The Tata Group, a prominent Indian multinational conglomerate, is embroiled in a significant boardroom conflict. On Thursday, Noel Tata, who chairs Tata Trusts, declared the reappointment of N. Chandrasekaran as chairman of Tata Sons to be "illegal." This move has intensified the power struggle within the conglomerate, which owns Jaguar Land Rover and Air India, and is a key supplier for Apple.
Chandrasekaran, who has been at the helm of Tata Sons, aims to expand the business through substantial investments, a strategy that requires considerable capital. In contrast, Noel Tata is keen on keeping Tata Sons private to protect its current ownership structure. This disagreement could delay the potential public listing of Tata Sons, a crucial step in Chandrasekaran's strategy to secure necessary funding.
The ongoing dispute echoes a similar situation from a decade ago, which lasted over six months. If unresolved, it could hinder Tata Group's ambitious plans, including significant investments in Air India, semiconductors, and batteries. the deadlock could slow down these capital-intensive projects, where leadership continuity and trust are as vital as financial resources.
Under Chandrasekaran's leadership, Tata Group has made substantial capital commitments. These include acquiring Air India in 2022 and planning a $11 billion semiconductor plant. However, the group faces a funding shortfall, needing over 290 billion rupees ($3 billion) annually to support loss-making ventures like Air India, Tata Digital, and Tata Electronics. Additionally, 900 billion rupees are required for the semiconductor project.
Despite earning over 300 billion rupees in dividends, Tata Sons faces a significant funding gap. Listing the company could potentially bridge this gap, with an estimated gross valuation of over 12 trillion rupees. However, Tata Trusts, the largest shareholder with a 66% stake, opposes this move, fearing it would impair their rights as majority shareholders.
Last month, Chandrasekaran expressed dissatisfaction over delays in finalizing his reappointment. Tata Trusts accepted this decision and advised Tata Sons to form a selection committee for a successor. Yet, on Thursday, Tata Sons announced that its board, by a majority vote, approved Chandrasekaran's reappointment for another five years, a decision Noel Tata opposed.
Tata Trusts argues that the chairman of Tata Sons cannot be appointed without their approval, rendering the decision a "legal nullity." The Trusts have resisted regulatory demands to list Tata Sons, stating they will explore all avenues to avoid mandatory listing.
The financial year ending in March saw Tata Sons' consolidated net profit fall by 35% to 266 billion rupees, exacerbated by losses from Air India, Tata Digital, and Tata Electronics. The market capitalization of Tata Group's listed companies also dropped by 12% during this period.
The rift between Chandrasekaran and Noel Tata has deepened as Tata Consultancy Services, the group's top revenue generator, faces challenges from the rise of artificial intelligence in the IT sector. Tata Sons currently lacks access to capital or debt markets to fund its loss-making ventures, according to Shriram Subramanian of InGovern Research Services.
Listing Tata Sons could be inevitable if it seeks funds for large capital investments. The Reserve Bank of India recently rejected Tata Sons' application to surrender its registration as a Core Investment Company, reinforcing the mandatory listing requirement.
This listing could challenge Tata Trusts' control over Tata Sons, potentially allowing a new strategic minority investor to acquire the 18% stake held by Shapoorji Pallonji Group. To counter this, Tata Trusts proposed acquiring the stake for 250 billion rupees over 18 months, suggesting Tata Sons fund this through internal cash flows, sale of listed shares, or by attracting an investor into newer businesses.
The dividend income from Tata Sons is insufficient to cover losses and fund expansion, and monetizing loss-making assets like Air India or Tata Digital is currently unfeasible in India, according to Deven Choksey of DRChoksey Finserv.
