Markets
Excited about Tata Sons' listing? Temper your expectations
Summary
- The Street seems to be ignoring the company’s preference to stay as a private company as it had voluntarily converted from a public to a private entity in 2017
Tata Sons, the holding company of Tata group, has been in the spotlight lately due to speculation about its listing. This news has triggered euphoria in select Tata group stocks such as Tata Chemicals Ltd and Tata Motors Ltd, which were seen as likely beneficiaries.
But investors would do well not to get carried away because chances are that this listing may not happen. The Street seems to be ignoring the company’s preference to stay as a private company as it had voluntarily converted from a public to a private entity in 2017.
As per the rules, a listed company should have a minimum non-promoter shareholding of 25%. If promoters don't sell their stake through an offer for sale, there has to be a fresh equity issue. This would bring down the Tata group's stake to less than 75%. This means that the Tata group would not be able to pass special resolutions that require a 75% majority.
Moreover, Tata Sons may not like to give up the privileges of being a private limited company as it helps in avoiding a lot of disclosures. For example, it has unlisted investments in loss-making Air India, the newly set up digital entity Tata Neu, and proposed semiconductor ventures. Currently, the financial performance of these loss-making companies and new ventures are not required to be disclosed to the stock exchanges and financial institutions at large.
Further, if the company chooses not to get listed, there are many options to circumvent the Reserve Bank of India’s (RBI) guidelines for mandatory listing. Recall that Tata Sons has been classified as a core investment company in the upper layer of the RBI’s list of non-banking financial companies (NBFC-UL). Such companies must list within three years of being identified as NBFC-UL. For Tata Sons, the deadline is September 2025.
The listing is mandatory only if the company has more than ₹100 crore in assets and also has public funds. Public funds refer to non-promoter funds in the form of debt or equity. Tata Sons’ annual report for FY23 shows that the company holds debt of about ₹20,000 crore.
This debt can be paid off easily by selling less than 2% of its 72.4% stake in Tata Consultancy Services Ltd, which has a market capitalization of about ₹15 trillion.
The other alternative is to transfer the debt and holding in Tata Capital, which is the group’s other NBFC, to a separate entity. With no public funds in the balance sheet, the mandatory listing can be bypassed.
Shares of Tata Chemicals Ltd, which holds about 3% stake in Tata Sons, have been more sensitive to the news of listing, considering its relatively small market capitalization of less than ₹30,000 crore.
The stock had rallied more than 35% during the previous week following media reports about the listing and that it could be a potential biggest beneficiary. However, it has pared gains as alternatives to listing emerged. The stock has declined more than 14% so far this week.
On the other hand, shares of Tata Motors Ltd, with a market capitalization of about ₹379,000 crore, were up over 5% last week. The shares have dropped 4% so far this week. Tata Motors holds about 3% stake in Tata Sons. Other major listed shareholders in Tata Sons include Tata Steel Ltd (3%), Tata Power Co. Ltd (1.7%) and The Indian Hotels Co. Ltd (1.1%).
Till further clarity emerges on this matter, uncertainty is likely to linger for Tata group stocks.
