The Mysterious Expenditure | Value Research Speculations rife over the Tata Group's money raising initiatives & concerns over quantity of shares pledged
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The Mysterious Expenditure

Speculations rife over the Tata Group's money raising initiatives & concerns over quantity of shares pledged

With nearly a 100 companies - 27 of them listed on the BSE - the Tata Group is one of the most respected business groups in not only India, but around the world. It is one of the conglomerates that was well established when India won its freedom and over the years, the group has been considered as an ideal example of running successful businesses.

But perhaps now, the Tata Group will face its biggest test.

The Tata's have a unique business structure. The principal promoter of its key companies is Tata Sons, a trading enterprise that was set up by Group founder Jamsetji Tata in 1868. But in certain cases, other group companies also act as co-promoters. For example, for Tata Chemicals, there are 15 promoters, of which there are 11 that are part of the Tata Group.

As of yet, information on share pledging had never come to light, but with the unfolding of Satyam saga, the topic of share pledging is given importance. The Securities and Exchange Board of India (SEBI) has made it mandatory for all listed companies to inform about the shares pledged by their promoters on a quarterly basis. This has brought to light the fact that not only Tata Sons, but other companies under the Tata umbrella have also been raising money by pledging their shares.

However, one of the things that is not clear is that why are these co-promoters pledging their shares and where will the raised money be used.

Since, there is no compulsion to disclose how the money will be used, there has been plenty of speculation about the same. Most media reports are assuming that the money will be used for the JLR acquisition.

And here's why...
In March 2008, a consortium of banks financed a bridge loan of three billion dollars for the JLR acquisition. Out of this, two billion dollars have to be repaid in June 2009. And according to the ENAM Securities' December 2008 report on Tata Motors, one billion dollars have already been raised by means of rights issue and the sale of Tata Steel shares.

In view of this scenario, there might be some truth in the speculations that most of the amount raised through the pledged shares will be diverted to the JLR cause. However, there are some other news that should be taken into consideration as well. On February 2, 2009, the Economic Times reported that Tata Motors is facing a liquidity crunch, which has resulted in delayed payments to some vendors. Add to this the loss incurred because of the shifting of the Nano plant, it becomes obvious that the group might be strapped for cash.

Furthermore, the group has employed other avenues to raise cash as well. Tata Capital, a wholly owned subsidy of Tata Sons, has come up with a public issue of non-convertible debentures (NCD). Tata Capital is a non-deposit taking Non Banking Financial Company (NBFC) with operations in several areas like personal/auto loans, SME/infrastructure finance, wealth management, investment banking, private equity and treasury advisory. This enables the company to get fund and fee based income.

As per experts, the NCD offered by Tata Capital is an excellent fixed income investment wherein liquidity is also maintained in the current market situation. Rating agencies have also given it a good rating and furthermore, Tata Capital will give more interest than bank fixed deposits.

The NCD issue and the pledged shares leave little room for scepticism over the fact that the Tata Group is in the process of raising money. But the question that still remains unanswered is where will this amount go? Why are the co-promoters also raising cash? To fund the JLR acquisition or only because they are cash strapped?

The questions are aplenty and the answers few and far between, most of them only conjecture. Hence, for definite answers, we will have to wait for the wheels of time to uncover the truth.

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