Ahead of IPO, Tata Sons reviews Articles of Association, says report; Tata Trusts’ special rights may be impacted

Tata Sons, which is gearing up for a listing on the bourses, has started reviewing its Articles of Association (AoA). The move could affect the special rights held by Tata Trusts regarding board appointments, voting and governance at the holding company of the Tata Group, says a report in The Economic Times.

The review is aimed at aligning the company’s rules with the requirements for listed companies as mandated by the Securities and Exchange Board of India (Sebi), says the report. The proposed changes could cover the appointment of directors, independent board representation, voting rights and restrictions on share transfers, the report says.

This comes after the Reserve Bank of India (RBI) rejected Tata Sons’ application to surrender its registration as a core investment company (CIC).

The review is in its early stages, and no final amendments have been approved, says the report.

After RBI announced its decision in September, Fortune India was the first to report that the move to list will force the privately held holding company of the salt-to-chips conglomerate to junk the provisions in its own Articles of Association that have kept outside shareholders out and kept control locked firmly within Tata Trusts.

What could come under review?

Under the AoA, Tata Trusts—which collectively hold around 66% of Tata Sons—can nominate up to a third of the board. Plus, certain decisions also require the affirmative vote of a majority of Trusts-nominated directors. A majority of these nominees must be present for a board meeting to constitute a quorum.

These provisions could need changes if Tata Sons is listed, as it must comply with Sebi regulations governing special shareholder rights and board composition, says the report. Under Sebi Regulation 31B, special rights granted to shareholders must be approved by shareholders at least once every five years, says the report. Public shareholders would play an important role in determining whether such rights continue.

Also, while listing the shares will not reduce Tata Trusts’ majority stake in Tata Sons, their influence at the board level could change depending on the final structure and applicable regulatory requirements, says the report.

The company will also have to meet Sebi’s mandate on independent directors. If its chairman is an executive director, at least half the board would need to comprise independent directors, says the report.

The process for selecting the chairman could also be reviewed. The existing five-member selection committee includes three nominees linked to Tata Trusts, says the report.

Board committees would also need to be aligned with listing requirements, while restrictions on share transfers could require amendments to accommodate public shareholding and stock market trading, says the report.

What else needs to change?

As Fortune India reported in September, for a listing, other aspects of the AoA need to change as well.

For instance, Article 4(c) states that “no invitation shall be issued to the public to subscribe to any securities of the company”.

Then Article 57 gives existing Tata Sons shareholders, that is largely the Tata Trusts and group companies, the first right of refusal on any outside sale, requiring the company to first find a member willing to buy at “fair value” before an outsider can be admitted. Also, Article 66 hands the board absolute discretion to refuse registering a transfer to anyone it considers “undesirable”.

Similarly, Article 76 lets the board block any transfer that would push a single acquirer past 5% of the company’s ordinary share capital, or what the board believes could alter “the controlling interest” of the company. Interestingly, Article 77 requires anyone crossing that 5% threshold to pay a board-determined premium for use of the “Tata” name, payable to the other shareholders before the transfer is even registered.

All these articles would potentially need to be changed before listing can take place.

The extent of the changes will depend on the eventual listing structure and applicable legal requirements, says the report, adding that Tata Sons has not commented on the review, and the company has not approved any final amendments to its AoA.