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Pallonji Mistry and sons Shapoor Mistry and Cyrus Mistry, who together control the diversified SP Group, have tapped Canadian investor Brookfield for a mega $2-2.5 billion funding facility using part of its stake in Tata Sons as collateral.
Brookfield, while evaluating the investment, has also reached out to a group of global and local banks to scope out refinancing opportunities. Most lenders however have sought an acknowledgement from Tata Group for their in-principle buy-in.
“In the last 2 years, the operating companies of the SP Group have recorded their strongest performance to date,” an SP Group spokesperson told ET. “The Group has adequate liquidity to meet its current obligations. The SP Group periodically adjusts its portfolio to maximise value from all its assets, and such value maximisation programs are on track.” The spokesperson said that the Covid-19 pandemic has impacted all sectors, including the construction and real estate sector.
‘Right of First Refusal with Tatas’
However, “the swift response from the Government of India, including the Reserve Bank of India, has helped mitigate the economic impact of the lockdown,” the SP Group spokesperson added.
A senior Tata Sons executive aware of the development said there is clear restriction on transfer of Tata Sons shares to a non-shareholder as it is a closely held holding company. Clauses in the Articles of Association say that shares cannot change hands including to lenders or other parties. “The first right of refusal rests with Tata Sons and the SP Group will have to issue a notice to the Tata Sons board,” the person said on condition of anonymity.
A top legal official close to the SP Group however disputed this saying that AoA does not prevent pledging of shares. “Pledging happens only as a mechanism for security. These shares are not for sale. And in a worst case scenario where SP Group cannot meet obligations on the pledged shares, nothing can stop them from selling shares which are held in Cyrus & Sterling Investments. Also, Tata Sons can object to transfer of shares to undesirable entities which can only be a criminal or competitor, ” he added.
Brookfield declined to comment and Tata Group declined to send an official response.
Pallonji Mistry, whose son Cyrus was ousted as chairman of Tata Sons in October 2016, has been sparring with the Tata Group since then on various corporate governance related matters. Mistry’s dismissal is now being heard in the Supreme Court.
The 18.4% stake that the Mistry family owns in Tata Sons is held through two family entities, Sterling Investments and Cyrus Investments, making them the biggest single shareholders in India’s largest conglomerate. Closely held Tata Sons, which controls the $111 billion conglomerate spanning more than 100 companies, is 66% owned by Tata Trusts, helmed by chairman emeritus Ratan Tata.
The value of the Mistry family stake, as per various credit assessments for advancing money against it, is pegged at $14-20 billion. Cyrus Mistry had himself cited $14 billion as an estimate in the past. At a time when the two key pillars of SP Group — construction and realty –are both parched for cash, the group wants to raise more money to meet current and future obligations.
In January, ET reported that SP Group had raised $200 million from Deutsche Bank against the Tata Sons shares as a short-term funding measure. Since then, sources said, the family has been negotiating with Singapore based private lenders and hedge funds to borrow expensive money at Libor plus 10. The over 90% erosion of Sterling and Wilson Solar, a group company, since its August listing, has also made the situation more acute, said SP Group watchers.
In recent months, people in the know said, the Mistrys have also had talks with a diverse set of funds including KKR, banks such as Standard Chartered and nonbank finance companies (NBFCs) like Edelweiss, among others, to raise funds. However, its requirements have also gone up exponentially as no debt resolution has been in sight.
“No one can sell Tata Sons shares which are privately held without seeking Tata Sons approval,” said a lawyer for Tata Trusts. “Tata Sons will have to be offered the shares first which can be bought at a deemed fair price approved every year by the holding company.”
Cherag Balsara, a practising advocate in commercial law in the Mumbai High Court, said that pledging of shares is different from mortgage. “Pledging is different from a mortgage, according to the Supreme Court in the case of Balakrishnan Gupta V/s Swadeshi Polytex. The ownership of the pledged shares continues to remain with the pledgor and therefore no interest is created in the same. If Tata Sons were to file an action for restraining SP Group from pledging its shares, it would amount to the oppression of the minority shareholder,” he added.
Balsara also explained that a shareholder has the right to benefit from the equity share ownership. “Since the Tata Group would be restraining a shareholder from exercising its legal right to benefit from the ownership of its shares which include a right to pledge or receive bonus shares, dividends etc,” Balsara added.
The banks who have been approached for refinancing by Brookfield are also in a bind since Tata Sons is an illiquid stock and is under litigation. They are pressing for a NoC or a verbal assurance from Tata Sons. The matter is yet to come up to Tata Sons board, people in the know said.
According to a CARE Ratings report, dated February 21, the SP Group’s debt increased from Rs 28,000 crore in March to Rs 30,000 crore as on September 30, 2019 while the company’s standalone debt stood at Rs 9,019 crore as of September-end. Matters have compounded since the asset sale exercises – Eureka Forbes and solar assets – are also far from closure. The sale process for the former has been paused with the onset of Covid-19 after muted response from potential buyers who baulked at the premium billion dollar plus valuation.
“In view of substantial repayments ~Rs.3,000 crore falling due in H2FY20 at SPCPL (standalone) level, timely progress with respect to these initiatives would be critical for the credit profile of the company and will be a key rating monitorable,” the Care report said.
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