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.
The financing of the Tata-Corus deal through debt and preference shares most directly impacts which aspect of Tata Steel’s financial structure?
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Capital structure
Option (1) Dividend policy — Incorrect. Dividend policy decides how much profit is paid out and how much is retained. Raising debt and preference capital for a takeover is a different decision.
Option (2) Capital structure — Correct. Capital structure is the mix of the different long-term sources of funds a company uses: equity, preference capital, retained earnings and debt. When Tata Steel raised a large debt and brought in preference capital, it changed the proportion of each source. The passage itself ends by saying that this financing decision affected the capital structure of the acquirer.
Option (3) Capital budgeting — Incorrect. Capital budgeting is the investment decision: where to put long-term funds. Buying Corus was capital budgeting, but the question is about how the money was raised, which is capital structure.
Option (4) Working capital management — Incorrect. This deals with short-term assets and liabilities, such as stock, debtors and creditors. Long-term debt and preference shares are not part of 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.
NCERT (2026-27 Edition): “When Tata Steel Acquired Corus … 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.” “Capital Structure … On the basis of ownership, the sources of business finance can be broadly classified into two categories viz., ‘owners’ funds’ and ‘borrowed funds’. Owners’ funds consist of equity share capital, preference share capital and reserves and surpluses or retained earnings. Borrowed funds can be in the form of loans, debentures, public deposits etc. These may be borrowed from banks, other financial institutions, debentureholders and public. Capital structure refers to the mix between owners and borrowed funds. …” |