Tata Capital adds Tata Motors Finance to its business verticals

Recently, TATA Group decided to merge its two key companies engaged in the business of financing.

Tata Motors Finance Limited (“TMFL” or “Transferor Company”) is a non-banking financial company operating as a non-banking financial company – Investment and Credit Company (“NBFC-ICC”). The Company is also registered with the Insurance Regulatory and Development Authority of India (“IRDAI”) as a corporate agent in terms of the Insurance Regulatory and Development Authority of India (Registration of Corporate Agents) Regulations, 2015.

TMFL is inter-alia carrying on the business of –

(a) granting loans and facilities for, inter-alia, financing the purchase of
            (i) new vehicles manufactured by Tata Motors Limited and its group companies and
            (ii) pre-owned vehicles including refinancing existing vehicle finance loans; and
(b) granting of loans and advances to transporters, dealers and vendors of TML including the provision of working capital facilities, invoice discounting facilities and factoring facilities.

Certain non-convertible debentures of the Amalgamating Company are listed on the BSE Limited and the National Stock Exchange of India Limited. Commercial papers of the Amalgamating Company are listed on the National Stock Exchange of India Limited. Currently, TMFL is an indirect wholly owned subsidiary of Tata Motors Limited.

Tata Capital Limited (“TCL” or “Transferee Company”) is a non-banking financial company operating as an NBFC-ICC and is inter-alia carrying on the business of lending, leasing, factoring, hire purchase and financing. TCL is also registered with the IRDAI as a corporate agent in terms of the Insurance Regulatory and Development Authority of India (Registration of Corporate Agents) Regulations, 2015. Certain non-convertible debentures of the Amalgamated Company are listed on the BSE Limited and the National Stock Exchange of India Limited. Commercial papers of the Amalgamated Company are listed on the National Stock Exchange of India Limited. The Amalgamated Company has also issued unlisted cumulative redeemable preference shares.

Recent Scheme of Arrangement by TMFL:

For the creation of a single larger unified entity and to reduce the number of non-banking financial companies (NBFCs) within Tata Motors Group, Scheme of Arrangement was executed between TMF Business Services Limited (TMFBSL) (Formerly Tata Motors Finance Limited) (Demerged Company) and Tata Motors Finance Limited (TMFL) (Formerly Tata Motors Finance Solutions Limited) (Resulting Company) which was inter-alia provided for:

• Consolidation of passenger car & commercial vehicle finance business (larger commercial vehicle business got consolidated with passenger car business)
• The name of the Company has changed from ‘Tata Motors Finance Solutions Limited’ to ‘Tata Motors Finance Limited’.

The appointed date for the demerger was 1^st April 2023.

The Proposed Transaction:

The Board of Directors of TMFL & TCL at their respective board meetings have approved a Scheme of Amalgamation which inter-alia provides for the merger of TMFL with TCL. One of the main reasons for consolidation is to simplify, scaling and synergizing the businesses.

• Consolidation of businesses would help in achieving a greater scale i.e., leading to the creation of a larger unified financial services entity with a wider geographical reach, stronger capital and asset base
• Generate significant business synergies thereby enhancing stakeholders’ value;
• Drive diversification and provide integrated solutions to the enhanced customer base.

The appointed date for the merger means opening business hours of April 1, 2024.

TMFL’s finance revolved around commercial vehicles and passenger vehicles in which commercial vehicles account for more than 90% of the overall business.

Swap Ratio & Capital Structure:

Pursuant to the merger, TCL will issue and allot “37 (Thirty-Seven) equity shares of the face value of Rs. 10/- each as fully paid up for every 100 (One Hundred) equity shares of the face value of Rs. 100/- each fully paid upheld in the TMFL by TMFL’s shareholders.

*: tentative figures.

Currently, Tata Sons & other Tata entities hold circa 95.28% of TCL while others being held by employees & outside shareholders. TMFL is an indirectly wholly-owned subsidiary of Tata Motors Limited. Post-merger, Tata Motors will be held circa 4.68% in the merged entity.

There will not be any impact on the debenture holders of TCL & TMFL pursuant to the Scheme. The current debenture holders will continue to be served by TCL. Thus, the Scheme envisages that the holders of NCDs of TMFL will become the holders of NCDs of TCL on exactly the same terms, including the coupon rate, tenure, redemption price, quantum, and nature of security respectively. Therefore, the Scheme will not have an adverse impact on the holders of the NCDs and thus adequately safeguards the interests of the holders of the NCDs.

Financials

Though both businesses are engaged in financing activities, there seem to be different risk & returns parameters engaged for both businesses. This could be one of the reasons for the significant difference in valuation multiples for both businesses.  While the consolidation will add significant numbers to TCL’s financials, one needs to evaluate the incremental returns.

Conclusion:

The transaction will mark consolidation of sub-par financial business of Tata Motors with group giant Tata Capital. For Tata Capital, this will be an additional business stream (bolt-on) acquisition with minimal impact. Using expertise, Tata Capital may be able to turn around the business substantially in the coming period. This could facilitate in improved valuation for overall Tata Capital.

For Tata Motors, this could provide them with an opportunity to focus on its core business. It has already announced the separation of commercial vehicles business and passenger vehicle business. The merger of finance business with Tata Capital could be pursuant to its separation of commercial & passenger vehicle business. Tata Motors could liquidate the shares of Tata Capital received pursuant to the merger afterwards.

One may expect similar move in Bajaj /TVS Group where they have a separate finance business for financing their vehicles.