In the opinion of Justice (Retd) Srikrishna, former Judge of the Supreme Court, “The ability of Cyrus Investments and Sterling to pledge their shares in Tata Sons in favour of third party is not in any way controlled by the Articles of Tata Sons. This is so because the pledge of shares does not amount to a transfer of the title to the shares, as the title of the shares would continue with the pledgor”.
The SP Group spokesperson questioned the motive and timing of Tata’s application stating “The SP Group had also raised funds against Tata Sons shares in the January 2020, which was widely covered in the media. The security documents, which are in the public domain, clearly record that lenders would comply with the Articles of Tata Sons in the event they seek to enforce the pledge of shares. Tatas have suppressed this vital information in their application in a desperate attempt to mislead the Hon’ble Supreme Court.”
In January, the Supreme Court, while according a stay on the NCLAT verdict, had recorded that the Squeeze Out provision of Article 75 would not be used on the SP Group.
In their application, Tata has also sought to reverse their commitment made to the Supreme Court. Article 75 of the AoA of Tata Sons, gives Tata the power, via a special resolution, to ‘squeeze out’ the Mistry family by buying out their shareholding at fair market value The NCLAT in an order had noted that the fair value of the SP Group’s 18.37% stake in Tata Sons was more than Rs 1 lakh crore. affidavit end August in the Supreme Court challenging SP Group's plan to pledge shares to raise funds for funding the requirements of businesses.
Tata Sons and Tata Trusts are also understood to have communicated to several lenders including Canadian investor Canadian Brookfield advising against participating in the Tata Sons shares pledge by the SP Group as illegal. Top officials close to the development said this was necessitated since most lenders have sought an acknowledgement from Tata Sons for their in-principle buy-in.
The SP group however say the pledge has been legally ratified by a former SC Justice Srikrishna.
Tata Sons and Tata Trusts did not comment.
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.
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.
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 shareholder in Tata Sons, which controls the $111 billion conglomerate spanning more than 100 companies, is 66% owned by Tata Trusts.
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.
A lawyer for Tata Trusts had earlier told ET that no one can sell Tata Sons shares which are privately held without seeking Tata Sons approval and that 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."
The Construction and Real Estate Sector, the mainstay of the SP Group, has been significantly impacted by the global COVID-19 pandemic. An SP Group spokesperson stated “The Promoters of the SP Group are in the process of raising ~ Rs 11,000 Cr from marquee global investors with Rs 3,750 Cr being raised in the first tranche, against the security of shares that their investment companies own in Tata Sons. These funds are intended to mitigate the severe stress caused by COVID pandemic, deleverage the group’s balance sheet, support its financial obligations and protect the livelihoods of its workforce. This vindictive move by Tata Sons is solely aimed to create delays and roadblocks in the Fund raise that will jeopardize the future of 60,000 employees and over 1 lakh migrant workers who draw sustenance by working at various SP Group facilities. This calculated move by Tata is intended to inflict irreparable damage on the SP Group. These actions are a departure from the values and ethos of the founders of the Tata Group and is a unfortunate reflection of the mindset of the present leadership. We will vigorously contest these frivolous and misguided claims in the Supreme Court.”
Tatas have sought to restrain the creation of a direct or indirect pledge of shares. In fact, the Articles of Association of Tata Sons only regulate the transfer of shares, with the Board of Tata Sons having a Right of First Refusal to buy at fair market value, the shares of any member who is seeking to sell their shares. There is no provision in the Articles of Tata Sons that restrict the creation of a pledge or encumbrance.
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