Tatas seek legal opinion on plan to avoid listing

Mumbai: Tata Sons board has sought counsel on the feasibility of the restructuring plan proposed by Tata Trusts, suggesting it is doubtful the board will convene a formal session to deliberate on the matter, sources revealed. The modified plan is said to be designed to circumvent the listing of the Tata Group parent company. However, this proposal cannot be regarded as an official shareholder mandate, as it was not presented as a formally approved and signed resolution by the two primary shareholder trusts, Sir Ratan Tata Trust (SRTT) and Sir Dorabji Tata Trust (SDTT), experts explained.Also reported: Tensions escalate within Tata Trusts: Noel Tata-led trustees claim Trusts do not govern Tata Sons while defending restructuring plan to sidestep listingThe proposal was forwarded following the Reserve Bank of India's directive to Tata Sons to adhere to regulations applicable to upper-tier non-banking finance companies (NBFCs).

The holding company has commenced preparations to comply with the RBI's listing mandate. Tata Sons has not commented. The RBI's decision on Tata Sons' regulatory status cannot be overridden by an alternative proposal from shareholders; instead, the regulator must independently evaluate whether the proposed restructuring satisfies its criteria, according to one of the cited individuals.The Tata Trusts had recommended to the Tata Sons board a plan to consolidate two operating entities - Tata Electronics Systems Solutions and Tata Consulting Engineers - into the holding company, aiming to alter its regulatory status and maintain it as an unlisted private entity.

The Trusts, which hold a 66% stake in Tata Sons, argue that the restructuring would generate sufficient operating income for the company to fall outside the principal-business criteria for an NBFC and diminish the proportion of investments in group companies, thus exceeding the definition of a core investment company. Among the 66%, SDTT and SRTT jointly possess a majority 51.54% stake in Tata Sons.An executive familiar with Tata Trusts chairman Noel Tata disclosed that the proposal sent to Tata Sons is merely an option for the company to assess and potentially modify.

Tata Sons also sought assistance from Tata Trusts during its last board meeting to devise a solution to comply with the RBI directive, and the proposal, which adheres to all applicable guidelines, was submitted under this context, the source stated.The executive added that Tata Sons would inevitably require shareholder approval to comply with the RBI directive or undertake any alteration in its shareholding structure under Article 121A of its Articles of Association.

Consequently, the Trusts' proposal was intended to offer an alternative plan for the company to contemplate and evade a listing, as per the executive.The proposal has also been submitted to the RBI.Also reported: Tata Trusts escalate rift: Noel Tata-led trustees state Trusts do not manage Tata Sons while defending restructuring plan to avoid listingThe Tata Sons board is believed to have initiated planning for a potential listing, encompassing the financial, regulatory, and corporate actions required to fulfill the RBI directive.

Consequently, any decision to halt this work would need to be evaluated against the ongoing regulatory process.The Tata Sons board may be justified in seeking clarity through an expert legal opinion before acting on any restructuring proposal that could potentially enable it to circumvent the mandatory initial public offering (IPO) requirement, stated Nazneen Ichhaporia, a partner at law firm ANB Legal.

While the Tata Trusts, as the majority shareholders controlling a combined 66% stake, can advance their preferred course of action, the Tata Sons Board must independently evaluate the proposal and undertake the requisite corporate steps, Ichhaporia emphasized. Until Tata Sons' shareholders adopt a formal resolution approving this restructuring proposal, the board's earlier resolution to consider and pursue the listing route, would continue to apply.

By opting not to formally examine the proposal until its legal validity is confirmed, the board appears to be safeguarding itself from potential governance oversights. Ultimately, the board owes a fiduciary duty to all stakeholders, Ichhaporia concluded.