A Tata-Mistry divorce deal may prove thorny2 min read . Updated: 23 Sep 2020, 08:54 PM IST
Mistry’s family selling its stake in Tata Sons to the conglomerate could end a long corporate battle. Divergences over legal rights and the firm’s valuation, though, might prove vexatious
Now that India’s biggest ever business battle seems headed for record books as our most expensive corporate divorce, it may be tempting to expect a truce between the Tata Group led by Ratan Tata and the Shapoorji Pallonji (SP) camp under Cyrus Mistry. Sighs of relief, though, seem premature. There are signs that their acrimony will extend to a settlement deal. On Tuesday, Mistry’s team declared SP’s readiness to part ways with Tata, a parting that is expected to entail the sale back to the Group of his family’s 18.4% stake in Tata Sons, the share-holding company from which he was ousted in 2016 as chairman, sparking off a bitter dispute that has involved legal wrangles, mud-slinging and ungainly allegations. That stake has been a big bone of contention all along, and could stay so for a while. At one level, SP’s offer appears to be a victory for the Tata Group. The $110 billion conglomerate controls four-fifths of Tata Sons, has been especially keen to prevent those shares from being sold to a third party, and had moved the Supreme Court to stop the cash-strapped SP group from pawning them for money. Notably, it was only after the apex court restrained SP from pledging its Tata shares that a buy-back deal began to take shape. How it will pan out is still unclear. Had Mistry’s own businesses not been so hard up, however, it might have held out for a better deal (possibly with another buyer). Even now, Mistry may opt to drive a hard bargain on how much his group’s 18.4% stake is worth.
The SP group has asked for an “early, fair and equitable" way out at a price that reflects the value of Tata Sons’ “underlying tangible and intangible assets". While the value of Tata’s listed companies is easy to calculate, and that of its unlisted entities can be estimated on business parameters, what the Tata brand—owned by Tata Sons—is worth could be hard to settle. Reports suggest that SP places Tata Sons’ overall value at over ₹9.7 trillion, a figure that includes ₹1.46 trillion for the brand. But a recent court filing by Tata estimates SP’s 18.4% stake to be worth some ₹1.5 trillion, which would translate to under ₹8.2 trillion for the whole company. Even if brand value experts are called in, the gap between the two sides’ calculations could cause disharmony.
The relative strength of their bargaining positions could play a role in the negotiations that ensue. While SP has been weakened by its dire finances, these talks could be inflected by the legal status of Article 75 under Tata Sons’ Articles of Association, which restricts SP’s leeway to dispose of its stake without Tata’s nod. This acts as a clamp on those shares, but its validity has been challenged by the Mistry camp, arguing that its invocation would amount to oppression of a minority shareholder. While some legal experts take a dim view of this clause, others consider it a valid tool for a principal owner to retain control. The top court is yet to rule on this issue. If time runs out for Mistry before that happens, he may simply have to take what’s on the table. The Tata Group, though, is debt-laden and not cash-rich enough to buy SP’s stake, even at a low price, without a scramble to raise funds. The Group may need to offload a chunk of its 72% holding in Tata Consultancy Services. If so, a tighter hold on Tata Sons would leave it with a looser grip on its cash cow.