Tata Sons case is about the financial system’s safety

The debate over Tata Sons' status as a non-banking financial company (NBFC) has expanded beyond the realm of a single business house, focusing instead on the safety and integrity of the entire financial system. This discussion comes from a statement made by Sanjay Malhotra, Governor of the Reserve Bank of India, at a media summit.

Core investment companies, which are essentially holding firms owning shares in their group companies, are regulated by the RBI as non-banking financial companies (NBFCs). These firms, which hold considerable assets and leverage, must list within three years. Tata Sons, a prominent holding company in India, entered this category in September 2022, with a deadline set for September 2025. However, Tata Sons preemptively paid over Rs 21,000 crore in debt and applied to surrender its registration.

The RBI's decision not to grant the surrender has raised concerns about the safety of public money, as Tata Sons, with standalone assets surpassing Rs 2 lakh crore, is far above the Rs 1 lakh crore threshold. The RBI Governor emphasized the importance of this rule, stating that such companies, sitting atop their groups and relying on group company balances to repay debts, pose a significant risk to the public money raised through banks and bonds.

The governor shared a parallel scenario involving IL&FS, another systemically important core investment company, which defaulted in 2018. This default led to mutual fund redemptions and a tightening of funding for the entire NBFC sector. The writer argues that while Tata Sons is a well-managed entity, the structure poses a systemic risk and warrants a listing to ensure transparency and discipline.

The writer also raises concerns about the timing of such actions. The rescue of Yes Bank in 2020 by SBI, led by Malhotra himself, suggests that regulatory action could have been taken earlier to prevent similar crises. The writer suggests that the RBI should consider bringing Tata Sons under the listing requirement while it is still strong, rather than waiting for a crisis.

The Tata Trusts, which own about two-thirds of Tata Sons, fund various philanthropic causes and are concerned that a listing could alter the institution's character. However, the writer argues that a listing size-based rule could be circumvented by the Tata Sons, undermining the rule's purpose. Additionally, the writer points out that repaying debt does not necessarily mean the company is free from systemic risk, as new debt can be raised later.

The writer concludes by emphasizing the importance of maintaining the public's trust in the regulatory framework. A listing, if done correctly, could bring transparency and discipline to Tata Sons without compromising its philanthropic mission. The RBI has the power to make an exception but should do so based on process and timeline, ensuring that the institution's values and stakeholder interests are preserved.