When Tata Steel Acquired Corus
Tata Steel, the biggest steel producer in the Indian private sector acquired Corus, a Dutch Steel Company in a deal worth 12 billion USD in 2007. A financial decision of this magnitude has significant implicitness for both Tata Steel and Corus as well as their employees and shareholders. Details of acquisition are as follows:
This acquisition has been a largest private sector transaction by Indian company outside of India and named Tata Steel Europe in 2010.
Tata Steel raised a debt of over 8 billion to finance the transaction. The deal will be paid for by Tata Steel UK, a special purpose vehicle (SPV) set up for the purpose. Another company of the Tata group, Tata Sons Ltd., invested 1 billion dollars for preference shares along with Tata Steel which will invest an equal amount.
Tata Steel, the acquirer company, arranged about 36,500 crores of rupees to finance the take-over.
Tata Steel raised this amount through debt or equity or a combination of both. Some amount came from internal accruals also. This financing decision affected the capital structure of the acquirer.
Setting up Tata Steel UK as a Special Purpose Vehicle (SPV) mainly served which financial purpose?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → To separate and limit financial risk from the parent company
Option (1) To manage the taxation of the deal more efficiently — Incorrect. The passage says nothing about tax. It says only that the SPV was set up to pay for the deal. Tax may be one reason a company chooses where to set up a unit, but it is not the main purpose of an SPV.
Option (2) To separate and limit financial risk from the parent company — Correct. A special purpose vehicle is a separate company formed for one task only. Here the task is to buy Corus and carry the debt raised for it. The debt of over 8 billion sits in the books of Tata Steel UK, not directly in those of Tata Steel. If the deal does badly, the loss falls mainly on the SPV. This keeps the risk of the deal apart from the parent company.
Option (3) To improve the company’s liquidity ratio — Incorrect. Liquidity is the firm’s ability to meet its short-term dues. Borrowing billions for a takeover does not improve it. The SPV was set up for a long-term purpose.
Option (4) To enhance dividend yield to shareholders — Incorrect. Dividend yield depends on the dividend paid out of profits. Setting up a company to pay for a takeover has nothing to do with it.
Note 1: The passage is the NCERT case study ‘When Tata Steel Acquired Corus’, which has been reproduced by NTA in the exam. Note 2: The passage prints “significant implicitness”, which should read “significant implications”. The slip is NCERT’s own: the textbook prints the case this way, and NTA copies lines from NCERT word for word, even where the book is wrong. Note 3: The passage is taken from NCERT and names the special purpose vehicle. However, NCERT does not explain what an SPV is or why it is used. This question tests the general meaning of an SPV in business finance.
NCERT (2026-27 Edition): “When Tata Steel Acquired Corus … Tata Steel raised a debt of over $8 billion to finance the transaction. The deal will be paid for by Tata Steel UK, a special purpose vehicle (SPV) set up for the purpose. Another company of the Tata group, Tata Sons Ltd., invested $ 1 billion dollars for preference shares along with Tata Steel which will invest an equal amount.” |