the sagging demand. However, experts and developers now feel that property demand is unlikely to get stimulated in the medium term even if real estate prices correct 20-25%; and mortgage rates decline 250-300bp (basis points).”
One basis point is one-hundredth of a percentage point.
As both Tata Realty and Tata Sons are not listed on the stock exchanges, only statutory approvals from the court and the registrar of companies were needed for returning capital.
Justice S.J. Vazifdar said in a 9 January order that the “company is entitled to the orders sought” as the reduction of paid-up share capital does not decrease the firm’s liability and is not adverse to the interest of its creditors. In its court petition, Tata Realty had said “creditors of an aggregate value of about 99.38%” of its Rs122 crore debt had given their consent “and that subsequently, the remaining creditors have been paid and/or have also given their consent”.