How the Shapoorji Pallonji group is being restructured

Just about 10 years back, everything was going right for the Shapoorji Pallonji group, one of the richest business families of Mumbai. The group derived much of its power and clout from their 18% holdings in Tata Sons. The feather in the cap was when Cyrus Mistry was appointed the chairman of Tata Sons to drive future strategy of the group. At the same time, the Shapoorji Pallonji group was being driven by the patriarch father and Shapoor Mistry, the brother of Cyrus Mistry. However, the dalliance did not last too long. Despite their 18% stake in Tata Sons, Cyrus was asked to leave over allegations of working in a manner antithetical to the interests of the company.

About a year ago, the Mistry family lost their patriarch to old age and Cyrus Mistry to a tragic car accident. Now, only Shapoor Mistry remains and the children of Shapoor and Cyrus, who are all set to take charge. Meanwhile, the cold vibes between the Tata group and its largest shareholder, Mistry family, have also been easing. Unlike in the past, when the Tata group had blocked the pledge of the shares of Tata Sons, this time around, the Tatas have not objected, allowing the Mistry family to raise the much needed funds and reduce their debt. SO, how does the restructuring look like.

Highlights of the restructuring plan

Here are some of the key points of the restructuring of the Shapoorji Pallonji group as per the plan drawn internally.

• The original holding company, Shapoorji Pallonji Company Private Ltd will cease to exist. Instead, the stake in the holding company would be divided equally 47.90% each to the Cyrus Mistry family and Shapoor family. While Shapoor is still around, the interests of the Cyrus Mistry family will be handled by Rohiqa (the wife of Cyrus Mistry) and also the grand daughter of noted jurist MC Chagla.
   

• In the year 2022, the company had undertaken a major debt reduction exercise. Between January 2022 and January 2023, the group reduced its debt from Rs32,500 crore to just about Rs20,000 crore. This was done through the monetization of stakes in companies like Sterling & Wilson and by raising funds against pledge of Tata Sons shares.
   

• Broadly, the responsibilities on the business front would be distributed between the two families of Shapoor Mistry and Cyrus Mistry. One suggestion doing the rounds is that Shapoor may get the traditional construction business of the group while Cyrus Mistry family may get the new age businesses, which would include renewable energy, new age batteries, data centres etc. This classification is yet to be confirmed by the group.

In short, the 2-tier structure is conceived in such a way as to separate the ownership and to also separate the managerial control from ownership.

What would be the implications of the restructuring?

The primary step in this restructuring would be the creation of two holding companies to house its diverse businesses. The business interests of the SP group range from real estate and construction to oil and gas as well as new age businesses like renewable energy, consumer products and data centres. Both the new holding companies viz. SP Finance Private Ltd and SC Finance Private Ltd, will replace the erstwhile holding company of Shapoorji Pallonji Company Private Ltd. Each of these companies will hold 47.69% stake in Shapoorji Pallonji Company Private Ltd. Both these companies are likely to be overseen by an advisory board of 4 family members, including Shapoor and his son, Pallon as well as the 2 children of Cyrus Mistry viz. Firoz and Zahan.

Incidentally, this type of structure is quite common on European countries but not too common in India. The structure had been put in place by the two brothers, Shapoor and Cyrus, before the latter had been tragically killed in a car accident. Essentially, the SP Group would like to separate the responsibilities of promoters as custodians, and the management. This will reduce the conflict of interest and ensure that all these parties work to enhance stakeholder value. The way it would work is that each vertical will not have any cross-holdings. In addition, each cluster would drive its own growth path and would be independently accountable to shareholders. The families will play more of an ownership role and less of a role in day-to-day management.

Separating ownership and management

If this paradigm works, it could become a model for others to follow and emulate, but more of that later. Immediately, the SP group is looking to get all the regulatory and stakeholder clearances for the reorganization. This entire exercise would be completed by 30th September. Most experts also concur that this would be the road ahead. Ownership should not be the criterion to decide who should operationally manage a business; it must be based on the required capabilities of the individual. IT could be a step in the right direction if it really happens.

Incidentally, the group has already hived off some of its key businesses till date. For instance, to monetize assets, the SP group sold Eureka Forbes as part of the consumer facing business while Sterling and Wilson Renewable was sold to the Reliance group. Out of the total debt of Rs32,500 crore, the group has repaid debt of Rs12,500 crore in 2022 and is looking to further reduce its Rs20,000 crore debt from these levels. But what is more important is that the powerful Tata group and the Mistry family have called a truce, even if temporary.