Tata Sons mulling legal view on Trusts offer, not seen as a Trusts resolution to be considered

Mumbai: The Tata Sons board has sought a legal opinion on the validity of the restructuring proposal recently sent by Tata Trusts and is unlikely to formally meet to consider it, people familiar with the matter said. The recast plan is aimed at avoiding the listing of the Tata Group holding company.

The proposal cannot be treated as a formal shareholder mandate as it was not presented as a valid resolution formally approved and signed by the two principal shareholder trusts, Sir Ratan Tata Trust (SRTT) and Sir Dorabji Tata Trust (SDTT), they said.

Also read: Tata Trusts rift deepens: Noel Tata-led trustees say 'Trusts do not run Tata Sons' as they defend restructuring plan to avoid listing


The proposal was sent after the Reserve Bank of India directed Tata Sons to comply with regulations applicable to an upper layer non-banking finance company (NBFC). The holding company has begun preparations to comply with the RBI's listing directive.

Tata Sons did not comment.

"RBI's decision on Tata Sons' regulatory status cannot be displaced simply by an alternative proposal from shareholders and the regulator will have to independently consider whether the proposed restructuring meets its requirements," said one of the persons cited.

The Tata Trusts had proposed to the Tata Sons board a plan to merge two operating companies-Tata Electronics Systems Solutions and Tata Consulting Engineers-with the holding company, in a bid to change its regulatory status and retain it as an unlisted private entity.

The Trusts, which own 66% of Tata Sons, said the restructuring would give the company sufficient operating income to fall outside the principal-business criteria for an NBFC and reduce the proportion of investments in group companies, putting it beyond the definition of a core investment company. Out of the 66%, SDTT and SRTT jointly hold a majority 51.54% stake in Tata Sons.

An executive close to Tata Trusts chairman Noel Tata said the proposal sent to Tata Sons was an option for the company to evaluate and modify, if necessary.

"Tata Sons too had sought the help of Tata Trusts at its last board meeting to work out a way to comply with the RBI directive, and the proposal, which meets all applicable guidelines, was made in that context," the person said.

The executive said Tata Sons would, in any case, require shareholders' approval to comply with the RBI directive or undertake any change in its shareholding structure under Article 121A of its Articles of Association.

"The proposal from the Trusts was therefore intended to provide an alternative plan for the company to consider and avoid a listing," the person said.

The proposal has also been sent to the RBI.

Also read: Tata Trusts pitch Tata Sons restructuring as alternative to listing

The Tata Sons board is understood to have begun planning for a potential listing, including the financial, regulatory and corporate actions that would be needed to meet the RBI directive. Any decision to pause that work would therefore have to be weighed against the regulatory process already under way.

The Tata Sons board would be justified in seeking clarity in the form of an expert legal opinion before acting on any restructuring proposal that could potentially help it avoid mandatory initial public offering (IPO) requirement, said Nazneen Ichhaporia, partner at law firm ANB Legal.

"While the Tata Trusts, as majority shareholders holding a combined 66% stake, can put forward their preferred course of action, the Tata Sons Board must independently assess the proposal and take the necessary corporate steps," said Ichhaporia.

"Until the shareholders of Tata Sons pass a formal resolution approving this restructuring proposal, the board's earlier resolution to consider and pursue the listing route, would continue to apply."

By choosing not to formally consider the proposal until its legal validity is verified, the board appears to be protecting itself from potential governance lapses.

"At the end of the day, the board owes a fiduciary duty to all stakeholders," said Ichhaporia.