The Tata Trusts and Tata Sons have been discussing the question of whether the institutions are aware that the Tata Sons Articles of Association, 57-61, regulate the transfer of shares in the event of a shareholder default, said people with knowledge of the matter. There can be no transfer of shares without board approvals, they said.
“Indian lenders and their credit committees would need to evaluate whether their inability to transfer or sell the security in a default situation represents an acceptable risk,” said one of the persons.
Agencies ‘No Question of Default’
“They also need to contemplate the possibility of getting embroiled in litigation with Tata Sons in order to be able to enforce the security,” the person said.
Another person said: “This is relevant for locally regulated institutions, whilst it might not have been so for foreign unregulated entities. A potential lender by virtue of being a regulated entity would need to get comfortable that such a loan is compliant with local regulations given the imperfect nature of the underlying security.”
Once close associates, the two sides turned foes after the late Cyrus Mistry was ousted as Tata Sons chairman in October 2016. Since then, the Mistry family’s holding in Tata Sons has been a bone of contention. The SP Group’s financial troubles have sharpened the divide.
The SP Group said the question of default doesn’t arise and there is no restriction on its Tata Sons equity. It’s been in talks with lenders to refinance $2.2 billion borrowed from Ares SSG and US hedge fund Farallon Capital at over 18% in June 2021, with a tenor of 3.5 years. The debt is held by the Mistry family through Sterling Investment Corp. Pvt. Ltd (SICPL), which owns a 9.182% stake in Tata Sons. The remaining stake is held by another unit, Cyrus Investments Pvt Ltd (CIPL).
“This loan is likely to be rolled over by both the funds as it is high cost,” said one of the persons.
Under the AoA (Articles of Association), any transfer of Tata Sons shares will need board approval, said the persons cited above.
Tata Sons and the Tata Trusts did not comment. PFC and REC, the financial institutions said to have been approached by the SP Group, didn’t respond to queries.
The SP Group said there are no curbs attached to its Tata Sons shareholding as per a Supreme Court ruling.
“It is a matter of record that the Tatas sought to restrain the SP Group from raising money against the pledge of its 18.37% ownership of Tata Sons by filing an interlocutory application in the Supreme Court,” an SP group spokesperson said. “The (court) vide its final judgment dated March 26, 2021, dismissed all interlocutory applications filed by the parties, including the IA filed by the Tata Group. Pursuant to the judgment referred above, it is clear that there is no restriction on the SP Group’s ownership over the shares and their rights to raise capital against these shares.”
Mainstream lenders have been hesitant to step in due to their existing relationships with the Tata Group, according to people who didn’t want to be named. Still, while the Tata Group is concerned over the matter, it is also averse to another legal spat with the SP Group, said the people cited above.
“All lenders are fully aware of the AoA of Tata Sons,” said a person close to the SP Group. “There is no question of any default on any debt backed by Tata shares. The group has been going through a temporary challenging phase and it has more than sufficient assets to repay all its lenders. The funds raised against Tata shares are not even a fraction of the value of the Tata shares. Therefore, to doubt a lender’s scrutiny would be foolish.”
In June 2023, SP Group unit Goswami Infratech Pvt Ltd raised Rs 14,300 crore through bond sales at a high yield of 18.75% by pledging the 9.185% that Cyrus Investments held in Tata Sons. It was used to largely refinance upcoming maturities of CIPL debt. Deutsche Bank AG and Standard Chartered Bank were lead arrangers for this deal, which saw several special situation funds and private credit funds including Cerberus Capital, Varde Partners, Canyon Capital and Davidson Kempner participating.
Earlier this month, Goswami Infratech floated a plan to repay debenture holders to the tune of Rs 7,000 crore, leveraging the monetisation of Afcons Infrastructure, an SP Group company, according to a consent note sent to existing holders of the 18.75% bond maturing in June 2026.
In 2020, the Tata Group sought to restrain the creation of any direct or indirect pledge on the Tata Sons shares, stating that this would amount to a transfer of shares. Under the AoA, it said, the Tata Sons board has the right of first refusal on any shares being sold by a stakeholder at fair market value.
Tata Sons had moved the Supreme Court challenging pledges made by SP Group units in December 2019 and April 2020, as well as a fresh move to do so in favour of Canadian private equity firm Brookfield Asset Management. The SP Group had then approached the apex court to dismiss the petition as “creation of pledge does not amount to transfer of shares”.
The final Supreme Court order in March 2021 stated that the valuation of shares held by the SP Group depends on the value of the stake in listed equities, unlisted equities, immovable assets and also perhaps the funds raised by Mistry-led conglomerate against these shares. “Therefore, at this stage, in this court, we cannot adjudicate on the fair compensation,” it had said.