Pledge battle is the latest stand-off between the two groups
The ongoing turf war between the Tatas and the Mistry family has now assumed a new dimension. It pertains to Mistry family proposing to pledge shares of Tata Sons to raise funds for businesses in the post COVID scenario.
What Mistry family wants?
The Shapoorji Pallonji Group has been in a liquidity crisis for some time now, post the fallout with the Tata Group in 2016. With COVID1-19 bringing construction activity to a virtual halt, the building business of the group has been under severe strain. The Mistry family, which owns 18.4% shares in Tata Sons is looking to pledge part of these shares to global investors to raise funds. It is this decision of the Mistry family that has raised the hackles at the Tata Group.
Tatas take the legal route
Tata Sons has now approached the SC to block the pledge of shares by the Mistry family. The contention of Tata Sons is that a pledge is tantamount to a sale of shares and that is contravention of the articles of association (AOA) of Tata Sons. As per the AOA, any sale of Tata Sons shares by the Mistry family, will have to automatically give the right of first refusal to the Tata Group and only then can they sell shares to any outside parties. This has been made possible by converting Tata Sons into a private limited company where there can be restrictions on share transfer.
Is a pledge of shares a sale?
There are two ways to look at this and the answer can be a matter of debate. Let us look at the issue from the point of view of the Mistry family. The family is the legitimate owners of 18.4% stake in Tata Sons and there is nothing to stop them from pledging shares to raise funds. Also, as the Mistry family argued, a pledge is not tantamount to a sale as the ownership still vests with the pledgor of the shares and there is no transfer of ownership that happens. The Tata group has a slightly different take on this subject. In the event of any default by the Mistry group on the loans, the pledgee automatically gets the right to assume ownership of those shares. In such a case, the pledge would end up being a sale. That would be against the AOA of Tata Sons.
Courts may take a wary stance
The courts are likely to take a more cautious stance since the law can be interpreted both ways. It would also have to be cautious of what precedent it sets by its judgment. At best, the court may direct the two parties to sit across the table and hammer out a solution. For the good of Indian business, the most formidable family holding company in India cannot be at loggerheads with its largest single shareholder. This could provide an opportunity for the two Parsi families to sit across the table. That would be in the best interests of all!
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