DC Edit | Will Tata Sons Continue To Pose Risk After Merger?

Tata Trusts’ proposal to merge two Tata Group operating companies with Tata Sons offers the Reserve Bank of India (RBI) an opportunity to resolve the long-running dispute over the listing of the Tata Group holding company. The issue should not be reduced to whether the Tatas have devised another way to avoid an IPO. The more important question is whether Tata Sons will continue to pose the kind of financial-system risk for which the RBI mandated the listing of large non-banking financial companies (NBFCs) in the first place.

Under the RBI’s Scale Based Regulation framework announced in 2021, NBFCs identified as belonging to the Upper Layer are subject to stringent regulation, including mandatory listing. The principle behind the framework is sound. Large financial companies that are leveraged and extensively interconnected with banks, bond markets and other financial institutions can transmit their problems across the financial system. Greater disclosure, governance standards and market discipline are therefore justified to prevent ripple effects on the broader economy.

The RBI’s own methodology shows that systemic risk, rather than size alone, is core to this categorisation. Quantitative factors account for 70 per cent of the assessment. Size and leverage have a weight of 35 per cent, interconnectedness 25 per cent and complexity 10 per cent. Interconnectedness includes borrowings from financial institutions and securities issued to them, apart from an NBFC’s financial-system assets.

When the regulations were issued, Tata Sons was a Core Investment Company (CIC) NBFC, which means a company whose sole purpose is investment in other entities without any operating business of its own. But Tata Sons repaid its entire debt, which ended the issue of leverage. It offered to surrender its NBFC status, but the RBI rejected the offer, which made the listing of Tata Sons mandatory.

However, through the merger of two operating companies, Tata Sons seeks to move away from borrowing and lending, which come under the RBI’s regulatory jurisdiction. A company that trades in goods and services does not come under the RBI’s jurisdiction. Unless a company’s decisions affect the nation, it should have the liberty to choose how it wants to operate. Listing should not become an end in itself, detached from the systemic-risk considerations that produced the requirement.

After the proposed merger of Tata Electronics Systems Solutions and Tata Consulting Engineers with Tata Sons, the parent company will have nearly 65 per cent of its revenue coming from its own business. If Tata Sons genuinely becomes an operating company and no longer qualifies as an NBFC, the consequences of its former NBFC status cannot logically be allowed to pursue it indefinitely.

The RBI’s mandate is to protect financial stability, not to force Tata Sons to list. It must, therefore, provide a transparent exit route to all its regulated entities that enables them to exercise their constitutionally guaranteed liberty to choose their area of operations. Equally, Tata Sons cannot demand special treatment merely because its shareholders prefer to remain private. If it does not want to face public scrutiny, it must cease to pose the risk that the RBI’s 2021 regulations envisaged.