One of the consequences of being a private limited company is restricted borrowing
Tata Sons, the holding company of the Tata group, has received a clearance from the Registrar of Companies
(RoC) to change its status from a deemed public limited company to a private limited one, according to the certificate of incorporation filed by the firm.
A Tata Sons spokesperson declined to comment.
The move is a big setback for the Shapoorji Pallonji Mistry family, which has been involved in a legal slugfest with Tata Sons since December 2016. Cyrus Mistry was removed as chairman of Tata Sons two months earlier. Most importantly, it will effectively restrict the Mistry family’s ability to sell its stake in the Tata group holding company to external entities.
The Mistry family firms — Cyrus Investments and Sterling Investment — jointly own 18.4 per cent in Tata Sons’ equity capital. Shareholders of the Tata Trusts-controlled Tata Sons had passed a resolution favouring the conversion of its status at its annual general meeting on September 21, 2017. Tata Sons had been a private limited company since 1917. It was deemed to be a public company in 1976 on the grounds of turnover according to Section 43(A) of the Companies
Tata Sons got RoC’s nod on August 6, just a day before the National Company Law Appellate Tribunal (NCLAT) in Delhi started hearing the Mistry family’s appeal against the July 9 order of the National Company Law Tribunal (NCLT), Mumbai. On Wednesday, the appellate tribunal heard a petition filed by Cyrus Investments seeking a stay on the conversion while challenging the July order.
In response to the appeal, the NCLAT directed Tata Sons to file an affidavit and written responses by August 10 regarding its conversion into a private limited company from a deemed public company. The two-judge NCLAT bench, headed by Justice S J Mukhopadhyay, said it would hear arguments on August 14 after all documents related to the conversion are presented by Tata Sons in a proper manner and not as “loose documents”.
“Private limited companies
are a lot less transparent. Therefore, it won’t be good for other shareholders if holding companies become private,” said Sandeep Parekh, managing partner at Finsec Law Advisors. While such a move would ease regulatory burden on the holding company, it would restrict share transfer rights of the minority shareholders, he added.
Also, under the Companies Act, a private limited firm requires a minimum of two and a maximum of 15 directors with liabilities.
Considering Tata Sons has got a formal nod from the RoC, it can conduct itself like a private limited company absent a stay, said Parekh. However, this can easily be reversed once the appellate tribunal has heard the parties on merits.
One of the consequences of being a private limited company is restricted borrowing, pointed out Amit Tandon, managing director of Institutional Investor Advisory Services, a proxy firm. “It will have an impact on the borrowing side as large lenders like Life Insurance Corporation do not lend to private limited companies,” said Tandon.
Paving the way for the change, the NCLT bench comprising B S V Prakash Kumar and V Nallasenapathy, in its July 9 order, had justified Tata Sons’ move. The change in status, Kumar said, would not be tantamount to oppression against the Mistry family — the largest shareholder in Tata Sons after Tata Trusts — because the law itself directs the company to become private according to Section 43A (2A) of the Companies Act, 1956. Under the Companies Act, 2013, there is no provision for a deemed public company. It only has two classes: public company and private. Tata Sons, he added, was at liberty to become a private company.
Series of events
Sep 21, 2017: Tata Sons shareholders approve conversion of holding company into a private ltd firm
Nov 3, 2017: Mistry camp moves petition to the NCLT, Mumbai, against Tata Sons going private
Jul 9, 2018: Two-judge bench clears the decks for Tata Sons going private
Aug 6, 2018: Registrar of Companies approves Tata Sons conversion into a private firm
Aug 8, 2018: The NCLAT seeks response from Tata Sons on Mistry’s petition against conversion