What will it mean if Tata Sons go private
The shareholders of Tata Sons, the holding company of the Tata Group, Thursday voted to go private. While this has its advantages and disadvantages, in the short term group patriarch Ratan Tata and his associates will gain an edge over Cyrus Mistry.
The Tata camp and Mistry have been at loggerheads since the later was ousted as the company's chairman in October last. Allegedly, he did not keep up with corporate governance and the philosophy of the group.
The latest decision can be seen as a part of that battle. Here's what going private will mean to the company and its shareholders:
1. Shares in a private limited company cannot be sold or transferred in the open market; existing shareholders' consent is necessary. So, in a way, all shareholders have to be on the same page for any share sale.
Cyrus Mistry's family, which owns 18.4% in Tata Sons, will now not be able to sell their shares to any outsider without the permission of the majority shareholders. This will put Tata a step ahead of Mistry and his family.
2. While a privately held company is good for promoters and majority shareholders, it goes against the interests of minority shareholders, who may not be able to find an exit from the company. The situation becomes more difficult in the case of Tata Sons, because it has been a publicly held company for many years.
3. In case of a public company, every information needs to be shared via the stock exchange where it is listed. Private firms are free from this requirement. Their disclosures remain basic.
4. The group companies will lose value. Tata Sons is the holding company for all publicly listed Tata Group companies like Tata Steel, Tata Motors etc. This means that those who purchase the shares of the publicly listed companies of the Tata Group will have less information about the happenings at the holding company level.
In the stock market, information is the biggest asset, and the information about the promoters is the most important thing. Definitely, this will make the public shares of the Tata Group companies less attractive.
5. To justify and soften the impact of going private, the promoters of Tata Sons have introduced a few clauses in the Article of Association. They are:
a) Giving preferential shareholders voting rights in case Tata Sons failed to pay a dividend for two consecutive years.
b) Appointing a woman director.
c) A third of the board would be made up of independent directors.
d) An alternate director will be appointed in case any independent director goes out of the country.
All these clauses have been voluntarily adopted by the company and are not mandatory for a private limited company.
The decision to go private at the level of group holding company shows that it is not possible to go against the majority shareholders in any company. Whatever hopes Mistry harboured against Ratan Tata and Tata Sons trusts have now been dashed. Though, he can challenge the move, but, it is unlikely that he will come out as a winner.
Edited by Joyjeet Das