Tata Tech defends preferential allotment to group entities

The board of Tata Technologies has approved preferential allotment of shares to two entities promoted by Tata Sons, the holding company for the group. This comes amid objections from some minority shareholders that the placement was being done at a low price to benefit group entities. The board says the Tata Group companies were chosen after evaluating many private equity entities.

"The two entities were chosen after a long-drawn procedure that included a beauty parade before various private equity players," said S Ramadorai, chairman, Tata Technologies, in a telephonic conversation with Business Standard. "The whole process was subject to intense scrutiny and the final selection was based on various parameters. I can assure that all the prescribed norms were followed.”

"Tata Technologies... announced it has completed a round of equity funding for Rs 141.06 crore ($30 million) from Alpha TC Holdings Pte Ltd and Tata Capital Growth Fund I. The investment represents a 13.04 per cent equity stake on a fully diluted basis," said a company statement.

Tata Technologies is an unlisted company of the Tata Group. So are the two companies to which it has allotted preferential shares. The board decided to do the preferential allotment at Rs 251 per share, opposed by minority shareholders.

The dissenters allege the placement was done at a very low price only to benefit the group entities, which will be allotted around 5.62 million equity shares. The company says there is no such motive, as the price was based on a detailed valuation report prepared by Karvy Investor Services.

“An enormous amount of analysis went into the report and the price was arrived on the basis of the DCF (discounted cash flow) method," says Ramadorai. "The first report was prepared in December 2009 and the fair value was Rs 212. Thereafter, another analysis was done in December 2010, wherein the fair value was pegged at Rs 236. We are still offering the shares at a premium. I think we have protected the interest of the shareholders."

The company also defended the decision of a preferential allotment instead of a rights issue as demanded by some minority shareholders. Tata Motors holds 85 per cent in Tata Technologies and the balance 15 per cent is held by employees and a few outsiders who bought the shares from staffers.

"Tata Motors is already highly leveraged and was not in a position to subscribe to the rights issue," says C Ramakrishnan, director, Tata Technologies. "If we had gone for a rights issue, then Tata Motors would have renounced their rights and raising the intended amount would have been difficult. So, we discussed this issue with nine private equity players and then shortlisted three. The negotiations took many months, before the two entities were selected," said Ramakrishnan, who is also the chief financial officer of Tata Motors.