A few days back, Shapoorji Pallonji Group decided to sell off its 18.4% stake in Tata Sons. The Shapoorji Pallonji Group(SP Group) is headed by Pallonji Mistry and his son, ex-Tata Chairman Cyrus Mistry. The Mistrys and Tatas have been associated with each other for the past 70 years. Their relationship has turned sour in the past few years.

The reason why SP Group and the Tatas were in news was since SP Group which has been hit by a liquidity crunch intended to raise capital by putting their 18.4% stake as collateral. This did not go down well with Ratan Tata. He did not want their stake to go in the wrong hands. A battle followed in the courts. How did Ratan Tata’s relationship with Cyrus Mistry turn sour? Why is SP Group selling its complete stake in Tata Sons? Let us find out what lead the long-time friends turning into foes.

Cyrus Mistry Ratan Tata’s Blue Eyed Boy

Ratan Tata had immense faith in Cyrus Mistry. In fact, it was him who declared Mistry as his successor as Chairman of Tata Sons in 2013. Shortly after he was appointed as chairman, many of his business decisions did not go down well with Ratan Tata. Tata felt that many of Mistry’s decisions were against the ethics and morals of the company and that some of his decisions didn’t do justice to the Tata name. After all, Tatas are admired for their ethics.

Ratan Tata earlier offered Mistry to resign voluntarily, he even asked his close confidante Nitin Nohria, also the Dean of Havard Business School and Director at Tata Sons, to convince Mistry to resign voluntarily. Mistry failed to comply. He was voted out as chairman by the Tata Sons Board on 24 October 2016. Thereafter he was voted out of every possible board, making the bitterness between Ratan Tata and Cyrus evident.

Why does SP Group want to Sell Off Their Stake?

SP Group hasn’t done very well in the past few years. The company has accumulated a lot of debt. The company works mostly in the real estate and infrastructure sector which hasn’t performed well over the past year. When COVID struck, the situation worsened. SP Group currently owes debt worth Rs 28,000 crores.

In the past, SP Group has already pledged a few its shares in Tata Sons to raise a capital close to Rs 1,437 crores. However, SP Group missed the deadline for payment.
This was worth worrying for many at Tata Sons.

Tata’s Worry

While SP Group still owed the debt, it decided to raise capital by pledging shares it has in Tata Sons. They wanted to raise money to finance themselves by keeping Tata Sons shares as collateral. In case SP Group fails to pay, the shares might be transferred to the creditor. This did not go down well with Ratan Tata since he did not want Tata Sons’ shares to go into the hands of an unfriendly investor.

Tata Sons Board approached the Supreme Court. The plea was to restrict the SP Group promoters from raising capital by pledging their shares in Tata Sons. Their plea was that under the company’s articles of association (AoA), the board of Tata Sons has the first right to buy the shares at fair market value. The move shattered SP Group’s hope of raising the capital of Rs 3,750 crores from Canadian Investor Brookefield as well.

Coming To A Common Ground

Recently, SP Group confirmed their intentions of selling their complete 18.4% stake in Tata Sons. SP Group said in an official statement: “a separation from the Tata Group is necessary due to the potential impact this continuing litigation could have on livelihoods and the economy”.

The best-case scenario for SP Group would be to get a fair value for its stake in the Tata’s in order to get their company out of a liquidity crisis. The value of the 18.4% stake which SP Group has in Tata Sons is 1.78 lakh crores or $24 Billion. Such a big amount may not be covered at one-go but in parts, a proposed by Tata Sons.

Apart from a few companies like TCS, none of the Tata Companies have faired well this quarter owing to the COVID-19 pandemic. For Tata Sons, the problem of arranging funds and deciding on the fair value of the purchase still remains. Tata has set up a team for contingency fund planning, which shall decide on how to arrange funds to buy out the stake owned by the Mistrys.

TCS’s buyback has given Tata Sons some relief. Tata Consultancy Services’ buyback of shares has infused close to Rs.11,000 crores in Tata Sons. This gives Tata some liquidity to begin the acquisition in parts if it decides to do so.

Also recently, there were unconfirmed reports about Walmart investing around $25 Million into Tata Group’s proposed ‘super app’, which will bring all of Tata’s Retail channels under a single app. The amount to be invested by Walmart and the amount which Tata shall give to SP Group is a close figure… What do you think is cooking up?