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Slimming Down

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The consolidation process within the Tata Group continues. In letters to the Bombay and National Stock Exchanges, Tata Chemicals said it had sold its stake in two other Tata firms — Tata Motors and Tata Steel — to holding company Tata Sons through open markets transaction, together worth nearly Rs 50 crore. Tata Sons bought 331,000 shares of Tata Motors from Tata Chemicals for Rs 24.82 crore and 510,000 shares of Tata Steel held by Tata Chemicals for Rs 24.64 crore. Thanks to these deals, Tata Sons' stake in Tata Motors has gone up from 25.61 per cent to 25.97 per cent. In Tata Steel, Tata Sons' stake has risen from 28.5 per cent to 28.62 per cent.

These transactions may appear small, but may point to some larger implications. Since Ratan Tata became chairman in 1991, Tata group has been thinking of cleaning up the cross-holdings by group companies. First, the group reduced the number of companies from 300 to 90 in seven business sectors — communications and information technology, engineering, materials, services, energy, consumer products and chemicals. "The Tata Group's move to streamline promoter holding under an investment company will increase the confidence of outside investors in the companies," says Deven Choksey, managing director of KR Choksey Securities. Eventually, disentangling the cross-investment will free the operating companies from investments in unrelated areas.

The Tata Group has been steadily cleaning up cross-holdings in its portfolio. The stakes till June 2011:
Tata Sons 28.5
Tata Motors 0.46
Tata Chemicals 0.44
Tata Sons 29.81
Tata Steel 0.73
Tata Sons 19.35
Tata Global
Beverages 4.39
Tata Coffee 0.06
Tata Motors 0.03
Tata Sons 25.61
Tata Steel 5.49
Tata Chemicals 0.13
Tata Global Beverages
holds less than .01%
Tata Sons 22.94
Tata Chemicals 6.98
Tata Coffee 0.16

art of the rationale for the divestment of cross-holdings could be to find resources for need-based investments. "In most of the deals, the group companies had sold the stake to Tata Sons, which is cash rich now," says Arun Kejriwal, director of Kejriwal Research & Investment Services. "The seller could use the money for expansion or acquisition."

This kind of consolidation has been on for a few years now. In June 2006, Tata Motors had 4.66 per cent stake in Tata Steel; now that is at 0.46 per cent. In between, the carmaker invested in its Nano, and acquired marquee brands Jaguar and LandRover from Ford in 2007. Similarly, Tata Steel reduced it stake in Tata Motors to 5.49 per cent from the 8.45 per cent it held in 2006. The steelmaker similarly went shopping, buying Corus for $12 billion.

Tata Power's last divestment was a bit different. It had sold the stake in two telecom companies — Tata Teleservices and Tata Teleservices Maharashtra — to strategic investor NTT DoCoMo in 2009, and used the monies in part for reducing debt taken for the acquisition of 30 per cent in mining company Bumi Resources in Indonesia. Tata Chemicals' own consolidation continues apace; its stake in Rallis India rose to 45.2 per cent from 9.4 per cent in 2009.

But this may be an exception. "When operating companies invest in other group companies, the market becomes sceptical," says Choksey. "The valuation will not reflect in the price of the stake-holding company." It remains to be seen if the consolidation will be completed before the new chairman takes charge at end-2012.

(This story was published in Businessworld Issue Dated 19-09-2011)