Tata Sons: When a public company goes private

Strategic and legal considerations may have driven Tata Sons down this path, but the move may not work for promoters of debt-laden firms, say experts

Following the decision of Tata Sons, the holding company of the Tata group that voted in favour of turning itself into a private limited company, there is apprehension that the move may embolden some debt-laden promoters to strengthen their grip on their companies.  

Ramesh Vaidyanathan, managing partner, Advaya Legal, says the larger message for corporate India from Tata Sons’ decision to go private is “promoters should re-arrange their holdings and agreements such that they continue to retain a controlling role in the company”.

For Sumit Agrawal, founding partner, Suvan Law Advisors, the message is the need for more flexibility in management. “Becoming and remaining private gives a larger degree of freedom to company managements,” he adds.

Experts point out since a private company is required to make limited disclosures about its debt, liabilities and operations, turning private is one of the tools to achieve that objective, given the lower compliance requirements. 

However, going private may not be smooth for promoters with stressed assets on their companies’ balance sheets if they are to go down this path. According to Shriram Subramanian, managing director, Ingovern Research Services, Tata Sons’ situation is unique. It was easy for shareholders of Tata Sons to take the decision to go private, as they could muster the requisite voting strength of 75 per cent. 

“It will not be easy for debt-laden listed companies to go private. Not many of these companies will be able to muster the votes needed. Also, delisting requires greater than 90 per cent shareholding with a single hand,” says Subramanian. 

Experts aver that going private may not solve their debt problems. “Certain relaxations that are provided to private companies under the Companies Act, 2013, are not available if they have borrowed funds from banks or public financial institutions,” says Ankit Singhi, partner, Corporate Professionals.

Further, a conversion to private limited company will cut off avenues for public funding. “A company drowning in debt will need a wide range of options to come out of it, else it would be a case of shooting oneself in the foot,” says Vaidyanathan. Securing approval from the NCLT could turn out to be another hurdle for these companies, say experts. 

Several corporate law experts are not in favour of the holding companies of large business conglomerates going private. Citing the case of Tata Sons, Sandeep Parekh, founder, Finsec Law Advisors, argues that going private will create opacity, not just for Tata Sons “but for all the listed companies it holds, which will obtain lesser information about the holding company”.

There are clear provisions for the protection of the interest of minority shareholders in a private company, but the fact remains that any transfer of shares requires the approval of the board. This could curb the bargaining power of minority shareholders when it comes to transfer of shares, say experts.