The battle between the Tatas and the Shapoorji Pallonji group has erupted once again: this time over the cash-strapped SP group’s plan to raise funds by pledging a tiny sliver of its 18.4 per cent stake in Tata Sons with a bunch of Canadian investors for Rs 3,750 crore.

The SP Group signed a definitive agreement for the loan pledge on September 4 -- and the Tatas retaliated on the following day by moving an “urgent application” before the Supreme Court to stop them from doing so.

The Shapoorji Pallonji group has been locked in battle with the Tatas ever since Cyrus Mistry was removed from his position as chairman of the Tata group in October 2016 in a boardroom coup.

The real estate and construction group has been planning to raise Rs 11,000 crore that it desperately needs to tide over an acute funds crunch precipitated by the pandemic.

The group had signed a deal with Brookfield -- a marquee Canadian investment firm -- to raise a sum of Rs 3750 crore in the first tranche.

The SP group has argued that the pledge of the Tata Sons shares was a legitimate practice in the industry and does not amount to the transfer of ownership. The group said that it needed funds as it had been badly hit by the pandemic that has knocked the bottom out of most of its businesses including real estate and construction.

The 18.4 per cent stake held by the SP group is valued at about Rs 1 lakh crore.

The Tatas are afraid that the loan pledge is just a ruse to circumvent a proviso in the articles of association of the $111 billion Tata group’s holding company -- which turned into a private company in controversial circumstances in August 2018 -- that grants a right of first refusal to the Tatas before any share sale can go through.

Through the petition, the Tatas have sought to prevent the SP Group from creating any direct or indirect pledge of shares.

Reacting to the application by Tata Sons which was made on September, the SP Group said the vindictive move amounts to oppression of minority shareholder rights.

“The promoters of the SP Group are in the process of raising around Rs 11,000 crore from marquee global investors with Rs 3,750 crore being raised in the first tranche, against the security of shares that their investment companies own in Tata Sons. These funds are intended to mitigate the severe stress caused by Covid pandemic, deleverage the group’s balance sheet, support its financial obligations and protect the livelihoods of its workforce,” a spokesperson for the SP Group said.

The spokesperson added that the “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. This calculated move by the Tatas is intended to inflict irreparable damage on the SP Group. These actions are a departure from the values and ethos of the founders of the Tata Group and is an unfortunate reflection of the mindset of the present leadership. We will vigorously contest these frivolous and misguided claims in the Supreme Court”.

The SP Group further said the articles of association of Tata Sons only regulate transfer of shares and the Tata Sons board only has a right of first refusal to buy back, at fair market value, the shares of any minority shareholder who is seeking to exit.

“There is absolutely no provision in the articles of Tata Sons that restrict the creation of a pledge or encumbrance,” the SP Group said.

The spokesperson further said the group “will ask the Supreme Court to dismiss the Tatas’ application at the threshold by highlighting the settled position in law that a mere creation of a pledge on shares would not amount to a transfer of title of the shares”.

Questioning the motive and timing of Tata’s application, the SP Group pointed out that it had raised funds against Tata Sons shares in January 2020.

“The security documents, which are in public domain, clearly record that lenders would comply with the articles of Tata Sons in the event they seek to enforce the pledge of shares. The Tatas have suppressed this vital information in their application in their desperate bid to mislead the apex court,” the spokesperson added.

The group also quoted the opinion of Justice (Retd) Srikrishna, a former judge of the Supreme Court. “The ability of Cyrus Investments and Sterling to pledge their shares in Tata Sons in favour of third party is not in any way controlled by the Articles of Tata Sons. This is so because the pledge of shares does not amount to a transfer of the title to the shares, as the title of the shares would continue with the pledgor,” the retired judge said.

In their 152-page supplementary petition against Cyrus Investment submitted to the Supreme Court on September 5, Tata Sons sought to prevent the Mistry group from “creating any charge/pledge/interest/ encumbrance on the shares of Tata Sons in any manner, either directly or indirectly and also to further direct them to forthwith remove any charge/pledge/ interest/ encumbrance created by them”.

“It is respectfully submitted that creation of a pledge in this manner, without informing the Tatas and seeking the leave of this SC, is in absolute derogation of the spirit of this court's January 10 order, wherein the Tata voluntarily gave a good faith undertaking to not exercise their rights under Article 75 against Mistrys,” it said.

Article 75 gives the Tatas the power, via a special resolution, to squeeze out the Mistry family by buying out their shareholding at fair market value.