The settlement involving the different branches of the TVS family was consummated recently as the national company law tribunal (NCLT) passed the relevant orders. Since the parties to the settlement were the private (unlisted) companies of the TVS group, little beyond the news releases issued by the different branches of the family exist in the public domain. Hence, it is quite possible that some inaccuracy in understanding or appreciation of the impact may pervade this article, which, though undesirable, is inevitable.
The settlement was purportedly to get the shareholdings of the large conglomerate reorganised to rest with the relevant branches of the four sub families involved. For the sake of convenience, these are identified as the families of TS Rajam (deceased), TS Krishna (deceased), TS Srinivasan (deceased), and TS Santhanam (deceased). The children of the respective branches head the relevant parts of the group and there, perhaps, exists a further sub group where the children of the above four may have worked out their respective domains.
Historically, the shareholdings of the various operating companies in the TVS group largely rested with the three holding companies, viz., TVS and Sons, Sundaram Industries and Southern Roadways. Based on publicly available information, the three above-mentioned companies have coalesced into a single entity as step-1 and, quite likely, the shares of all the companies consolidated in this process were further split into independent holding companies representing the different families, a minimum of four or more, depending on the number of sub-groups that the public is not privy to.
It is not clear how the segregation was achieved; but it is reasonable to speculate that a split off like a demerger would have been the route for this purpose. A news from The Hindu refers to different
appointed dates for the restructuring. Going by certain past cases, it is likely that the restructuring was a composite one with an initial consolidation of the three former holding companies and a later split, family-wise.
As a consequence, one of the new family holding companies that emerged appears to be TVS Holdings Pvt Ltd, relevant to the family controlling Sundaram Clayton Ltd and its satellite and subsidiary companies.
Going by the market data, this cluster has the highest value compared to any other cluster pertaining to the other families. TVS Motor alone has a market-cap of about Rs31,000 crore (as on 8 February 2022), while Sundaram Clayton holds around 53%. As a comparison, the second most valuable company in the group, Sundaram Fastners, has market-cap of about Rs17,600 crore.
So, the family getting control of the TVS Motor and Sundaram Clayton cluster is most likely to be paying a cash value to the other families. These steps would be outside any publicly available document as this would be a private arrangement among the family members.
What fuels the above speculation is the fact that Sundaram Clayton, during the second quarter 2022, had booked a sum of Rs1,494 crore as exceptional profits. However, there was little in terms of disclosure by the company about the reason for selling a block of 5.14% in TVS Motor that resulted in this profit.
Presumably, it was to keep the powder dry to complete the cash settlement as and when the final tribunal order was received, approving the corporate side of the reorganisation.
However, the amount is trapped in Sundaram Clayton (SCL), a listed entity with 25% public shareholding. Hence, forthwith on receipt of the formal order, the board of directors of the company in the meeting held on 9 February 2022 have come up with a very novel and complex scheme which is the reason for this article.
SCL is an operating company with its core business in castings and automobile parts and incidentally holds valuable stake of 53% in TVS Motor. The details as available about the decision of the board of directors as reported by The Hindu BusinessLine
, are examined here for the implications of the decision.
While, apparently, the announcement seeks to create an excitement that surplus cash is proposed to be shared with all shareholders, there are other components to the proposal that tickles one’s curiosity. To set the record straight, the surplus under consideration is essentially the amount of approximately Rs1,500 crore realised on the sale of TVS Motor shares in the second quarter of the current year, which was hardly explained beyond a note that the amount was exceptional in nature.(Read: Corporates in Cross Roads of Candour in Communication
However, the manner of distribution proposed is not a simple special dividend or a pro rata buy-back of shares. Rather, it involves the issue of non-convertible redeemable preference shares as bonus shares. These shares will have a two-year tenure and would be redeemed in February 2024.
It is quite strange to ferret out such an outmoded idea that a few companies have adopted in the past either as preference share or debenture as a bonus issue to commemorate special occasions. A company with cash on hand and wanting to dispose it does not need such a convoluted way to distribute it.
A possible reason could be that some clever tax advice may have triggered this, with the view that a buyback or a dividend would attract a higher rate of tax but the disposal of listed security like a preference share may suffer a slightly lower tax. It is most unlikely that any of the recipients of the preference share would wish to hold on till maturity as it may get a minuscule return, and instead liquidate it in the market at a discount and get cash in hand. In effect, the discount may equal or exceed the tax difference and leave one none the richer in the process!
But the subject doesn’t end here. The announcement also talks of a merger of some private companies and most intriguingly the demerger of the entire operating business of SCL!
This is stranger than the route considered to return the excess cash to the investors. The merger of TVS Holdings Ltd and VS Investments Pvt Ltd being the promoter holding companies is understandable as these are, perhaps, the two new entities formed as part of the family reorganisation and hold the capital of SCL. The promoters may legitimately wish to simplify the holding structure to avoid a step holding involving multiple tiers.
However, if the two amalgamating companies that received the shares in the demerger become subject to any adverse tax proceedings which the tax department may initiate regarding the entire exercise, viewing it to be non-tax neutral, the public shareholders with their 25% holding would get entangled in such tax demands.
The other bigger question is: Why demerge the entire operating business of SCL; what would the residual SCL hold? While the author may be accused of jumping the gun and not awaiting the finer details, it is not unreasonable to conclude that the design seems to be to ring-fence the 53% holding in TVS Motor in the residual entity, essentially making it an investment company with 75% promoter holding and 25% public holding.
This has been the situation in many cases across the country where historically operating-cum-shareholding companies were demerged and new shell entities that merely hold shares in a down-stream entity were formed.
A question may legitimately be raised about why this is objectionable? Market data shows that such holding companies suffer a big discount in valuation and the case of how the Bajaj family effectively used that route to augment its holding in its operating companies is already explained in the article given in the link. The Racing Pulsar !! - by Ranganathan V (substack.com)
Clearly, the public shareholders will, over time, be forced to exit at sub-optimal valuation and the promoters will have the luxury of time to consolidate their holding indirectly in TVS Motor.
And this very group has the distinction of using this mode in an earlier restructuring that involved certain other group company shares (designated as a non-automotive business), which was effected on 7 July 2011. Though the resulting company, namely, Sundaram Investments Ltd, was unlisted, there were some public shareholders who stayed put and, finally, by resorting to a hitherto untested procedure under Section 236 of the Companies Act 2013, all the non-promoter family shareholders were squeezed out sometime in 2021 or so.
The group normally expands its abbreviation as Trust, Value and Service.
It would be best that the misconceived reorganisation be revisited and the independent directors come out with a detailed explanation for the reasons for favouring this proposal.
Will the independent directors suggest that the residual SCL holding the shares of TVS Motor should merge into the latter so that the shareholders of SCL will directly own TVS Motor than through a layered structure? Is good governance really feasible in promoter-owned companies?
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)