RBI explains why it wants Tata Sons listing

While the Reserve Bank of India (RBI) took 30 long months to reject Tata Sons’ application to cancel its NBFC-CIC licence without giving any reason for its decision on September 11, the central bank explained six days later why it did what it did in the case of the Tatas, in the form of an FAQ.

The FAQ, issued late Tuesday night, explains the three provisions under which it classified Tata Sons as an upper-layer NBFC, and accordingly rejected the company’s bid to deregister as an unregistered core investment company (CIC). The first relates to the definition of a CIC, which requires a company to hold at least 90% of its net assets in investments in group companies, of which at least 60% must be in equity shares.

This places Tata Sons within the CIC framework, given its primary role as a holding company with equity investments in operating companies such as TCS, Tata Motors and Tata Steel, among others. The group has as many as 26 large listed companies.

The FAQ also highlights the 50:50 criteria, also known as the principal business test, which RBI uses to determine whether a firm’s principal business is financial activity, thereby requiring it to register and be regulated as an NBFC.

To qualify as an NBFC under this rule, an entity must satisfy two conditions -- financial assets must constitute more than 50% of its total assets, net of intangible assets, and income generated from those financial assets must account for more than 50% of its total gross income.

The second key condition is the asset-size threshold of Rs 100 crore or above. The third relates to the definition of public funds, which RBI says is not restricted to direct borrowing by the entity itself.

“Public funds are not the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds raised by issue of commercial papers, debentures, etc. Further, indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds,” the FAQ said.

Tata Sons had repaid its standalone debt of over Rs 22,000 crore by March 2024, meeting one of the conditions specified in the October 2022 upper-layer NBFC list and becoming a zero-debt entity. It had also stopped providing corporate guarantees for borrowings by group companies, thereby meeting two key conditions under the earlier norms.

In March 2024, it filed an application to cancel its NBFC licence, arguing that without direct public borrowings, it was no longer required to remain a registered NBFC-CIC and therefore wanted to surrender its certificate of registration.