Tata Teleservices: From subsidiary to associate

Experts say Tata Sons might have ceded board control by changing nomenclature

Tata Group’s holding company Tata Sons has made Tata Teleservices (TTSL) an “associate”, changing its earlier status of a subsidiary, even though its holding in the company has not changed.

While TTSL has not given any reason for the change in status (Tata Sons and Tata Teleservices did not respond to the queries sent to them), top accountants say the move would have required the Tatas to give up some control over composition of the board of the loss-making telecommunications company. Japan’s NTT Docomo picked up 26 per cent stake in TTSL in March 2009 for $2.7 billion (Rs 13,070 crore).

“Tata Teleservices would have become an associate company (from a subsidiary) of Tata Sons in the event it does not control the composition of the board of directors of Tata Teleservices,” says Rukshad Davar, partner at international law firm Majmudar & Partners. Tata Sons’ latest annual report mentions March 26, 2013, as the date when TTSL ceased to be a subsidiary and became an associate. Davar, however, said by merely characterising Tata Teleservices as an associate company of Tata Sons might not lead to less management control by Tata Sons over Tata Teleservices, as a company can control business decisions of its associate company under terms of an agreement.

This basically means if Tata Sons still has contractual rights over business decisions of Tata Teleservices, it will continue to retain control over management and business decisions of Tata Teleservices.

TTSL reported a 15 per cent rise in net loss to Rs 4,858 crore in 2012-13, which turned the company’s net worth to negative Rs 1,862.9 crore. The Japanese mobile phone operator has a put option due in March, which it can exercise if it wants to exit the business.

Tata Sons directly owns 36.17 stake in TTSL, while group firms Tata Communications, Tata Power and Tata Industries own a 9.33, 6.97 and 5.46 per cent stake, respectively. The Singapore sovereign fund Temasek owns a 6.45 per cent stake in the company through Aranda Investments.

Says Ramesh Lakshman, chief executive of the eponymous boutique accountancy firm in Mumbai: “While it appears that Tata Sons has given up the right to appoint the majority of the directors to the board of Tata Teleservices, this could in all probability arise from the shareholders agreement. But it is not clear whether the provision was in the original shareholders’ agreement or it was amended subsequently.”

The need for such a move by Tata Sons is not clear. Its investment in the telecommunications company at a book value of Rs 5,146.9 crore is about a tenth of its balance sheet of Rs 50,944 crore. The change in the status of TTSL to associate from a subsidiary is not likely to have a big impact on the consolidated balance sheet of the holding company or its ability to raise funds from the market.

“The most likely reason for such a move is there is already a provision to this effect in the shareholders agreement with NTT Docomo,” says a partner at one of the five leading global accountancy firms. He did not wish to be identified as his firm’s clientele include some of the Tata group firms.