Moneycontrol Pro Panorama: An end in sight for the Tata-Mistry dispute?

In December 2019, the National Company Law Appellate Tribunal had ruled as illegal the appointment of N.Chandrasekaran as chairman of Tata Sons and had restored Cyrus Mistry as chairman. The tribunal had also set aside Tata Sons’ decision to become a private company.

The Supreme Court has struck down the NCLAT order, in a big relief to the Tata group. It also said that it will not rule on the matter of valuation of Mistry’s stake to be acquired by Tata Sons. The SC has said that Tata Sons and Mistry can take the legal route to resolve the issue of shares. While the detailed order is awaited to see what the SC has said on this matter, the valuation of the 18.4percent stake is likely to become the next bone of contention.

The valuation of a holding company has always been a matter of debate. Even among listed holding companies, it is normal to see them trade at a discount to the value of the stakes held in listed companies. A holding company discount is a term that’s often used to describe this difference in valuation.

Why does it take place? There could be several reasons. Investor perception of the promoters is one aspect. The mix of industries in the investment portfolio is another aspect. The main income of the holding company is the dividend flows from its investments, valuing it based on those flows typically earns a lower valuation. Also, the holding company holds these investments for life and therefore it’s not as if shareholders can directly access the market value of its investments. Even when it sells an investment, this amount is typically reinvested in some other business and not paid out to shareholders. Therefore, the holding company discount is a fact of life. What this discount should be will be the matter that both parties will need to agree upon.

The SC’s ruling means that both groups now come back to the negotiating table for another round of discussions. The Mistry group will be keen on completing the transaction as they can use the liquidity to ease some of the pressures they are facing in some of their businesses. The Tata group too will like to put this episode in the past and concentrate on their businesses. The SC ruling certainly gives them the upper hand.

Will they be able to find a middle path on valuation and the deal structure for an exit for the Mistry group is the big question? So far, the track record on being able to compromise has been a weak one and if that does not change, they may again turn to the courts to resolve the issue. Expect another long wait for a complete resolution if that happens.

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Ravi Ananthanarayanan
Moneycontrol Pro