As Mistrys seek to sell Tata stakes, valuation emerges as the key challenge

The Pallonji Mistry family, the largest minority shareholder of the Tata Group, has said it needs to separate its interests after India’s biggest conglomerate took steps to block the family’s attempt to borrow against Tata shares.

Sources close to the Shapoorji Pallonji Group peg the valuation of their 18.37 per cent stake at ₹1,78,459 crore. This includes the value of the brand as well as the listed and unlisted entities. If struck, it would be the mother of all deals for India Inc. So, the separation doesn’t appear to be simple.

Tata Sons will have to work out the details of the share-purchase proposal, including valuation, source of funding and the deal structure amid the financial difficulties caused by the COVID-19 pandemic and its debt obligations.

Tata Trusts, the controlling shareholder of Tata Sons with 66 per cent stake is restricted by law from investing in equities. Tata Sons may have to tap sovereign wealth funds and other long-term investors for a possible funding tie-up to buy out the Mistrys.

The Tata Sons informed the Supreme Court on Tuesday (September 22) that it’s open to buying out the 18.37 per cent stake owned by the Mistry family’s cash-strapped Shapoorji Pallonji Group if the latter needed to raise money for paying maturing debt. The SP Group instead wanted to borrow funds using the shares as collateral, a move Tata considers as potentially risky because the securities may end up falling in the hands of unfriendly investors.

“The action by Tata Sons to block this crucial fund raising, without any heed for the collateral consequences, is the latest demonstration of their vindictive mind-set,” the SP Group said in a statement.

“The SP-Tata relationship spanning over 70 years, was forged on mutual trust, good faith, and friendship. Today, it is with a heavy heart that the Mistry family believes that a separation of interests would best serve all stakeholder groups.”

Both sides have been locked in rounds of litigation at the National Company Law Tribunal and the Supreme Court since the shock dismissal of Cyrus Mistry, a handpicked successor to Ratan Tata, as Tata Sons chairman in October, 2016. The dismissal was linked to differences with Ratan Tata and the board of Tata Sons losing confidence in Mistry.

The Mistry family, the promoters of SP Group, alleged oppression of minority shareholders and lack of corporate governance following the sacking which rattled corporate India.

The Tata group moved the Supreme Court to restrict the SP Group from raising capital against their shareholding in Tata Sons and address debt obligations which were pegged around Rs 30,000 crore in March 2019.

The COVID-19 pandemic has put further pressure on the SP Group, which has significant interests in the real estate and construction segments.

This was reflected in the liquidity crisis that hit the group company Sterling and Wilson Solar which struggled with loan repayments.

The Supreme Court has ordered a status quo on the transfer or pledging of Tata Sons shares by the SP Group companies and will next hear the case on October 28.