As RBI Weighs Tata Sons' Plea To Stay Private, Public Interest Favours Listing
After the one-day slump caused by poll results, India’s stock markets have rebounded and, thankfully, remained steady—albeit on a very high plateau. This means that around Rs20,000 crore per month will continue to flow into mutual funds (MFs) which, in turn, needs to find its way into stocks of well-managed companies, with adequate liquidity and at a fair price. 
New listings are one way to make it happen. So investors were thrilled at reports that the Reserve Bank of India (RBI) had ordered Tata Sons Pvt Ltd (Tata Sons), the holding entity of the vast Tata empire to list by September 2025.  However, soon after, reports emerged that the Tata group is looking for loopholes to avoid mandatory listing under RBI rules. 
Instead, a south Korean company, Hyundai Motor Company India Ltd, will be the biggest initial public offering (IPO) in India, raising around Rs25,000 crore (or US$3 bn --billion) by selling just 17.5% of its equity. And this does not even include all its Indian businesses. There is a positive irony in the fact that Hyundai, coming from a far richer economy, will be the biggest fund-raiser in India’s primary market, surpassing the Life Insurance Corporation (LIC) IPO of Rs21,000 crore. 
While we wait and see whether RBI and the finance ministry succumb to the Tata group’s persuasion, let us look at whether listing Tata Sons will be a good thing for investors, and from the regulatory and governance perspective. Currently, Tata Trusts hold a 66% stake in Tata Sons, while the Shapoorji Pallonji group (SP group) is the second-largest shareholder, with an 18.37% stake.
Why Does RBI Want Tata Son’s To List?
In September 2018, Infrastructure Leasing & Financial Services (IL&FS), a hydra-headed conglomerate of 347 companies, classified as a systemically important non-banking finance company (NBFC) began to default . The unlisted, main holding company’s shadowy dealings remained undetected by RBI, leading to a severe systemic shock to the financial system. This was followed by revelations of large-scale fraud in Dewan Housing Finance Limited (DHFC) and Housing Development and Infrastructure Ltd (HDIL) and the SREI group, inflicting massive losses on shareholders, depositors and debenture-holders. 
In response to the IL&FS collapse, RBI introduced a revised, scale-based regulation (SBR) framework in October 2021, to mitigate systemic risk and improve governance. This divided all NBFCs into four layers, based on their size, activity and perceived riskiness. Ten of India’s largest NBFC’s were classified in the upper layer requiring stricter governance and oversight, since they are systemically important entities. RBI prescribed mandatory listing of these NBFCs in three years which ends in September 2025. Notably, most companies in this category, such as Bajaj Housing Finance, Aditya Birla Finance, L&T Finance, and Tata Capital have either got listed or initiated the process of doing so. 
How does Tata Sons Plan To Avoid Listing?
According to a Times of India report, Tata Sons intends to cut its debt of Rs21,909 crore (FY22-23) and seek an exemption from listing. It has already sold Rs9,362 crore worth of share in Tata Consultancy Services (TCS) to pay off loans. The report puts the book value of its investments in over 14 blue-chip companies at Rs1.3 lakh crore in FY23; it also holds several valuable unlisted entities. If listed, Tata Sons would be among the biggest listed companies in India. 
By relinquishing public funds in all forms, Tata Sons apparently hopes to convince RBI that it should escape listing and be considered an unregistered core investment company. This will involve dropping all finance related businesses listed in its articles of association including banking, merchant banking, lending and holding shares, bonds, debentures and providing guarantees. 
The question also is: Will Tata Sons really pay back all bank debt, inter-corporate deposits as well as other off-balance sheet exposure and letters of comfort to group entities? The annual report of Tata Sons for FY22-23 shows that it had off-balance sheet exposure of more than Rs15,000 crore with nearly Rs11,400 crore of soft comfort provided to lenders on behalf of its subsidiaries. 
Given the enormous direct and indirect influence of Tata Sons on group companies, it is hard to see how it can shed all these businesses and relationships, and if the changes it makes will be drastic enough to be acceptable to the regulator. But more on this later.
Why Is Tata Sons Reluctant To List?
The news agency Reuters says, “One potential worry is that Tata Sons' listing will highlight the special treatment its owners receive, and whether that is still deserved.” The special treatment appears to be two-fold. First, the articles of association of Tata Sons give the Tata Trusts the ability to control is board agenda by requiring an affirmative vote by the nominee directors of the trusts. This will not be permitted under company law, if Tata Sons is listed. 
Secondly, at least three Tata trusts set up in 1990—Tata Education Trust, Tata Social Welfare Trust and RD Tata Trust – which have a 10% stake in Tata Sons, do not qualify for exemptions claimed by the older trusts (Dorabji Trust and Sir Ratan Tata Trust) as part of a grand-fathering agreement. I understand that the audit reports of the three trusts are qualified to note that their investment in the holding company is against the provisions of Section 35 of the Maharashtra Trust Act. 
Thirdly, its strained relationship with the SP group continues even after the tragic death of Cyrus Mistry who was treated very shabbily by the group, creating an incentive to have less public scrutiny on its actions.
Should Tata Sons Be Exempted from Listing?
RBI will need to weigh these and several other factors before arriving at a decision. An exemption from listing to the fourth largest NBFC, would call into question the robustness of RBI’s entire SBR framework. IL&FS managed to hide its massive debt, cooked up books, dubious inter-group transaction and round-tripping of funds, primarily because it was hidden from the public eye. Let’s not forget that RBI’s regulation and supervision of IL&FS was questioned by the serious frauds investigation office (SFIO). 
Secondly, the issue extends beyond Tata Sons being debt-free. The group holding company has a huge impact on its six major listed entities and unlisted ones, including the newly-acquired Air India. This is clear from S&P Global Ratings (S&P Global), putting six Tata companies on credit watch with positive implications, ahead of a review of the relationship between the group's holding company, Tata Sons and its subsidiaries. This happened on 13th June.
S&P Global says, “The review will assess whether the potential of extraordinary support for the group entities from Tata Sons is greater than what we previously factored. This is due to increasing operational and management linkages within the group. Tata Sons has a record of supporting group entities in events of stress. For example, the group provided material extraordinary financial support to entities such as Tata Teleservices Ltd. and Coastal Gujarat Power Ltd, an erstwhile subsidiary of Tata Power, which has now been merged with Tata Power. We are also undertaking the review because we believe operational integration between Tata Sons and group entities, as well as between group entities, will continue to increase.” 
To put it simply, it is globally acknowledged that the symbiotic relationship between Tata Sons and the group is not merely about cutting the debt and letting it remain private. The systemic implication of Tata Sons and its relationship with group entities will continue to remain significant. S&P provides several examples:
A) On the “continued close involvement of Tata Sons in the strategies of group entities”, S&P points out  that the holding company led negotiations with the UK government for setting up the battery plant and securing government support for the restructuring of Tata Steel's UK facility.
B) The market value of some of Tata Sons' key holdings has increased significantly over the past few years, says S&P, and thinks that this will lead to improved flexibility for the holding company to support group entities. 
C) S&P suggests that if its review concludes that Tata Sons will provide greater support to group entities, it could even enhance their ratings; if it concludes otherwise, it would affirm the existing ratings.  
Interestingly, if Tata Sons gives up access to public funds in order to avoid listing, the flip side is that it reduces its flexibility and makes it hugely dependent on dividend income from the big shining star in its portfolio, TCS. This will also impact its ability to ‘support’ group companies more strongly which would prevent any enhancement in their credit rating. The self- imposed constraints of the holding company will affect the unlisted airline companies even more. 
Given these factors, will RBI and the government still allow themselves to be convinced that Tata Sons should remain private? On the other hand, the market will eagerly snap up Tata Sons’ shares anytime it decides to list. This is one case where public interest and appropriate application of the rules go hand in hand. 
4 weeks ago
Tata Sons has management control (direct & indirect) on a many large companies which have large borrowings from banks.

It is simply inconceivable that RBI can give it an exception from listing - given that it has forced Bajaj Finance to list their Housing Finance Company on the exchange - inspite of its way lower borrowings from banks and public
Kumar Swamy
4 weeks ago
Why there is always a tinge of anti-Tata while MoneyLife covers Tata group?
4 weeks ago
This is an interesting case albeit one riddled with too many legal implications. Our laws are a mess, with a lot of leg room for interpretation in corporate laws. My view is we need a total reset in the laws, a complete clean up of the regulatory system (which includes SEBI and every regulatory body under the sun). This is what happens when laws are vague and not clear cut like in Singapore. Laws are supposed to be black and white. Ours is a lot of Shades of Grey, with a lot more questionable shenanigians. If we get to the root problem (which is that our laws suck) we will be able to weed out a lot of problems. Unfortunately, I don't see judicial reforms happening this term (thanks to the weaker mandate in the elections). Putting the onus on corporate governance puts too much pressure on management and regulators alike (and regulators have to cherry pick which cases to fight and which cases not to fight).

Good article.
4 weeks ago
Well said. It is high time the special treatment to Tata Sons and the Tata Trusts was ended. As you rightly say "This is one case where public interest and appropriate application of the rules go hand in hand. ". Fully agree.
1 month ago
Stock inflation: Too much money chasing too few stocks. Why not list Courts, Government departments, Central and States? Most of India's capital and manpower, albeit unproductive is held there:
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