RBI Writes Twice to Tata Sons for a Listing Timeline as Groups Rejig Books to Escape NBFC Rules

The news

Mumbai. The Reserve Bank of India has written to Tata Sons twice since September 11 asking how the Tata Group’s holding company plans to meet the mandatory listing requirement, The Indian Express reports, citing people aware of the matter. This follows this magazine’s card of September 19; what is new is the RBI’s follow-up, the AGM vote and evidence that other groups are avoiding the same regulation. Tata Sons has told the RBI it will expedite its reply, which will include a time frame for listing, and its board “remains firm” on complying. The board resolved on September 17 to start the listing process. That came days after the RBI rejected Tata Sons’ application to surrender its Certificate of Registration (CoR), the licence that makes a company a registered non-banking financial company (NBFC), and directed it to follow the rules for NBFCs in the Upper Layer (NBFC-UL). At that meeting Tata Trusts chairman and Tata Sons nominee director Noel Tata repeated the Trusts’ position that the company should stay privately held. He asked for the full correspondence with the RBI and has since received about 600 pages. The Economic Times reports a second pressure point. The board resolution of September 17 also reappointed Mr. Chandrasekaran as executive chairman for five more years after his current term ends in February next year. His executive role depends on his keeping a board seat, so shareholders must reappoint him as a director. Noel Tata has opposed the reappointment. About ten operating companies, including Tata Motors, Tata Steel and Tata Power, together own 12.86% of Tata Sons, so their votes matter. Each must vote and be seen to take a side, or abstain. The August 18 AGM lapsed for want of a quorum. The Maharashtra Charity Commissioner had not lifted restrictions on the Sir Ratan Tata Trust, so the joint nominee of that Trust and the Sir Dorabji Tata Trust could not take part. The two Trusts together hold a majority of Tata Sons. The Registrar of Companies has granted a three-month extension, and Section 97(1) of the Companies Act allows the National Company Law Tribunal (NCLT) to order an AGM and override the normal quorum requirement. ET also reports that many groups are altering the balance sheets of their NBFCs and core investment companies (CICs), holding companies invested mostly in group firms, to fall outside the RBI’s definitions, even as the RBI sends notices asking why some have not registered. An NBFC can book commodity trades, buying cotton for ₹100 crore and selling it for ₹101 crore, to push its financial income below 50% of gross income. A CIC can buy property to bring its group investments below 90% of net assets. Others hold investments through LLPs or private trusts. In an op-ed in The Indian Express, Laveesh Bhandari of CSEP calls the forced listing “a disproportionate requirement” for the RBI’s concern about information gaps. The syllabus link is GS3 on financial-sector regulation and GS2 on regulatory bodies.

Static syllabus linkage

1. Chapter IIIB of the RBI Act gives the central bank its power over NBFCs. Chapter IIIB of the Reserve Bank of India Act, 1934, inserted in 1963 and strengthened in 1997, governs deposit-taking and non-banking financial institutions. Section 45-IA bars an NBFC from carrying on financial business without a certificate of registration from the RBI and sets a minimum net owned fund. Section 45-IC requires every NBFC to transfer at least 20% of its net profit each year to a reserve fund. Sections 45JA and 45L let the RBI issue directions on prudential norms, disclosure and conduct. Registration therefore brings a whole regime of supervision, which is why firms try to leave it.
2. The principal business test decides whether a company is an NBFC at all. The RBI treats a company as an NBFC if financial assets are more than 50% of its total assets (net of intangible assets) and income from financial assets is more than 50% of its gross income. This is the “50-50” or principal business test, applied to the last audited balance sheet. A company that meets both limbs must register, and one that fails either limb is outside the definition. Because the test is mechanical, a company can move out of it by changing the composition of its assets or income, which is the arbitrage ET describes.
3. Core investment companies are holding companies with their own test. A core investment company is an NBFC that holds at least 90% of its net assets in equity, preference shares, bonds, debentures or loans of group companies, with at least 60% of net assets in equity of group companies. It does not trade in these investments except to sell blocks for dilution or disinvestment. CICs with assets of ₹100 crore or more that access public funds must register with the RBI; smaller ones, and those without public funds, are largely exempt. Holding companies of large family groups usually fall in this category.
4. Scale-based regulation classifies NBFCs into four layers and asks the largest to list. The RBI’s Scale-Based Regulation framework, announced in October 2021, places NBFCs in a Base Layer, a Middle Layer, an Upper Layer and a notionally empty Top Layer, according to size and risk. Upper Layer NBFCs are identified by a scoring method and face bank-like norms, including a Common Equity Tier 1 requirement, concentration limits and a board-approved policy on listing. They must list on a stock exchange within three years of being identified. Once identified, an NBFC stays in the Upper Layer for at least five years, even if it no longer meets the criteria. Listing brings SEBI’s disclosure rules and a minimum public shareholding, which is normally 25% under Rule 19A of the Securities Contracts (Regulation) Rules, 1957.

Why UPSC loves this

1. Shadow banking has been examined since the IL&FS failure. The default of Infrastructure Leasing & Financial Services in 2018 pushed NBFC regulation into Mains questions on financial stability. UPSC asks about the role of NBFCs in credit delivery and the risks they carry for banks. The Tata case adds a newer question: how far a regulator may reach into the ownership of a large holding company.
2. Prelims tests definitions and the regulatory perimeter. Past papers have asked which entities the RBI regulates, what an NBFC may not do (for example, accept demand deposits or issue cheques drawn on itself), and how NBFCs differ from banks. The principal business test and the CIC thresholds are the kind of definitional detail UPSC uses to frame statements.
3. GS2 and GS4 bring in corporate governance. The dispute between a promoter trust and a professional board, and the dilemma of operating companies with a vote, suit questions on corporate governance, conflicts of interest and fiduciary duty. An ethics case study can be framed around a director who must vote in a dispute not of his making.

Analysis

1. The RBI is regulating the risk of the structure, not the size of the firm. Mr. Bhandari says Tata Sons is being punished for being “too successful or too big”. The RBI’s actual criterion is different. A holding company with large borrowing capacity sits between the public’s savings and a set of listed operating companies, and he himself notes that the RBI objected to the tens of thousands of crores lent by group firms to Tata Sons. Listing places that connection under the continuous disclosure of the securities market. It is not a punishment. The Upper Layer rule has also been public since 2021. The counter-view is that disclosure rules and prior approvals could have achieved the same transparency without forcing a private owner to sell equity, and that is a fair argument about proportionality rather than about the RBI’s power.
2. The holding-company rejig shows that a mechanical test invites arbitrage. The 50-50 test and the 90% test are bright lines, and bright lines are easy to step over. A ₹100 crore cotton trade at a ₹1 crore margin exists only to change an income ratio. Buying property to dilute group holdings does the same for a CIC. Each device is legal, which is the problem. The RBI can respond by tightening definitions, by looking at substance over form, or by accepting that small private holding companies with no public funds do not need regulation. Its recent exemption for entities below ₹1,000 crore without public funds or customers follows the third option and is sensible. Large groups that hold public money should not have the same way out.
3. Tata shows how regulation can reach a governance dispute. The listing order was meant to deal with systemic risk, but it has fed into a dispute between the Trusts and the board. The Trusts want Tata Sons private, the board has chosen to comply, and ten operating companies with 12.86% now have to vote on Mr. Chandrasekaran. Minority shareholders in Tata Motors or Tata Steel did not buy those shares to settle a question about Tata Sons. Directors of those companies owe their duty to their own shareholders, and abstention may be the most defensible choice. A regulator should expect this kind of spill-over when it acts on a holding company, and it should say clearly what it requires so that the dispute does not grow.
4. Using the NCLT to settle the AGM would hand a governance question to a tribunal. Section 97(1) lets the NCLT order an AGM and relax the quorum. That solves the procedural problem created by the Charity Commissioner’s restrictions on one Trust. But it would mean a tribunal choosing to go ahead without the representative of the majority owners. Whatever the legal merit, this would harden positions rather than settle them. The better outcome is for the Trusts’ internal restrictions to be resolved so that the owners themselves can vote.
5. Consistency matters more than the answer in any one case. India needs private capital from family groups, and it has seen family offices move abroad, as Mr. Bhandari warns. The way to protect that is predictable regulation: a rule announced in advance, applied to everyone above a threshold, with time allowed to comply. Case-by-case relaxations for powerful groups would undermine the RBI’s credibility more than a firm line would. By writing twice for a timeline, the RBI is showing that the Upper Layer rule will be enforced.

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