There is a Tamil saying that a wife was readying the vessel for storing ghee while her husband was still dreaming of buying a cow. The media has already begun calculating how the initial public offering (IPO) of Tata Sons would create new crorepatis and add more zeroes to the wealth of the existing ones.
Obviously, no corporate chieftain would wish to stand in the way of incrementing the crorepati count in the country, as that would be a more important marker than even the record GDP growth of the nation’s promised march towards the viksit destination.
Still, the Tata Trusts are averse to taking the company public. Is the disinclination solely based on the apprehension that their agenda of philanthropy will be adversely impacted? Many retired senior executives of the group have aired this view — is this the primary concern or is there an unstated fear of something deeper?
Without having to second-guess the possible deeper concern, the recent happenings around the board meeting help better visualise the type of challenges that Tata Trusts, despite the majority shareholding, may encounter which they have not escaped even with the full protection under the articles of association (AoA).
The present essay is not based on any factually evidenced material nor is it a mere figment of the imagination. What it is, is best understood only by reading it.
Listing Tata Sons may create liquidity for the shares but is unlikely to unlock its potential value. The prevalent view is that the share will fetch a price markedly lower than its intrinsic value.
That discount could be significant because Tata Sons may carry not just a holding company discount but also suffer the conglomerate syndrome of a heterogeneous portfolio, including many businesses at very different stages of profitability and capital requirement.
A significant discount in a share’s value is not something that will go unnoticed by value pickers. Taking a significant minority position may be within the reach of investors even outside of pure passive institutions.
Painting this as a corporate raid will be viewed, rightly, as fear-mongering. Equally, dismissing the possibility of a disruptive minority stake is naïveté.
In this context, the SP group’s 18.37% shareholding is a loose cannon. It is a substantial minority stake held by a shareholder with an evident urgency to monetise at least a part of it. At an attractive price, the economic incentive to sell looms large.
This level of inroad may be enough to disturb the rhythm of the group; though, by itself, it will not translate into an ability to stall even special resolutions.
The irony is that the danger posed by the 18.37% SP group’s stake is no longer merely theoretical. They are the ones strongly pushing for the IPO given the prospect of default on their debts.
Another exposure the Tata Trusts’ shareholding carries, which has not surfaced in any discussion, is the locus of the voting rights.
The voting rights that the Tata Trusts currently enjoy did not exist till a law change enabled it a few years back. There was very little explanation behind lifting this embargo. Possibly, these very Trusts secured it by representation to the powers that were.
While there is nothing to suggest that the concept of a ‘public trustee’ voting on behalf of charitable trusts will be revived, it is not entirely imaginary.
A reference to the way Azim Premji’s charitable endowments are structured may illustrate the reason to view this matter with caution. He has only transferred the beneficial interest in the shares dedicated to the charity while retaining the legal ownership.
The 6.48% holding in Wipro Ltd by Azim Premji Trust and the 0.26% by Azim Premji Philanthropic Initiatives Private Limited are still considered as part of the promoter holdings – implying that the voting rights still stay with the promoter.
Despite a very significant promoter holding in Wipro, which at no stage is expected to face any control threat, this matter has been very smartly dealt with.
The Tata situation is precarious because any change in law, either restoring the previous dispensation or putting in place any other impediment to exercising the rights fully by the Trusts, will significantly upset the assumptions that underlie their legal rights today.
The matter of Tata Sons’ IPO and the voting rights on the shares may be seen as two unconnected matters. Somewhere, these issues can meld together and create an incendiary situation.
Imagine first, the IPO will cause the special rights to lapse; second, a significant minority interest, replacing the SP group, enters the scene; and just to make the scene dramatic, the law relating to the voting rights of the Trusts changes in some manner!
Even while the legal eagles are descending in droves on Bombay House, to make sure that this controversy plays out fully and no legal conundrum is left unexplored and the clients feel that they are getting significant value for the astronomical spends, this column closes this subject for today by speculating somewhat wildly on how Tata Sons can try to come out of this imbroglio.
The inspiration for the solution comes from none other than the TVS group!
The two cases may be seen to have a solitary but significant resemblance, and a plethora of—but less important-- differences.
The thought process rides on the similarity, keeping aside all the dissimilarities as mere distractions.
TVS group had a holding company owning the shares belonging to the group in all its listed entities. Different branches of the families descended from a common progenitor were managing these companies.
The reference to the holding company in the singular may be contested by persons aware of the case, but it is of little relevance. There were three companies (TVS &Sons, Sundaram Industries and Southern Roadways) which actually had a consolidated interest in all the downstream entities.
Under a family settlement, the individual family branches decided to take over the respective legal entities managed by each of them.
This was achieved by separating the investments in each of these listed entities and passing it on to each specific family company. The central point is, similar to Tata Sons having multiple investments under its wing, TVS & Sons had multiple investments in listed entities.
Each of these was separated and passed on to the individual family concerned. Tata’s case has no such requirement to cater to multiple families.
The TVS case is cited as a precedent to the effect that separating the investments from a central holding company through a demerger has apparently not met with any tax challenge, to the extent the information available in public sources shows.
The present problem of Tata Sons is the bulging investments causing it to exceed the RBI-imposed limit and to provide an exit to the SP group.
Taking forward the TVS example, each of the investments that Tata Sons owns can be separated as done in TVS so that the new structure has only a specific investment attributable to a specific listed entity.
Each of these individual entities will mirror the shareholding of Tata Sons. By merging the new entity into the downstream listed entity, the shareholding in illiquid Tata Sons’ shares will be substituted by shares in the listed entities.
The idea is not to advocate a solution which many experts may view as an oversimplification of a very complex problem that can only be resolved by retired judges and senior lawyers. It is just to say that this subject has possibly more facets than being debated in the media!
(Ranganathan V is a CA and CS. He has over 45 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 a 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.)
