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Mistry family suggests separation via share swap

The ongoing battle between the Tatas and the Mistry family has been taking numerous twists and turns over the last four years. Now there is the latest twist from Mr. Pallonji Mistry. He has agreed to sell the stake in Tata Sons. However, instead of payment in cash, he wants proportionate ownership in Tata group stocks. What exactly does that mean?

5 Mins Read   |   02-Nov-2020   |  
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Written By Bani Thakkar

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How will share swap work?

As of now it is hard to be sure whether it will work. However, the model offered for separation by Pallonji Mistry is very interesting and intriguing. He has asked the Tatas to swap his stake in Tata Sons with equivalent shares of various group companies. Effectively, there will be no cash payout but the Mistry family stake in Tata Sons will be replaced with a stake in Tata group companies in the same proportion.  Here is how it works. 

Let us say Tata Sons has a 70% stake in TCS. Since the Mistry family has an 18% stake in Tata Sons that proportionately gets replaced with a 12.6% stake in TCS. A similar formula will be applied for all the listed companies owned by Tata Sons. In the case of unlisted assets the Mistry family has asked for a court appointed independent assessment of the value of such net assets. Mistry wants the entire process to be handled by an independent authority, monitored by the courts. For the Tatas, this could have much larger implications as Mistry family will continue to exercise control. 

It all boils down to TCS

Eventually, any battle for the Tata group boils down to a battle for TCS. This is the one company that is still largely owned by Tata Sons with limited free float in the market. TCS generates over 80% of the value for Tata Sons and almost all its profits. A 12.6% stake in TCS would provide tremendous clout to the Mistry family and actually move them from being a passive investor in Tata Sons to an active investor in group companies of the Tatas. Clearly, the Mistry family will demand directorship in some of the key business franchises of the group including TCS, Titan, Tata Motors, Tata Steel, Tata Global etc. Then there is the hidden value of the digital properties and the brand, but that would be a different ballgame. 

Onus is on Tatas to respond

What began in 2016 may be coming to its most decisive phase now. It all began with the ouster of Cyrus Mistry from the Tata Sons board but the real trigger was when the Mistry family was not allowed to pledge shares of Tata Sons, being a private company. Effectively, there are two options in front of the Tatas. They can pay up Rs.1.80 trillion in cash and buy out the Mistry family stake. Else, they will have to facilitate a share swap for Mistry. Having committed to buy out Mistry’s stake in Tata Sons, there are only two choices available. Both are not exactly very delectable for the Tatas!