RBI vs Tata Sons: A Forced Listing Push and a Bigger Regulatory Question

The Reserve Bank of India (RBI)—an entity whose functioning is generally invisible to the common man—has twisted the tail of the storied Tata Sons, an investment (holding) company constituted in 1895, majority-owned by two Tata Trusts, holding shares in subordinate Tata companies worth about Rs 12 trillion at market value.Tata Sons has been debt-free since 2024. The Trusts owning Tata Sons have resolved to keep Tata Sons a private company. The RBI looks at this differently. Private company management decisions are more difficult to oversee and supervise for clues of invisible but burgeoning financial shocks, particularly when they influence the management decisions of large subordinate public limited companies.It remains unclear, though, why Tata Sons is being singled out.A Philosophical Take on Ratan Tata’s Unfortunate DeathThe private holding company model is standard for most large family-owned corporates. More fundamentally, if the holding company is not directly accessing any public capital, the loans or equity are vested in the subordinate, publicly listed group companies, which are insulated and independently managed by boards.There is, of course, a peculiar aspect to the Tata Sons case. The Shapoorji Pallonji (SP) group owns 18.6 percent of Tata Sons and have been trying to monetise their holding. If Tata Sons gets listed, they get a clear route to do so and hopefully repay bank borrowings to the extent of about Rs 600 billion.Sympathy for the predicament of the SP Group cannot override the principle that the structure of any company should be decided by the company concerned, within the law. RBI directions cannot subvert the right of companies to choose their holding structure.The RBI decision is appealable and might generate a long legal battle if the RBI has overreached its regulatory power by singling out Tata Sons as the only holding company being forced to go public and list. From a systemic perspective, the possibility of non-transparency, at a level higher than the actual borrower or user of public funds, is pervasive via corporatised family offices for investment of family funds. Often, personal guarantees from the promoters are used by banks to bolster secured lending. In the case of Tata Sons, the Trusts which own the company, use the income from investments in subordinate Tata Group companies for charitable purposes and not for business purposes or for on-lending or investment in the broader market.From a commonsense approach, regulations which encourage circumvention via the simple expedient of splitting up of promoter interest across multiple holding companies (rather than just one as in the case of Tata Sons) to remain statistically invisible and evade the maximum value prescribed by the RBI for private holding companies create a loophole. This needs to be plugged in rather than celebrated.Regulations which fail to serve the intended economic purpose become “hurdles”, increasing the cost of doing business through regulatory friction and administrative expenses. Consider our regulations for micro, small and medium enterprises (MSMEs), which over the years have been misused to remain within the value limits to enjoy benefits, rather than grow.It would make more sense if the RBI was to derive a formula applicable across all the private holding companies of a promoter group, irrespective of the number of holding companies across which promoter interest is split. This would present a levelised capital constraint for promoters irrespective of how many private holding companies they split their holdings across.Subhash Garg Writes: Centre's FAQs on GDP Revision Lack Crucial Supporting DataNevertheless, Tata Sons also does not come out smelling of roses. The summary removal in 2017 of Tata Sons Chairman Cyrus Mistry, who was from the Shapoorji Pallonji group, which holds 18.7 percent of Tata Sons, led to much public bloodletting. The face-off between the Tata companies and the SP Group in proceedings before the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT), and eventually in the Supreme Court, uncovered allegations (albeit unsubstantiated) of malfeasance and poor governance within the Tata Group companies.The then Chief Justice of India, Sharad Arvind Bobde, presiding over the bench in the Supreme Court in 2021, pointed out that separation of ownership interests of the SP Group in Tata Sons, by reducing the capital and paying out fair compensation to them, might be the most practical option available to the company all along but not adopted.By directing that Tata Sons seek a listing as a public company, the RBI aligns with the Supreme Court’s approach of precipitating a separation of interests of the warring groups. Tata Sons Chairperson N Chandrasekaran has already announced he will not be available for reappointment after February 2027, when his term ends. One of the Tata Trusts boards is non-functional because it has been charged with violating the Maharashtra Public Trusts Rules. So, the 17 September meeting of Tata Sons is unlikely to present a solution.Continued turbulence at the board level in Tata Sons comes at a heavy cost for the subordinate, listed, public companies. Given the systematically important status of Tata Sons, the RBI could still smother the smouldering embers, rather than fan them further. If all else fails, seeking refuge in litigation is the default option till a solution is manufactured.(The author is distinguished fellow Chintan Research Foundation and was previously in the IAS and the World Bank. This is an opinion piece and the views expressed are the author's own. The Quint does not endorse or is responsible for them.)

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Why RBI's Push for Tata Sons' Listing Deserves Greater Scrutiny

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