Analysis: Tata Sons faces a delicate balancing act between pragmatism and upholding its legacy

According to people in the know, Tata Sons has explored a potential listing twice, first in 2007 during Ratan Tata’s tenure as chairman and again in 2016 under Cyrus Mistry’s leadership.

Tata Sons Ltd, the cornerstone of India’s corporate landscape, finds itself at the centre of public discourse once again over talks of going public. The latest resurgence of interest in an IPO comes amid evolving regulatory directives from the Reserve Bank of India (RBI), which has mandated that Tata Sons, which is registered as a core investment company ( CIC) and classified as an upper-layer non-banking financial company (NBFC), must list its shares within a specified timeframe. The RBI’s directive, issued in September 2023, mandates that such entities must go public within three years. Consequently, Tata Sons faces a deadline of September 2025 to list on stock exchanges.

While the deadline looms, there is speculation that Tata Sons is exploring alternative paths to compliance. Under RBI rules, a company is treated as an NBFC if its financial assets are more than 50 percent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 percent of the gross income. Further, both these tests are required to be satisfied to determine the principal business of a company.

No easy option

One significant aspect of listing Tata Sons is the heightened public and regulatory scrutiny it will inevitably attract. Like all listed companies in India, Tata Sons would be subject to greater public accountability and regulatory oversight. While this can enhance transparency and governance, it may also pose challenges. Key decisions, such as capital allocation in new ventures and long-term strategic vision, could potentially face interference and scrutiny, which can become distractions for the company’s leadership.

Furthermore, post-listing, Tata Sons shares may face a notable holding company discount, potentially limiting the upside for investors and existing shareholders. This situation resembles the challenges encountered by the Aditya Birla group, prompting them to recently announce the merger of Aditya Birla Capital Limited and Aditya Birla Finance. This move seems aimed at addressing the holding company discount issue and leveraging improved synergies.

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Deborshi Chaki

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However, amid these considerations, a listing could offer a welcome respite for the Shapoorji Pallonji Group, Tata Sons’ single-largest shareholder, which is facing financial challenges of its own. The group, which holds an around 18 percent stake in Tata Sons, has grappled with liquidity issues and has been forced to borrow large sums running into billions of dollars from global credit funds by pledging its shares of Tata Sons. A partial stake sale in Tata Sons could alleviate liquidity concerns for the SP Group, enabling it to manage its financial position more effectively.

Yet, the prospect of a financially resurgent SP Group may raise concerns within Tata Sons’ leadership, given the acrimonious history between the two entities. The strained relations between the Mistry family and the Tata Group further complicate the dynamics, potentially adding a layer of apprehension regarding the consequences of a strengthened SP Group.

Although the final decision is yet to be made, legal experts suggest that one way for Tata Sons to avoid listing is to deregister itself as a CIC, for which Tata Sons will need to adjust its current structure. This adjustment could entail reducing its holdings of financial assets and dividend income from such assets below the RBI’s 50 percent threshold. Experts believe this could potentially be achieved by merging Tata Sons with an unlisted operating company within the group outside, provided it possesses the necessary amount of physical assets and income. While this task may pose challenges, it is not considered impossible with the right financial manoeuvres.

Past attempts at listing

According to people in the know, Tata Sons has explored a potential listing twice, first in 2007 during Ratan Tata’s tenure as chairman and again in 2016 under Cyrus Mistry’s leadership. However, both attempts were derailed by external circumstances and internal shifts.

Ratan Tata, a staunch advocate for transparency and corporate governance, firmly believed that Tata Sons should be a listed entity. He saw it not only as a means to enhance transparency but also as a way to provide much-needed liquidity to the philanthropic public trusts, which own 66 percent stake in Tata Sons are its controlling shareholders. In a 2004 interview with the UK Sunday Times, Ratan Tata outlined Tata Sons’ listing plans and said that as a listed entity, Tata Sons would not be very different from Berkshire Hathaway, founded by Billionaire investor Warren Buffet.

The trusts, which are instrumental in funding various social initiatives and charitable endeavours, ranging from education and healthcare to environmental conservation and rural development, depend on regular dividend payouts from Tata Sons for funds to carry on their work. Listing Tata Sons, Ratan Tata felt would not only bolster corporate governance but also enable the trusts to continue their work by generating additional funds through the sale of shares. Ratan Tata envisioned a scenario where the proceeds from the listing could be channelled into furthering philanthropic efforts, thereby amplifying the conglomerate’s positive impact on society. The idea was ultimately set aside as the global financial crisis of 2008 threw markets into disarray, forcing a reassessment of priorities and strategies.

In 2016, the late Cyrus Mistry, then chairman of Tata Sons, stirred up discussions within the conglomerate once again. Mistry, whose family is the single largest shareholder in Tata Sons, appointed Citibank to conduct a valuation exercise of the company. The primary motivation behind Mistry’s push for listing was the escalating financial requirements of the Tata Trusts, major stakeholders in Tata Sons. Much like his predecessor Ratan Tata, Mistry recognized the potential benefits of listing the company. He believed that by going public, Tata Sons could allow the trusts to divest some of their stake in the company post-listing.

The funds generated from this divestment could then be reinvested to generate regular returns for the trusts, thereby reducing their reliance on Tata Sons (and its subsidiary Tata Consultancy Services) for dividends. Mistry’s move may have been motivated by the possibility of divesting some of his own family’s stake in the IPO. However, tensions between Mistry and Tata, who served as the chairman of Tata Trusts at that time, quickly intensified, ultimately resulting in Mistry’s unceremonious departure from the Tata Group. Following Mistry’s exit, discussions about listing Tata Sons ceased abruptly. In 2017, Tata Sons transitioned from being a public limited company to a private entity, aiming to reduce external interference.

As Tata Sons, which controls 29 publicly listed Tata Group companies with a combined market capitalization of Rs 31.6 trillion, weighs its options, it faces a delicate balancing act between financial pragmatism, regulatory compliance, and upholding its legacy of corporate governance excellence. The decisions made in the coming months will not only shape the future trajectory of Tata Sons but also reverberate across the broader landscape of corporate India.