Issue 3- On share pledging, cheap smartphones and gold smuggling

In today's Finshots brief, we talk about

• Why Tata wants to buy out Shapoorji Pallonji's stake in Tata Sons
• Jio's plan to sell smartphones
• India's gold smuggling problem

Tata wants to buy out Shapoorji Pallonji’s minority stake

Before we get to the heart of the story, let’s talk about the structure of the Tata empire. The parent company of the global conglomerate is Tata Sons- it’s the glue that holds together various businesses like Tata Steel, Tata Motors, TCS, Titan, etc.

Tata Sons, in turn, predominantly belongs to two large institutions.

The first is Tata Trusts, a group of charitable organizations set up by the revered Sir Ratanji Jamsetji Tata. It owns a majority stake of 66%. The second is the Shapoorji Pallonji group. They own a minority stake of about 18.4%.

Now, the Shapoorji Pallonji (SP) group mainly works in the construction and real estate sectors- which were horribly affected by the coronavirus pandemic and resulting nationwide lockdowns. So after months of bad business, the group is in dire need of funds to pay off their mounting debt. And on that front, they’ve hit a bit of good fortune.

The SP group is currently in the process of raising ₹11,000 crore from a number of global investors. On September 4th, they finalised the paperwork to raise ₹3,750 crore in the first tranche. But to do so, they had to pledge some shares that they own in Tata Sons as collateral.

Well, Tata wasn’t very comfortable with this. So just one day later, they went to the Supreme Court to stop the SP group from pledging Tata shares for raising capital. Their contention was simple. Pledging of shares technically amount to a transfer of shares and according to the Articles of Association (a document that defines rules for running an organization) the board of Tata Sons ought to have the right of first refusal. Meaning Tata Sons have the first shot at buying the shares at fair value before anybody else can make an offer.  The court agreed with this assessment and barred the SP Group from pledging shares. Until October 28, when the court promised to deliver a verdict on the matter.

The SP group, of course, was outraged. Considering the two companies’ long history of legal dispute, they believed Tata was deliberately blocking their efforts at fundraising. As an SP group spokesperson noted, “This vindictive move by Tata Sons is solely aimed to create delays and roadblocks in the Fund raise that will jeopardize the future of 60,000 employees and over 1 lakh migrant workers who draw sustenance by working at various SP Group facilities."

On its part, Tata seems to be concerned about the risks associated with pledging shares, as they may end up being owned by ‘unfriendly investors’. And to be fair, these fears aren't completely unfounded. I mean, what if SP group falls into further trouble and the investors sell the collateral. That would amount to a transfer of ownership to an unknown entity. It’s a risk Tata just can’t afford to take.

So now, they’ve decided to take matters into their own hands and have offered to buy the SP group’s 18% stake in Tata Sons, in order to enable them to meet their obligations. Late last night, SP group also released a memo stating that this was in everybody's best interest.

And if all goes well, this move might finally put an end to years of bad blood between the two companies.

Share this brief on WhatsApp, Twitter, or LinkedIn.

Jio's latest gambit

In 2016, Reliance Jio barged into the Indian telecom market with tariffs so low they made competitors cry. Their data plans were so cheap, that the company managed to get millions of first time users on board in a matter of months. And now, Jio wants to do something similar with smartphones.

According to anonymous reports, Jio has asked suppliers in India to work on increasing their production capacity, in order to manufacture some 200 million smartphones in the next two years. These phones will cost about Rs. 4000 and will be powered by Android.

Also, this lofty goal of selling 150-200 million phones within 2 years would give a big fillip to local assemblers like Dixon Technologies India, Lava International and Karbonn Mobiles, while spelling trouble for Chinese manufacturers like Xiaomi.

As Neil Shah, research director at Counterpoint Research noted, “Jio has an opportunity to target more than half billion Indians who don’t own a smartphone and trigger a blue ocean market opportunity. With Reliance expected to work with Indian vendors, Chinese brands will lose out on a potential opportunity and market share.”

India's Gold smuggling goes down

Indians have an insatiable appetite for gold. We purchase it for festivals, show it off at weddings, or simply buy it for investment purposes. But this huge demand has a downside.

You see, we don’t have a lot of indigenous mines, and so, have to resort to imports to meet it. And you can’t import gold using rupees- you have to pay for it with dollars. So when too many people demand the shiny yellow metal, the dollar value rises while the rupee tumbles. So, to discourage imports, the government levies import duty on Gold- in fact, in 2019 this duty was raised from 10% to 15%.

But people still want what they want, and market demands are always met one way or the other. And this leads to a big smuggling problem.

India imports around 800-900 tonnes of gold every year- out of which 200-250 tons are smuggled. But now that the pandemic has badly affected personal income and closed international borders for months on end, smuggling is expected to fall to just 25 tonnes in 2020. However, this might not last once things go back to normal.

Why do good people do bad things?

Many readers were perplexed after reading our story on HSBC yesterday. They had several questions — How do checks and balances within financial institutions fall apart so easily when millions of dollars are at stake? How can so many people turn a blind eye to an obvious fraud all in the name of doing business? How can seemingly good people do such terrible things out of the blue? And while these are perfectly legitimate questions, I am not sure we have the expertise to offer the right answers here. However, in a bid to offer more context, we thought we would recommend you something— particularly on the psychology of fraud. So if you are one of those people looking for answers to these deep existential questions, head over to NPR and read/listen to this excellent article :)

Tesla is coming to town

A year ago, Tesla’s CEO Elon Musk said he intended to have a presence in the world’s fourth largest automobile market- India. And now, the electric car maker is in talks with the Karnataka government to set up an R&D centre in Bangalore. Know more.

Broadband Woes

For 18 months straight, a village in Wales lost its broadband every morning at 7 AM. Even a cable replacement programme failed to fix the issue. The village’s baffled engineers used a monitoring device and finally traced the problem to an old TV. Know more.

Record Recoveries

According to the health ministry’s update yesterday, India added over a lakh coronavirus recoveries in a single day, bringing the total active cases below 10 lakhs. Find out more.

Please do let us know what you think about new initiative- Feedback form

Share this brief on WhatsApp, Twitter, or LinkedIn.

-Written by Vedika Agarwal and Akshay Tater