Shapoorji Pallonji exiting Tata Group: All you need to know

With this piece, we take a look at everything you possibly need to know about the feud between Shapoorji Pallonji and Tata Sons, we take a look at how it started, the lawsuits and finally the exit.

Let’s jump right in.

How the feud came to light

The story of an in-group rivalry between The Tata’s and the Mistry family is not one that hasn’t been spoken of. But this wasn’t always the case. Things were good back in 2012. The visionary Mr Ratan Tata saw something great in Cyrus Mistry. He believed the man had the vision and the power to hold and guide the great empire. He saw himself in Cryus Mistry. And so, when he turned 75 in 2012, he decided to pass on the burden on the shoulders of Cyrus Mistry. Obviously, this wasn’t a temporary thing, he wanted Mistry to guide the organization just like he himself did for all these years.

But things changed swift in 2016 when Cyrus Mistry was removed from the board of Tata Sons as chairman on 24th October 2016, just four years post-Mistry taking charge of the company in 2012. It is said that Mistry was forced to step down overnight, and, when he refused, he was fired overnight after an emergency board meeting.

And this is where everything came to light. This feud between Ratan Tata and Cyrus Mistry raised tensions both on the business operations front as well as within the groups. We know very well how Tatas are not known to air their dirty laundry in public. But this feud forced a lot of things out. The NTT Docomo deal, the proposed sale of Tata Steel’s Port Talbot plant in the UK etc. all lead to a massive public reveal of the differences in opinion between Ratan Tata and Cyrus Mistry.

And thus the feud began. There were a lot of law suits that happened, which are yet to be resolved. But the entire thing became quiet for a few years until recently.

What erupted the volcano?

The tensions cropped up again when the SP group which reportedly owns 18.4% stake in Tata Sons was looking to raise capital by pledging its holding in Tata Sons. This basically means they were looking to raise loans with the stake they had in Tata Sons to marquee Canadian investor Brookfield Asset Management for Rs 3,750 crore.

shapoorji pallonji_shareholding in tata

But the thing with pledging is that it needs to be approved, other majority shareholders and Tata Sons did not want the stake to change hands. So they tried to stop SP Group from being able to pledge any shares of Tata Sons in exchange for additional capital for their business. They argued that as per Tata Group’s Articles of Association, shares cannot change hands including the lenders or other parties, and the right of the first refusal rests with Tata Sons.

They technically weren’t wrong and were acting as per the word of the written statutory document.

The Shapoorji Pallonji group, however, was raising this capital for supporting its troubled construction business due to the ongoing global pandemic. Further, It wanted to expand its business in the sector owing to growth potential in the sector post the recovery from the pandemic. Not to mention the outstanding payments they had to make, the company has already defaulted on its payment for borrowing from S&W Solar.

The situation seems justifiable for both sides. However, the SP group has alleged that The Tata Group has vindictively tried to restrict SP group from pledging its shares in Tata Sons even though the Mistry family was apparently raising funds against their own personal stake.

Which only means that both the sides are correct in their own books.

So what happens now?

The question now is, who is going to be able to buy the shares of SP Group in Tata Sons? And, If Tata Group is planning to buy out the former’s holding, will it be feasible to do so? I mean look at the valuation of Tata Sons.

Tata-Group-Valuation
Valuation of Tata Sons

The AoA of Tata Sons states that if any shareholder of Tata Sons wants to sell his/her shares, then he has to first offer it to Tata Sons. Tata Sons will then decide a fair market value and offer it. That brings us to the pertinent question of valuation. With this exit deal being the pinnacle of a long-standing issue between the two parties, the final valuation certainly is crucial to both parties. The SP group in a statement said to the media that they are willing to negotiate and humbly exit from Tata Group provided an early, equitable and fair solution was reached.

Now, having established that Tata Group has declared that it will be buying SP Group’s stake in Tata Sons, it will be interesting to see how The Tata Group plans to meet the valuation determined by SP group of its stake in Tata Sons. A close look at the financial performance of Tata Group’s companies will reveal the debt-ridden condition of the entities. Especially, the steel, auto and power businesses, which have been impacted significantly.

The steel business in the UK under the name of Tata Steel UK has accumulated over Rs. 11,000 Crores in debt and consecutive operational losses over the last few years. In total, the key companies in the Tata Group have accumulated approximately Rs. 1 Trillion in debt over the last 3 years. Tata Consultancy Services or TCS is one of the few large companies of the group that has managed to stay afloat and is performing reasonably well.

Next, the SP Group is reportedly stating a valuation of INR 1.78 Trillion for its stake in Tata Sons, taking the valuation of Tata Sons to INR 9.7 Trillion or INR 2.4 Crore per share. But Tata’s think the valuation is INR 1.5 trillion. Anyway, they have time until October 28th, 2020 to chalk out a contingency plan until the apex court declares a verdict on the case. Until that point, of course, the SP group has been asked to operate as per status quo and is not allowed to pledge its stake in Tata Sons.

Related: Take a look at Valuation methods
What’s the plan so far?

Per recent reports, Tata’s have sought approval from the Supreme Court to invoke Article 75 of the AoA of Tata Sons which gives Tatas the power to ‘squeeze out the Mistry family by buying out their shareholding at fair market value’. This, however, is okay to the extent that the Mistry family would anyways be getting their company at a valuation consistent with the market value for its company’s assets.

The catch-22 scenario here, however, is that if the SP Group were to separate from Tata Sons then Tata’s would be liable to pay the group market value for its holdings as it would have done for any other entity whether listed or unlisted under The Tata Umbrella. But that’s not quite the case here. The Tata Group is looking to buyout the stake of SP Group in its company giving the group the right to first refusal; meaning the contractual right of the Tata’s to enter into a deal with the SP Group before anyone else can to buy its holding in Tata Sons.

Essentially, Tata’s by way of litigation and upholding the word of the AoA are looking to make a settlement whereby they negotiate a valuation for the SP Group as per their terms and not necessarily one that benefits The SP Group.

To give this story a temporary stop, the latest development in this regard has been the statement issued by Tata’s to the press that they are in no hurry to go ahead with the buyout of the SP Group’s stake and are patiently waiting for the decision of the Supreme Court.

Be rest assured though, so far, the ball is in their court. We’ll add what happens next after the decision is out.

What do you think will happen? Tell us here.

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The Author:

The Author of this piece is Sidhant Satapthy, a student a TAPMI. If you liked the piece, go ahead and share it with your best friend on WhatsApp.

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