In today’s Finshots, we tell you why everyone’s been buzzing about a potential IPO of Tata Sons.
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The Story
For the uninitiated, Tata Sons is what you’d call a Holding Company. Think of it as the parent to the Tata Group of companies. It owns a sizeable stake of around 30% in these group companies — such as Titan, Tata Motors, and Indian Hotels. These companies can use the Tata surname for the company or the brand if they wish to as long as they follow the ethics and principles of the Tata Group. And then the parent lets them run their own business independently without interference.
When these 29 listed Tata companies and others in its stable make money, they share their profits with the parent. They might send it via dividends. For instance, 95% of ₹35,000 crores of its revenue in FY23 came from these dividends and a significant portion of it came from its biggest cash cow TCS.
Once the dividend hits its bank account, Tata Sons can use it for whatever it pleases. It used it for the acquisition of Air India. And it pumped thousands of crores into Tata Motors a few years ago when the automaker was struggling.
So yeah, the end use of the money is entirely up to the parent.
Now, a company might resort to an IPO primarily for 3 key reasons —
- The owners or investors of the company want to sell a sizeable stake and make some money.
- It wants to raise fresh money to expand the business and build new manufacturing units.
- It wants to pay off the debt it has accumulated and clean up the accounts.
But Tata Sons does not tick any of these boxes.
For starters, 66% of its shares are owned by Tata-related Trusts that do charity work. They conduct their philanthropy with the money they get from Tata Sons so they won’t really want to sell their shares. Sure, you could say that the Mistry family who also owns part of the company might want to cash out. But they’ve been waiting for that for a few years now and Tata does not seem to be in a hurry to show them the exit.
Also, Tata Sons has plenty of dividend clinking in its coffers. Not only did that help pare down existing debt but there’s enough to even pump into expanding capacity in its group companies.
On the face of it, it does not seem like Tata Sons should be in a tearing hurry to launch an IPO.
So, why has it been all over the news then, you ask?
Ah, that’s thanks to the RBI.
See, the central bank has a rule. If a holding company provides financial support to its group companies, especially by using “public money” or money that’s borrowed from banks, then it will be called a Core Investment Company (CIC).
And since Tata Sons fits the bill, the RBI classified it as a CIC. And also, labelled it as an ‘upper layer’ non-banking financial company (NBFC). This meant it was a crucial player in India’s lending ecosystem.
However, the problem with this classification was that it came with another caveat. A big one. Tata Sons would have to be publicly listed on the stock exchange by September 2025.
And you can imagine that Tata Sons wasn’t quite pleased with that diktat. It’s a private company. Which means that it gets to keep its affairs to itself. And it’s only responsible to its limited set of shareholders. But going public would increase scrutiny of its actions. It may not have a free hand in making business decisions either.
Now the rumour is that it tried to sway the RBI. Get an exemption to conduct affairs its own way. But unfortunately for Tata Sons, the RBI wasn’t having any of that. The Tata name didn’t matter in its books.
Tata would have to follow the rules and go the IPO route.
Now, all of this was a known fact even a few months ago. So it doesn’t really answer the question as to why there’s a buzz today, no?
Well, today’s hype is because a financial services firm Spark Capital released a note about Tata Sons. The analysts crunched the numbers and said by virtue of Tata Sons’ investments in all these listed companies, its value should be a whopping ₹8 lakh crores at least!
And it could potentially end up being the biggest IPO in India.
But that’s not what got people talking about Tata Sons.
The thing is, and this is quite weird…some listed Tata stocks own a stake in the parent company too!
Yup, Tata Chemicals owns 3% of its parent. So investors were just excited about the prospect of the amount of money Tata Chemicals could make when this ‘locked capital’ would become free. And by ‘locked’ capital, we mean that the company has held this stake for at least 25 years, and it hasn’t been able to make use of it. Investors never gave it any value because no one knew if the stake would be monetised. But if Tata Sons launched an IPO, Tata Chemicals could finally sell its stake and pocket the gains. It would be massive.
And that’s why the Tata Chemicals stock price soared by over 30% last week. It was a feeding frenzy.
But not so fast now.
Remember we told you that Tata Sons wouldn’t prefer a situation where it’s a publicly listed company, right? That it would like to remain private.
Well, looks like it will do everything in its power to maintain that status quo. Over the weekend, the news flipped on its head. And it now appears that Tata Sons is trying to find a workaround to the RBI diktat. It’s attempting to shed its CIC and upper-layer NBFC tag!
How’s it going to do that, you ask?
Well, the RBI rules do grant some leeway. If Tata Sons can repay all of its borrowings. And if it can shunt off its financial services firm Tata Capital into another subsidiary, that could solve its problems. At least that’s the word on the street.
Now we don’t know what will eventually happen. Rumours about a Tata Sons IPO have been doing the rounds for nearly two decades now. But each time, it fizzles out. And just like that, even the Tata Chemicals stock has lost its fizz — it crashed by 10% yesterday.
So maybe it’s prudent to wait for the Tata Group to make an official announcement the next time at least?
Until then…
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