Institutional support key for Tatas

Given its collective shareholding of 40-53% in Tata Chem, Tata Motors, Tata Power & Tata Steel, coming days will keep the Tata camp busy in building support of these big investors

It may have been easy for the Tata Sons camp to oust Cyrus Mistry as a director of Tata Consultancy Services (TCS), given its 73 per cent shareholding in the company. In an extraordinary general meeting (EGM) of shareholders held on Tuesday, resolutions to oust Mistry were passed with overwhelming majority. 

The jury is out on whether the group can replicate this success with companies such as Tata Motors, Tata Steel, Tata Chemicals, Indian Hotels and Tata Power. 

A resolution to remove Mistry as a director from these companies requires a simple majority. That is, 50 per cent plus one vote. 

The shareholding structure indicates the promoter holding (shares held by Tata Sons and its group companies) is between 30 and 35 per cent in these companies, except for Indian Hotels, where it has 38.65 per cent (as on September 30, 2016). With a vote deficit of 11.35-19.20 per cent, the Tatas may not find the going smooth, particularly in Tata Chemicals, Tata Motors and Tata Steel. 

The decision of institutional investors will be crucial for the Tatas as they collectively hold 40-53 per cent in these five companies — in Tata Chemicals and Tata Power their holding stood at 51-53 per cent as on September 30. 

Given that nearly 43 per cent of the institutional votes cast were against removal of Mistry in the TCS EGM, it cannot be ignored. Of the 22.21 per cent institutional holding in TCS (as on September 30), 7.24 per cent voted in favour, 5.36 per cent were against and 9.62 per cent abstained from voting. 

 

While it appears Tata will be able to get the resolutions passed in these five companies with even half the institutional support (even without support of retail investors), any change of winds in the opposite direction can reduce the margin substantially. Reportedly, the Life Insurance Corporation of India (LIC) abstained from voting in the TCS EGM on the resolution pertaining to Mistry’s removal. LIC’s support is crucial as it holds a significant stake in Tata Power (13.12 per cent), Tata Steel (13.26 per cent), Tata Chemicals (8.76 per cent), and Tata Motors (5.2 per cent). 

The question is: How will the institutional investors including LIC behave? 

“Usually, institutional investors like LIC abstain from voting as they don’t want to be seen as taking any side,” says Sudip Bandyopadhyay, chairman, Inditrade Capital. But, Shriram Subramanian, founder and managing director of InGovern, says: “If the likes of LIC don’t voice their opinion and abstain from voting, it is like abdication of responsibility.” Experts say the coming days would be crucial for the Tatas to garner as much possible support to strengthen their pitch in the EGMs as possible. 

“Representatives of Tata Sons would engage in rounds of discussion with domestic and foreign investors, including LIC, to ensure that the required number is reached,” said a senior executive of a foreign brokerage. “They (Tatas) also want all the other government institutions including banks, Unit Trust of India to vote in favour of the motions in the EGMs. They are communicating to the government that any unexpected outcome could adversely impact the stock performance, thereby impacting LIC’s portfolio,” said the custodian of a leading foreign institutional investor. 

What if institutional investors don’t support Tatas? In this hypothetical scenario and assuming all retail investors vote in favour of removing Mistry, the resolutions will go through in four of the five companies as the collective holding of Tatas and retail investors stood between 53 and 60 per cent in three companies; and at 50.1 per cent in Tata Chemicals, as on September 30. In Tata Power, it stands at 48 per cent. 

While it is not clear how iinstitutional and retail investors will vote, a strong outcome in favour of Tatas is necessary and will help in boosting the group’s image, especially given the accusations and allegations that have been made following the tiff between Ratan Tata and Cyrus Mistry. A weaker outcome, especially institutional votes, could mean that such investors are concerned about the issues raised by Mistry. And, that could in some way reflect on the share prices of Tata group companies.