How Tata Trusts picked two firms to merge with Tata Sons

Both companies are wholly owned within the Tata Sons structure, meaning the proposed mergers would not bring in additional shareholders.

Tata Trusts’ proposal to merge Tata Consulting Engineers (TCE) and Tata Electronics Systems Solutions Pvt. Ltd (TESS) into Tata Sons is centred on the two companies’ clean shareholding structures and significant revenues—factors that could help the holding company potentially avoid classification as a non-banking financial company (NBFC) without altering its shareholding structure, according to experts.

The proposed merger may also provide Tata Sons with an opportunity to expand its operating revenue. (Representative Image/Reuters)

Both companies are wholly owned within the Tata Sons structure, meaning the proposed mergers would not bring in additional shareholders. TCE is a 100% direct subsidiary of Tata Sons, while TESS is wholly owned by Tata Electronics, which in turn is wholly-owned by Tata Sons. That structure also makes the two companies easier to merge than listed subsidiaries, which have minority shareholders to account for.

“Both are unlisted companies and are also wholly owned subsidiary companies; hence, procedurally, it would be convenient in seeking approvals of the internal stakeholders,’’ said Gaurav Pingle, partner at Forefront Legal Consulting LLP. “Creditors’ approval may be the only procedural challenge.”

Battle over future of Tata Sons

The proposal comes amid a widening corporate battle over the future of Tata Sons, India’s largest business group’s holding company, with its potential public listing emerging as a point of contention.

On 17 September, Noel Tata, chairman of Tata Trusts, opposed the reappointment of N Chandrasekaran for a third term as chairman of Tata Sons, while the rest of the board insisted that the need for a public listing made continuity under Chandrasekaran necessary.

Key reason for choosing these two companies

A key reason for choosing these two companies was also that their revenues would help Tata Sons increase its operating income after the mergers and reduce the share of revenue it derives from investments in Tata group companies.

The Reserve Bank of India’s criteria for classifying a company as an NBFC include having more than 50% of income from financial assets and more than 50% of the total assets being financial assets such as investments. Tata Trusts estimates that the proposed merger would result in about 64% of Tata Sons’ revenue coming from operating businesses, potentially taking it out of the NBFC category and the RBI’s regulatory remit.

TESS is a unit of Tata Electronics and assembles iPhones at two facilities in India, one of which is operated through a joint venture with Taiwan’s Pegatron Corp. TCE is a project management consultancy that works on large infrastructure projects. It has worked on marquee projects including India’s new Parliament building in New Delhi and the Mumbai-Ahmedabad bullet train project. The fact that the two companies are profitable likely further made their case for the merger, one expert said, speaking on the condition of anonymity as they have a professional engagement with the Tata Group and its stakeholders.

“TCE has been a strong entity in various nationwide civil projects, while Tata Electronics is perhaps the strongest stakeholder of India’s electronics export story. Combined under Tata Sons, they make a compelling case, for they’ll also continue to grow and capture more business from both public and private sectors,” said Ashok Chandak, president of industry body SEMI India.

Being profitable was likely a reason why Tata Trusts chose to carve out TESS specifically from Tata Electronics and not the entire company. Tata Electronics is making a significant investment in setting up a semiconductor fabrication facility and a semiconductor assembly and test facility, businesses that are yet to start operations and will take a few years to earn any profit.

TESS had a standalone revenue of ₹67,542 crore in FY26 with a profit of ₹1,025 crore, according to financial documents filed with the Ministry of Corporate Affairs. TCE reported standalone revenue of ₹1,932 crore and profit of ₹226 crore in FY26.

“Overall, Tata Electronics is undoubtedly the biggest electronics manufacturing company in India, and its iPhone-making business is expected to ramp up profits further in the upcoming fiscals—but only to the scale of a company like Dixon, which relies on smartphone assemblies and has a margin of about 3-4%,’’ said Harshit Kapadia, vice-president at Elara Capital.

The clean ownership structure of the two companies is also a key reason they were chosen, experts said. Merging a listed subsidiary would be more complex from a regulatory perspective and would bring minority shareholders onto Tata Sons’ cap table.

“Tata Sons’ balance sheet holds 100% equity shares of this company. So that will just get cancelled. The share capital of Tata Sons or the shareholders of Tata Sons are totally neutral to this proposal,” Farokh Subedar, an advsior to Tata Trusts, told the media on Monday.

Among the 16 unlisted group companies mentioned by Tata Sons in its annual report, Tata Advanced Systems and Tata Realty and Infrastructure were the only other companies that it owned 100%. Tata Digital is 99% owned by Tata Sons, with the remaining 1% held by Ratan Tata Endowment Foundation. The other companies have either other Tata group companies or outside investors as shareholders.

Expansion of operating revenue

The proposed merger may also provide Tata Sons with an opportunity to expand its operating revenue, if needed, by increasing TESS’s stake in the Pegatron joint venture. In January 2025, Tata Electronics acquired a 60% stake in Pegatron’s India iPhone-making operations. Subedar said TESS has the right to acquire the remaining 40% stake.

“The company (TESS) has the right to buy over the balance 40% shareholding. So in a year’s time or so, once it becomes a 100% subsidiary of this particular company (TESS), it can also get merged (into Tata Sons). So you will immediately add on another ₹60,000 crore of income,” Subedar said.

However, the restructuring could face scrutiny over whether avoiding a listing is its sole objective. “An interesting aspect is whether RBI or NCLT will consider this proposal of corporate restructuring from the only perspective to avoid listing and no other commercial reason?” Pingle said.