Shares of Tata Consultancy Services Ltd were listed on the bourses on 25 August 2004.
A few of the financial dailies have carried a news item today tracing its stunning street performance over these 20 years.
The journey of the share price over the two decades since its listing, as the chart on the right shows, has been one-way, almost a perpendicular upward trajectory!
The performance of this stock must be one of a kind.
While rejoicing over the superlative shareholder value delivered by the company, it is also interesting to trace its origins, an exercise some could see as impertinent!
There is a saying, popular in Tamil, that the origin of rishis and the source of rivers are better not traced. They could be muddy or murky!
But given the occasion of the 20th anniversary of TCS as a company, it is worth recounting its birth.
TCS was a division of Tata Sons, the unlisted entity that serves as the holding company of the group.
In around December 2002, the decision to hive off and list TCS was formalised and was followed up with an arrangement to transfer the TCS division within Tata Sons, to another company.
The transferee entity was a shell company whose name was changed suitably as Tata Consultancy Services Ltd. For those a little curious, it was originally called RR Donnelly Ltd, later Orchid Prints, before surfacing as TCS.
Though this spin-off of the TCS division was only a simple transfer of a business, with all the associated assets and liabilities, the mechanism of seeking the approval of the High Court (HC) under the company law was triggered.
The consideration for the TCS division was fixed at Rs2,300 crore. Under the scheme, the transferee company would pay this amount to Tata Sons.
Interestingly, the share capital of TCS was structured quite differently from that of Tata Sons.
Tata Sons’ shareholding pattern is shown on the left with the majority held by the public charitable trusts.
The other major shareholder (18.4%) not mentioned by name is the Shapoorji Pallonji group which had been at loggerheads with the Tata group on its exit.
The Tata companies with a 12.86% holding had pumped money into Tata Sons at different points in time to enable Tata Sons to acquire the cross holding that existed among the Tata operating companies in the earlier days.
The shareholding pattern of TCS (new company) at the time of making the public issue was as shown in the chart on the right side.
The pattern of shareholding is quite different, with Tata Sons becoming a majority owner with 90%, and the rest of the 10% being distributed in some manner, the logic of which is not obvious to an outsider, but not in proportion to how the shareholding in Tata Sons was at that time.
A fundamental question that could arise is whether this tinkering with the shareholding pattern was correct, given that Tata Sons being an unlisted entity provided no liquidity for those holding its shares.
A fair and equitable way to structure such spin-off was to mirror image the shareholding in the new entity.
However, this scheme had been structured to avoid that compulsion and make it convenient to help Tata Sons retain a substantial part of the future value within itself.
Of course, the shareholders of Tata Sons will indirectly benefit.
The argument of Tata Sons may be that it anyway had a cent percent interest in the cash-flow of TCS division and the new structure did not create any additional detriment to the other shareholders.
This may be logical but not entirely righteous. The restructuring was a one-time opportunity to create some liquidity in the hands of all the shareholders of Tata Sons.
Unlike a typical holding company in family groups where there is little difference between the shareholders and the company, Tata Sons was, and continues to be, principally held by public trusts and they can’t be equated to a promoter in the common sense.
These trusts should function completely independently and not necessarily reflect the interests of the promoters (Tata family).
Similarly, over 12% in Tata Sons is held by other listed Tata companies and there is little value of such shareholding in a private entity to the public shareholders of those entities.
Thirdly, in hindsight, the SP group would not have got into the scruff with the Tatas if only they had a direct shareholding in TCS!
Hence, the shareholding that did not mirror the Tata Sons shareholding in TCS was certainly a debatable matter.
The second aspect was the way the transaction was structured whereby the TCS division was sold for a cash consideration of Rs2,300 crore. This aspect is to be seen from a tax compliance point of view.
The intrinsic value of TCS, which surfaced within days of the hive-off, in the IPO, was in excess of Rs40,000 crore.
While the ostensible consideration was specified as Rs2,300 crore, the actual consideration was that amount plus the 90% stake that Tata Sons started with in Orchid Prints (renamed TCS).
Hence, the sole consideration for the transaction was not merely Rs2,300 crore. And Tata Sons would not have sold it at that value to a third party!
The tax laws lacked due recognition of such arrangements at that time. The fair market value substitution has been introduced only in more recent times to catch these types of arrangements.
Any lesser mortal would have been chased by the tax department to the end of the planet as the potential tax difference was well over Rs8,000 crore.
The Tata group, with its battery of advisers, must have ensured a quiet burial to this even if some smart officer had raked it up!
In the final analysis, Tata Sons had reaped enormous cash-flow from TCS over the years as the chart here shows. It had, at most times, about 75% holding which has slightly come down recently.
The cash-flow has supported Tata Sons to indulge in businesses like the airlines, the purchase of Air India, and has recently ensured that the Reserve Bank of India (RBI) change its stance on its listing requirement by paying off all bank loans!
Thanks to the bounties of TCS, Tata Sons will remain outside the pale of public scrutiny!
(Ranganathan V is a CA and CS. He has over 43 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
