Bombay: Tata Sons and its minority shareholder Shapoorji Pallonji (SP) Group clashed again with the former opposing the cash-strapped SP group plans to pledge part of its stake in the Tata group’s parent company to raise funds.

Pallonji Mistry and his sons Shapoor Mistry and Cyrus Mistry, who together control the diversified SP group, tapped Canadian investor Brookfield for a $ 2 billion to $ 2.5 billion financing facility using part of his stake in Tata Sounds like guarantee.

Brookfield, while evaluating the investment, also contacted a group of global and local banks to determine refinancing opportunities. Most of the lenders, however, have requested recognition from the Tata group for their membership in principle.

“Over the past 2 years, the SP group operating companies have had their best performance to date,” a spokesperson for the SP group told ET. “The Group has sufficient liquidity to meet its current obligations. The SP Group periodically adjusts its portfolio to maximize the value of all of its assets, and these value maximization programs are well underway. The spokesperson said the Covid-19 pandemic has affected all sectors, including the construction and real estate sector.

“Right of first refusal with Tatas”

However, “the rapid response of the Indian government, including the Reserve Bank of India, has helped mitigate the economic impact of the lockdown,” the SP group spokesperson added.

A senior Tata Sons executive familiar with the development said there is a clear restriction on transferring Tata Sons shares to a non-shareholder because it is a private holding company. The articles of association stipulate that shares cannot change hands, including to lenders or other parties. “The first right of refusal belongs to Tata Sons and the SP Group will have to address a notice to the Tata Sons board of directors,” the person said on condition of anonymity.

A senior legal official close to the SP group, however, disputed this claim that the AoA does not prevent the pledging of shares. “Pledging occurs only as a security mechanism. These shares are not for sale. And in the worst-case scenario where SP Group cannot meet its obligations on the pledged shares, nothing can stop them from selling the shares held in Cyrus & Sterling Investments. Also, Tata Sons can oppose the transfer of shares to undesirable entities which can only be a criminal or a competitor, ”he added.

Brookfield declined to comment and Tata Group declined to send an official response.

Pallonji Mistry, whose son Cyrus was ousted from his post as chairman of Tata Sons in October 2016, has since battled with the Tata group over various corporate governance issues. Mistry’s impeachment is now being heard by the Supreme Court.

The Mistry family’s 18.4% stake in Tata Sons is held through two family-owned entities, Sterling Investments and Cyrus Investments, making them the largest shareholders in India’s largest conglomerate. Closely owned Tata Sons, which controls the $ 111 billion conglomerate spanning more than 100 companies, is 66% owned by Tata Trusts, headed by Chairman Emeritus Ratan Tata.

The value of the Mistry family’s stake, according to various credit ratings to advance money, is set at $ 14-20 billion. Cyrus Mistry himself had cited $ 14 billion as an estimate in the past. At a time when the two key pillars of the SP group – construction and real estate – are both strapped for cash, the group is keen to raise more money to meet its current and future obligations.

In January, ET reported that SP Group had raised $ 200 million from Deutsche Bank against shares in Tata Sons as a short-term funding measure. Since then, sources say, the family has been negotiating with Singapore-based private lenders and hedge funds to borrow expensive Libor plus 10 money. The more than 90% erosion of Sterling and Wilson Solar, a company in the group, since its listing in August, has also made the situation more acute, observers from the SP group said.

In recent months, people in the know, the Mistry have also had talks with a diverse set of funds including KKR, banks like Standard Chartered and non-bank financial companies (NBFCs) like Edelweiss, among others. , to raise funds. However, his demands have also increased exponentially as no debt resolution has been in sight.

“No one can sell Tata Sons shares which are private without seeking approval from Tata Sons,” said a lawyer for Tata Trusts. “Tata Sons will first need to be offered the shares which can be purchased at a deemed fair price approved each year by the holding company.”

Cherag Balsara, a commercial lawyer at the High Court in Mumbai, said pledging shares is different from a mortgage. “Pledging is different from a mortgage, according to the Supreme Court in Balakrishnan Gupta V / s Swadeshi Polytex. take action to prevent SP Group from pledging its shares, that would amount to oppression of the minority shareholder, ”he added.

Balsara also explained that a shareholder has the right to benefit from the participation in the capital. “Since the Tata group would prevent a shareholder from exercising their legal right to benefit from the ownership of their shares, which includes a right to pledge or receive free shares, dividends, etc.”, added Balsara.

Banks that have been approached for refinancing by Brookfield are also at a standstill as Tata Sons is an illiquid stock and is the subject of litigation. They are pushing for a NoC or verbal assurance from Tata Sons. The issue has yet to be addressed by the Tata Sons board of directors, people in the know have said.

According to a report by CARE Ratings, dated February 21, the debt of the SP group increased from Rs 28,000 crore in March to Rs 30,000 crore as of September 30, 2019, while the company’s stand-alone debt stood at Rs 9,019 crores at the end of September. Things have worsened since the asset selling exercises – Eureka Forbes and solar assets – are also far from over. The sale process for the former was halted with the onset of Covid-19 after a discreet response from potential buyers who recoiled from the billion dollar premium plus valuation.

“Given the substantial repayments of around Rs 3,000 crore maturing in the second half of FY2020 at the SPCPL (stand-alone) level, rapid progress on these initiatives would be critical to the credit profile of the company and will constitute a verifiable key rating, ”said Care report said.