Tata Power Reconsider to Merger of Solar System

In a rather interesting move, Tata Power has announced that it would seek shareholder approval to amend its scheme of arrangement. According to the original scheme of arrangement approved by shareholders, Tata Power had sought to merge Tata Power Solar into itself.

However, now it plans to keep its solar business as an independent subsidiary or in other words, it will restore the status quo.

Tata Power Solar Systems Limited (TPSSL) is a 100% subsidiary of Tata Power and focuses largely on the installation and operation of solar power generating plants.

In the last few months, the valuation of Tata Power has seen a sharply positive re-rating largely on the back of the performance of the TPSSL subsidiary. 
 

What explains this change in strategy?

According to Tata Power, there had been a number of government policies in recent months favourable to the solar power sector.

These include production linked incentives (PLI), imposition of basic customs duty on the import of solar modules and special incentives to manufacture highly efficient solar modules in India.

Tata Power believes that these regulatory changes would substantially enhance the value of their solar business which is currently housed under TPSSL.

Merging with Tata Power would have created confusion pockets for investors and analysts as the traditional fossil fuel business is largely regulation intensive. Thus a standalone TPSSL would be more value accretive.

According to Tata Power, this move would not impact shareholder value in any way as the accounts of TPSSL are anyways consolidated with that of Tata Power.

On the contrary, creating a separate company with a demarcated solar business would make the specific business a lot more valuable for investors in the long run due to its ring-fenced valuation.

In the original scheme of arrangement of August 2020, TPSSL and Coastal Gujarat Power Limited (CGPL) were to be merged into Tata Power. According to the modified scheme of arrangement proposed by Tata Power, only CGPL will be merged into Tata Power.

However, Tata Power Solar Systems Ltd (TPSSL) will continue to remain a 100% subsidiary of Tata Power.

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