Tata Teleservices may convert CCPS into shares before merger

Tata Teleservices, the loss-making wireless telephony company of the Tata Group, has the option to convert its compulsorily convertible non-cumulative preference shares (CCPS) issued to Tata Sons before its planned merger with Telenor. The conversion will be below Rs 23.34 a share valued by Price Waterhouse in December last year.

Bankers say Tata Tele had issued 24.80 crore Compulsorily Convertible Non-Cumulative Preference Shares (CCPS) of Rs 100 each aggregating Rs 2,480 crore on rights basis to all shareholders. Tata Sons had to subscribed to the entire issue of CCPS including additional shares as other shareholders like Japanese NTT Docomo stayed away. With the CCPS issue, the company’s paid-up capital increased by Rs 2,480 crore to Rs 7,192.60 crore, as per Tata Tele’s fiscal 2014 annual report. Docomo and the Tatas are currently engaged in an arbitration over Tata Tele’s valuation and the Japanese company’s exit price for its 26% stake.

A Tata Sons spokesperson said in the past and from time to time, Tata Sons has been infusing capital into TTSL to support various aspects of its business and operations. “Different tranches of Compulsorily Convertible Preference Shares (CCPS) have been issued at different points of time, with different conversion prices. No conversion of CCPS shares has taken place so far,” said a spokesperson.

Both Tata Sons and Telenor have not announced the merger till now. But bankers say both companies are waiting for the government to announce M&A guidelines for the telecom sector.

As per the terms of the CCPS transaction, each CCPS is to be compulsorily converted into equity share at the end of 24 months from the date of allotment of CCPS, ie, January 6, 2016. The CCPS can be converted earlier also or if any effective date of an event of merger of TTSL with any other entity or restructuring pursuant to a scheme of arrangement, is announced.

Each CCPS is to be compulsorily converted into such number of equity shares at the higher of fair market value determined as on the date of conversion; or fair market value prevailing as on the date of issue of CCPS or Rs 10 per equity share being the face value of shares. The conversion can take the Tatas stake to around 90% from the present 58%.

On December 22 last year, the RBI informed the finance ministry the Tatas had hired PW to determine the fair value of the shares of Tata Teleservices. This was after DoCoMo expressed interest to exit the company in April 2014 and asked the Tatas to buy back its shares at 50% of its acquisition price at Rs 58 a share or find new buyers at the same price. The RBI said the Tatas agreed to buy back the shares at Rs 58 a share and had sought the central bank's permission for the transaction, as the price to be paid was higher than the fair-price valuation. The finance ministry rejected the Tata proposal saying India does not allow pre-valuation of shares.

As per Price Waterhouse, Docomo's 26% stake was valued at Rs 2,915 crore, against the Rs 7,250 crore sought by the Japanese company, according to its 2009 agreement with the Tatas. Due to massive losses, the entire valuation of Tata Teleservices, according to PW, was only Rs 11,000 crore, as against the pre-agreed valuation of Rs 27,000 crore.