Will Tata block Mistry family’s plan to pledge Tata Sons shares?

Another battle of Tata and the Shapoorji Pallonji (SP) group is in the offing, as the latter plans to raise ₹8,000 crore by pledging their shares in Tata Sons—the umbrella firm of over 250 Tata subsidiary companies. According to legal sources, Tata group is evaluating all legal options to object to SP Group’s move, because pledging of shares may result in the transfer of ownership to a third party in case of repayment failure. According to the Articles of Association (AoA) of Tata Sons, the SP Group companies can sell or transfer their stake only to Tata Sons or entities approved by it.

When the dispute on the same matter came before the Supreme Court last time, SP Group had claimed that AoA of Tata Sons doesn’t regulate pledging of shares. The verdict of the Supreme Court in March—which approved the rights of Tata Sons board to remove Cyrus Mistry as its chairman—had not denied SP Group the option of using its shares as collateral for credit.

Though SP Group has not yet spoken about its fundraising plans, sources say the 156-year-old group is in talks with the U.S. hedge fund Farallon Capital to raise ₹8,000 crore. The group was earlier in talks with Brookfield and Ares SSG to raise the capital for meeting repayment obligations. The group has a debt of over ₹25,000 crore.

In March, the lenders of Shapoorji Pallonji and Company (SPCPL)—the holding company of SP Group—had offered a two-year debt repayment moratorium as its real estate and construction business were facing a slowdown in the wake of the Covid-19 pandemic. It had standalone debt repayment obligations of over ₹5,300 crore and ₹10,000 crore at a consolidated level in 2020-21.

The lenders allowed one-time restructuring (OTR) of its loans, under which the group had agreed to sell key assets—including its stake in Eureka Forbes, Sterling and Wilson Solar, Afcons Infrastructure, and land parcels—to raise ₹10,332 crore and repay its loans after the moratorium in 2023. The proceeds from the proposed monetisation of assets need to be used for repayment of loans worth ₹9,348 crore. To meet the OTR obligations, the group has recently sold a majority stake in its consumer durables business under the Eureka Forbes label to the U.S.-based private equity fund Advent International for ₹4,400 crore.

SP Group companies hold an 18.37% stake in Tata Sons. In 2019, when Tatas approached the apex court against pledging of shares, SP Group said that the move to block the fundraising is “oppressive and vindictive act”, which was “intended to cause irreparable harm” to them. Tatas moved an urgent application on September 5, 2019—a day after SP Group signed a definitive agreement with Brookfield to raise over ₹3,750 crore.

Tatas claimed that Tata Sons has the first right of refusal to buy the shares at fair market value if anyone sells. Mistrys countered that there was no provision in Tata Sons' AoA that restricts the creation of a pledge or encumbrance.