Can SP pledge Tata Sons shares? Opinion differs

MUMBAI: The dust has not yet settled on the Tata Sons-Shapoorji Pallonji (SP) Group battle as the two have come up with different interpretations of a crucial point in the Supreme Court (SC) order: “All interim applications, including the one for causing separation of ownership interests of the SP Group in Tata Sons, are dismissed.”
An SP lawyer claimed that this includes the dismissal of Tata Sons’ application seeking to restrain SP from pledging its shares in the company. If the interpretation holds good, it means SP’s economic interest in Tata Sons will remain protected and the order will not restrict SP from raising capital against its Tata Sons shares.
This would come as a relief for SP as it is in the midst of finalising a restructuring plan for its over Rs 22,000 crore debt under the RBI’s special scheme introduced following the Covid crisis.
A legal expert close to Tata Sons, however, has a different take on the judgment affecting the company’s application.

While Tata Sons refused to comment on the issue, the person said the application seeking to restrain SP from offering the company’s shares as collateral has been allowed by the SC. The person added that part of the order is “open” to interpretation and is “not settled”.
SP had pledged half of its 18.4% Tata Sons stake to Axis Bank and IDBI Bank for Rs 5,074 crore.
After this move, Tata Sons filed an interim application to restrain SP from pledging further. Following the SC ruling, SP, said a source, could revisit plans of raising Rs 3,750 crore from Toronto-based Brookfield Asset Management by pledging a portion of its unencumbered 9.2% Tata Sons stake.
However, if SP is restrained from pledging the Tata Sons shares, according to the Tata interpretation, it will have to release the shares pledged to Axis Bank and IDBI Bank and offer another asset as collateral.
SC has also dismissed SP’s interim application seeking separation of its ownership interests from Tata Sons. SP had proposed to swap 18.4% in Tata Sons with shares of listed Tata entities including India’s most valuable IT services player TCS.
The proposed separation is quite different from a buyout under Article 75 of Tata Sons’ Articles of Association. Under this Article, Tata Sons’ majority shareholders by a special resolution could force SP to transfer its shares to them any time. SP had a bone of contention over this, though Tata Sons never exercised Article 75 in its over 100-year history.
Article 57 of Tata Sons specifies that the shares will have to be bought at “fair value” and Article 60 states that the board will fix the fair value based on the company’s annual audited accounts of each year. The acquirer will also have to pay a premium for the Tata brand, according to Article 77 of Tata Sons.
SP had estimated its stake in Tata Sons to be worth Rs 1.78 lakh crore. SP’s estimation had included its proportionate share in the Tata brand value, which is worth a little under Rs 1.5 lakh crore, according to Brand Finance’s 2020 ranking.
Tata Sons, on the other hand, had valued SP’s stake at Rs 70,000-80,000 crore, which is 55-61% lower than the minority shareholder’s estimation.
The SC said that Article 75 is an exit option provision, though one may think of it as an expulsion option. “After attacking Article 75 before the National Company Law Tribunal, SP cannot ask this Court to go into the question of fixation of fair value compensation for exercising an exit option.”
The valuation of the shares of SP depends upon the value of the stake of Tata Sons in listed equities, unlisted equities, immovable assets etc., and also perhaps the funds raised by SP on the security/pledge of these shares.
“Therefore, at this stage and in this Court, we cannot adjudicate on the fair compensation (for SP’s stake in Tata Sons). We will leave it to the parties to take the Article 75 route or any other legally available route in this regard,” the SC said.

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