Funding talks against pledged Tata Sons shares between SP Group and Brookfield on hold

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By
Kala Vijayraghavan and Maulik Vyas


Funding discussions between Canadian investor Brookfield and the Shapoorji Pallonji Group against pledged Tata Sons shares are at a standstill until further clarity emerges on its its legality, top officials close to the development said.

The Shapoorji Pallonji Group had said it signed a definitive agreement with Canadian private equity firm Brookfield Asset Management to raise Rs 3,750 crore for debt financing. However, Tata Sons moved an application before the Supreme Court to restrain SP Group from raising funds by pledging Tata Sons shares as security on September 5, a day after the agreement was signed.

“While talks continue in a positive direction the expectation is that no funds would flow against the transaction unless the legal uncertainty is removed” an official said seeking anonymity.

The SP group did not comment. Brookfield too did not respond to a mail. The SP group had begun talks since late last year to raise capital and bring down its high debt position.

Lenders are cautiously watching the ongoing legal tussle between the two.warring shareholders, Tata Sons and SP group.

The SP Group have also moved the Supreme Court the same day, September 5, urging it to dismiss Tata Sons’ application while highlighting what it termed as a settled position in law that the mere creation of a pledge on shares would not amount to transfer of title of the shares.

ET first reported this development and the fact that the move by Tata Sons may delay the Brookfield-SP Group deal.

The Tata Group is also understood to have advised several lenders against participating in any deal where Tata Sons shares are pledged, said an official close to the development. Top officials said most lenders have sought an in-principle go-ahead from Tata Sons.

The SP Group had sought opinion from Justice BN Srikrishna, former Supreme Court judge, on the matter, and received a positive response.

Justice Srikrishna has said the ability of Cyrus Investments and Sterling Investments — the two SP Group companies that own 18.4% stake in Tata Sons — to pledge their shares in favour of a third party is not in any way controlled by the Articles of Association (AoA) of Tata Sons.

“This is so because the pledge of shares does not amount to a transfer of the title to the shares, as the title of the shares would continue with the pledger,” Justice Srikrishna opined.

Tata Sons had earlier stated that there is a clear restriction on transfer of Tata Sons shares to a non-shareholder since it is a closely held company. Clauses in the AoA stipulate that shares cannot change hands, including to lenders or other parties.

While the Tata Sons stock is unlisted and illiquid, lenders will still be willing to lend against these shares given the substantial inherent value associated with them,” said Sudip Mahapatra, a partner at law firm S&R Associates. “As long as lenders have comfort that the pledge can be legally enforced, they will be willing to lend against these shares even in the current economic scenario.”

The SP Group has been sparring with the Tata Group over various issues related to corporate governance following Cyrus Mistry’s ouster as Tata Sons chairman in October 2016.

The 18.4% stake that the Mistry family owns in Tata Sons is held through two entities — Cyrus Investments and Sterling Investments — making them the biggest single shareholder in Tata Sons, which controls the $111-billion conglomerate. The Tata Trusts own 66% in Tata Sons.



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