Tata Sons, the principal investment holding company of the $150 billion Tata group, is reportedly considering ways to avoid an initial public offering (IPO), necessitated by the Reserve Bank of India’s decision in 2022 to categorise the core investment company (CIC) as an upper layer non-banking finance company. While there has been no official comment from Tata Sons, it has been reported that the holding company brass sought a waiver from the listing condition in recent meetings with the RBI, but the requests have been turned down on the ground that it will set a precedence. Tata Sons is now apparently weighing several options to shake off the tag as a CIC and an upper layer NBFC, to sidestep the IPO rule. This includes transferring its holding in Tata Capital to another group entity as well as becoming a debt-free entity.
This may be sound legal advice, but Tata Sons, touted as one of India’s crown jewels as far as corporate transparency is concerned, should not be seen to be so desperate in trying to skirt the IPO route. The group’s hesitation probably stems from the fact that the holding company is controlled through various trusts and a public market listing would expose the company and the trusts to the regulatory scrutiny. A listing may also arguably limit the group’s control on its listed entities. Besides, investors in the IPO are likely to give a holding company discount of 30-60% while calculating the equity value. But the group should not ignore the fact that the restructuring process triggered by the IPO could lead to a rerating, providing new avenues for value creation.
In sum, a venerable name like the Tatas should not be sidestepping a listing just because of higher regulatory scrutiny. Lawyers close to the Tatas have said that one of the reasons why the RBI should spare it from IPO is that unlike other NBFCs, it is a core investment company. But in September 2018, Infrastructure Leasing and Financial Company, a CIC with over 300 subsidiaries, defaulted on its payment following which over Rs 90,000 crore worth of combined banking sector exposure was declared as bad asset in the subsequent months. No one, even in his wildest dreams, can draw a parallel between Tata Sons and IL&FS, but the short point is that a CIC status should be no argument for avoiding the IPO route.
Most importantly, Spark Private Wealth Management is absolutely correct in saying that listing of Tata Sons would help simplify the complicated group holding structure of the Tata Group, increase investor transparency and enable some of the listed holding companies to liquidate its holding within the giant parent conglomerate. For example, Tata Chemicals leads the list of at least five group companies holding stake in Tata Sons. That’s the reason all these group stocks rallying sharply on hopes of value unlocking because of the potential listing of Tata Sons. Cross-holdings have been a concern for investors for a while and a simplified structure enables Tata Sons to have better control over the promoter (controlling shareholder) votes on shareholder resolutions. Additionally, unwinding the cross-holdings will enable Tata companies to monetise some of their holdings in the group. A simpler structure would also be in synergy with Tata Sons chairman N Chandrasekaran’s publicly stated mission of streamlining the group’s complicated shareholding structure, hoping to unlock value at its subsidiaries and reduce debt further.
