Tata Capital's board, which is preparing for an IPO, will meet on Tuesday to discuss a potential rights issue to raise funds. Tata Capital has been classified as an upper-layer non-banking financial services company (NBFC) by the Reserve Bank of India, with instructions to list its shares by September. Tata Sons, which owns about 93% of Tata Capital, is expected to participate in the rights offering to maintain its current stake in the NBFC.
Tata Capital requires consistent capital infusion to support its 20-25% growth rate, and the rights issue aims to meet that need, according to a person familiar with the matter. The remaining 7% of Tata Capital is owned by various Tata Group entities, select executives from both Tata Group and external organisations, and the International Finance Corporation, which is based in Washington.
A rights issue is a more advantageous way for unlisted companies to raise funds than preferential allotment because it eliminates the need for fair value assessment. According to Binoy Parikh, executive director of Katalyst Advisors, the main advantage is its uniform pricing structure, which requires all existing shareholders to subscribe to new shares at the same price.
Tata Capital's proposed rights issue comes after recent changes to its memorandum of association (MoA) and articles of association (AoA). In its January communication to shareholders requesting approval for MoA and AoA amendments, the company disclosed that it had approximately 29,000 shareholders.
To comply with sections 25 and 42 of the Companies Act and prevent further expansion of its shareholder base through corporate actions, Tata Capital announced that it has added a new provision to its AoA that prohibits shareholders from renouncing their rights in rights issues until the company's equity shares are listed on the stock exchanges. It clarified that this restriction does not preclude existing shareholders from participating in or subscribing to additional equity shares through rights offerings.
Tata Capital is the Tata Group's largest financial services entity, and the conglomerate sees it as a critical component of its growth. The proposed IPO, which may involve the issuance of new shares, could reduce Tata Sons' ownership by approximately 5%. According to listing regulations, companies must maintain a 25% public shareholding within three years of listing.
In a February 5 note, Fitch Ratings stated that Tata Sons' ownership of Tata Capital is unlikely to fall below 75% following the proposed public listing. The IPO will strengthen Tata Capital's capital base and reduce its leverage even further, according to Fitch, adding that the NBFC's debt-to-tangible equity ratio has improved, falling to 6.3x by the end of 1HFY25, down from 7.2x at the end of fiscal year 22.
