Will RBI’s rules for Tata Sons’ stock market listing pave the way for the Shapoorji Pallonji Group to sell portion of stake?

The Reserve Bank of India’s (RBI’s) decision to classify Tata Sons as a core investment company (CIC) in the upper layer of its list of non-banking financial companies may allow the Shapoorji Pallonji Group to pare its 18.37 per cent stake in the holding company of the Tata group. At least that’s the buzz in Mumbai circles.

This is because NBFCs in the ‘upper tier’ must list within three years, according to RBI norms. These regulations came into effect in October 2022, which implies Tata Sons listing by October 2025.

The Pallonji Mistry family had earlier announced its decision to sell its stake, but valuation differences cropped up between the two.

“It is highly unlikely,” say market experts, but if it happens , that would be a huge bonanza for the SP Group, which is in need of money for supporting growth of its operating companies. 

Tata Sons is likely to press for a waiver from the public listing regulations of the RBI, since the NBFC is essentially a holding company with major operating companies already listed in the market.

Leading consultants and those well-versed with the RBI's regulations indicate that Tata Sons will have to make a representation that Tata Sons functions merely as a holding entity without any big operations. Tata Sons is the principal investment holding company and promoter of Tata companies.

“Given that Tata Sons’ major operational subsidiaries are already publicly listed, there's no necessity for an additional listing,” they suggest.

However, the RBI cannot provide a blanket exemption to CICs, as this would allow other NBFCs categorised as CICs with operations and high leverage to bypass the guidelines.

The central bank might consider an exemption if they amend their guidelines to create a specific category for CICs that solely function as promoter holding companies with their major or all operational subsidiaries listed in the market.

“There is also no over-leveraging leverage at the Holdco level for Tata Sons. They (Tata Sons) could repay the external debt, if any, and then apply for exemption,” say sources.

Infrastructure financing institution IL&FS operated using the holding, subsidiaries, and SPV model. There was significant leverage at the holding company level which ultimately led to the IL&FS’ downfall. The debacle of a large NBFC like IL&FS also created a systemic issue in the market because of its borrowing from banks and other institutions.

There are some experts who suggest that there are quite a few unlisted operating companies under Tata Sons.

Take for instance, Air India, which came to the Tata fold recently, is not listed. Two years ago, Tata Sons, through its wholly-owned subsidiary, Talace Pvt Ltd, made the highest bid of Rs 18,000 crore as the enterprise value of Air India. Tatas own a 100 per cent stake in Air India and in its subsidiary Air India Express.

According to RBI guidelines, an NBFC designated as ‘layer’ will be subject to rigorous regulations for a minimum of five years, irrespective of any subsequent changes in its status. An exit from this new framework is only permissible if the board strategically decides to restructure the current structure.

However, if an NBFC scales down its operations due to market challenges, it won’t be allowed to shift to a lighter regulatory system.

“The reorganisation of Tata Sons would require a lot of restructuring, which is not possible within the current time frame,” add sources.

There is a background to new stringent regulations. To address systemic risks from the NBFC sector, especially after the challenges faced by the debacle of IL&FS, DHFL, Reliance Capital, and SREI Infrastructure, the RBI introduced scale-based regulation about two years ago. Tata Sons, accordingly, was bracketed under the upper layer because of its size. 

Tata Sons and its subsidiaries operate in diverse sectors. These include IT services, engineering consultancy, finance, broadcasting, real estate, retail, research, auto parts, defence, telecommunications, and airlines. It also has associate companies in the areas of manufacturing steel, passenger and commercial vehicles, chemicals, engineering, power, retail, hospitality, beverages, etc.

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