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Ball in Tata Sons’ court after Mistry decides to part ways

  • SP group is in talks with investors to sell its stake in Tata Sons if the latter fails to buy shares first
  • Financial investors may not be interested in a direct stake in Tata Sons as exiting the position may become a problem

The Shapoorji Pallonji (SP) group is in talks with several institutional investors to sell its 18.4% stake in Tata Sons Ltd if the Tata group fails to exercise its right to buy the shares first, two people directly aware of the development said.

The move puts the onus on the Tata group to arrange the required funds to buy out the stake, which is estimated to be about 1.5 trillion. Given the challenging economic situation and the complexities of the transaction, it may well prove to be a tall task even for India’s biggest conglomerate.

The SP group will have to offer the stake to Tata Sons first because the latter has the right of first refusal on the shares as per the company’s articles of association (AoA). After Cyrus Mistry’s ouster in 2016, Tata Sons had decided to convert itself from a public to private company.

“Considering that the Tatas have the first right of refusal, the Mistry family would table these offers before Tata group, which are based on the current market value of the Tata Sons stake and may also entail some premium," one of the two people cited above said on condition of anonymity.

On Tuesday, the SP group, led by billionaire construction tycoon Pallonji Mistry, said it wanted to end its decades-long partnership with the Tatas following a bitter public feud between both parties after Cyrus Mistry was sacked. The Mistry family signalled its intention to sell the stake after Tata Sons blocked a move by the cash-strapped Mistry family to borrow funds by pledging its stake in Tata Sons.

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An email sent to the Mistry group spokesperson was not answered immediately.

“There are restrictions in the articles of association of Tata Sons, which may prevent the SP group from selling its shares to a third party without first offering it to existing shareholders. There could be two issues arising here—structuring the transaction for acquiring the entire stake of SP group and the funding for the transaction," said Nirav Shah, a partner at law firm DSK Legal.

This will be a feasible solution for both groups who have been embroiled in a protracted legal battle. “However, the Tata group, even if it agrees to buy the stake, faces legal and financial hurdles," said the second person cited above.

“Tata Trusts cannot buy these shares directly as charitable trusts cannot acquire shares under law. If they want to buy, they would need a specific exemption from the government. The Tata group’s financially sound listed subsidiaries can, however, purchase these shares through a special resolution," said a third person, a senior lawyer who requested anonymity.

“Alternatively, Tata Sons can sell non-core assets and pledge the equity of its listed firms to raise debt," he added. The other option is to get private equity or sovereign investors as a purely financial buyer, but even this option is tricky because of Tata Sons’s structure.

“The other possibility is that SP group could sell a small portion of its stake to either Tata Sons or a third party, which would help it tide over its immediate cash crisis but it will mean that the stalemate will continue," the third person said.

Financial investors may not be interested in a direct stake in Tata Sons as exiting the position may become a problem, said a senior partner at a Big Four audit firm.

“For PE firms, exits will be a question mark, and sovereign funds generally look for yields...So finding a financial buyer for the equity stake will be a challenge," the person cited above said.

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