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SP Group seeks shares in proposal to separate from Tata Sons

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EwlSP Group seeks pro-rata separation of assets and liabilities

The Shapoorji Pallonji (SP) Group has formally sought to end its relationship with the Tata Sons and has submitted a plan for the same to the Supreme Court.

“A selective reduction of capital by extinguishing shares of Tata Sons held by minority shareholders by swapping them with shares of listed companies (say Tata Consultancy Services (TCS) and others) would be a simple solution to provide liquidity to the Tata Companies and fair value compensation for the SP Group,” the SP Group said in the court filings.

Tata Sons holds 72 per cent of TCS. SP Group’s ownership of 18.37 per cent in Tata Sons translates to 13.22 per cent shareholding of TCS, valued at Rs 1,35,000 crore at present market capitalisation of TCS.

The SP Group further says the share of the brand value can be settled in cash or shares of listed companies.  As far as the unlisted companies go, an expedited valuation can be done with a valuer selected by both sides and this can also be settled in cash or shares of Tata companies, the SP Group contends.

“Disputes over valuation can be eliminated by doing a pro-rata split of listed assets (share price value is known) and pro-rata share of the brand (brand valuation already done by Tata and published). A neutral third-party valuation can be done for the unlisted assets adjusted for net debt (i.e. debt less cash),” the SP Group said.

The SP Group has had a relationship with the Tata Group for over seven decades; it had invested in Tata Sons in the 1960s. Over time, the SP Group came to hold 18.37 per cent stake in Tata Sons, the holding company of the Tata Group.

The two sides had held a cordial relationship, which led to Cyrus Mistry, managing director of the Shapoorji Pallonji & Co, being appointed the chairman of Tata Sons in 2012, succeeding Ratan Tata. However, the relations soured after Mistry was unceremoniously sacked as chairman in October 2016 and a long legal battle has followed since.

In recent times, SP Group had looked to pledge its stake in Tata Sons and raise much needed funds in the wake of the COVID-19 pandemic, which has hit businesses hard. Tatas objected to that move and had moved the top court to restrain the SP Group from raising capital by pledging the shares.

Finally, on September 22, the SP Group told the Supreme Court it was time to part ways with the Tatas.

“The SP Group stated before the Supreme Court that a separation from the Tata Group is necessary due to the potential impact this continuing litigation could have on livelihoods and the economy. They stated that it was crucial that an early resolution is reached to arrive at a fair and equitable solution reflecting the value of the underlying tangible and intangible assets,” according to the September 22 statement.

SP Group said on Thursday that the proposed separation scheme through a reduction in capital will have several benefits.

The pro-rata separation of assets and liabilities would be a fair and equitable solution to all stakeholders, it felt, adding that the largely non-cash settlement would also ease the pressure on Tatas to raise large quantum of debt.

It would also minimise any valuation-related dispute as the value of the listed companies would be based on their last traded price, the value of the brand would be as per latest valuation report done by the Tatas and value of unlisted companies could be taken at book value or a valuation process and adjusted for net debt.

Tata Sons would continue to have control of the underlying assets, and continue to hold more  than 51 per cent stake in TCS, the SP Group contested.

The SP Group says a similar scheme could also be used to provide liquidity to the Tata Group companies, which have cross-holdings in Tata Sons. The value to companies by unlocking cross holdings would be over Rs 1 lakh crore, thus benefiting shareholders, it claimed. There will also be minimum disruption to the operating companies, it felt.

Nirmalya Kumar, Lee Kong Chian Professor of Marketing at Singapore Management University and Distinguished Fellow at INSEAD Emerging Markets Institute had told THE WEEK earlier that giving SP Group shares of TCS could help in an easy separation.

“The easiest way for this separation, if you want to do it, is to give them equivalent value of TCS shares, and tell the SP Group they would be free to do what they want with those shares. This will resolve around two thirds of the valuation issue and Tatas will continue to hold a 51 per cent plus stake in TCS,” Kumar, who was was a member of the group executive council set up by Cyrus Mistry between 2013-2016, had said.

Published on The Week