Much ado about Tata Sons listing? What RBI amendment really means

RBI's June 24 second amendment of registration, exemptions and framework for scale-based regulation relates to the criteria of upper layer NBFCs. It doesn't seem to have anything to do with Tata Sons

Rarely is a Reserve Bank of India (RBI) directive read so differently by different business newspapers.

 

Yes, I am talking about the RBI (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Second Amendment Directions 2026, released on 24 June.

 

One newspaper headline says the central bank’s directive may see Tata Sons listing on stock exchanges. Another financial paper says the new norms, outlined by the amendment, could provide a breather for Tata Sons from listing on bourses. Yet another paper observes that Tata Sons’ listing hangs in the balance after the RBI diktat. Tata Sons is the holding company of the Tata group, an Indian multinational conglomerate.

 

Let me attempt to solve the puzzle.

 

First, what is the profile of Tata Sons? It is a core investment company (CIC) – a specialised non-banking financial company (NBFC) whose main business is holding investments/stakes in group companies. It’s an NBFC but a holding company, and not directly involved in the NBFC business of lending to the public and, at times, deposit-taking.

 

The Reserve Bank of India Act, 1934 [Section 45I(c) read with 45I(f)] refers to the principal business criteria (PBC), but it has left it to the regulator to delineate it. In other words, PBC is not defined in law in exact terms; the RBI has the freedom to prescribe it from time to time.

 

For NBFCs, the RBI follows a ‘50:50 norm’: If a company’s financial assets constitute at least 50 per cent of total assets and income from such assets constitute at least 50 per cent of its gross income, it is an NBFC.

 

The RBI has, however, raised the minimum net owned funds (NOF) requirement for the NBFCs from Rs2 crore to Rs10 crore, in stages. Existing NBFCs have until March 31, 2027, to scale their funds to the new threshold, while new entrants must meet this requirement from the start.

 

Net owned funds are capital plus reserves minus investments made and loans given to group companies or exposure to the group.

 

Now, what is a CIC? A CIC is a non-operating holding company whose primary source of income is dividends and interest earned from the group companies. It has its capital and reserves but since it invests and gives loans to group companies, it can have a negative net worth. This is why, for a CIC, the RBI follows the norm of adjusted net worth – the aggregate value of the company's capital base which reflects the actual market and risk values of its assets and intra-group capital flows.

 

When it comes to PBC, for CICs, the norm is 90:60. A CICI’s exposure to group companies in the form of investments in equity shares, preference shares, bonds, debentures, debt, or loans must be at least 90 per cent of its total assets. Out of this, its investment in the equity shares of group companies must constitute at least 60 per cent of its total assets.

 

If a CIC fails to meet these criteria, it becomes a normal NBFC.

 

Under the regulatory guidelines, the minimum capital adequacy ratio (CAR)—also known as capital to risk-weighted assets ratio (CRAR)—for an NBFC is 15 per cent. This prudential regulation is not applicable to all CICs. But, a ‘systemically important’ CIC needs to maintain a minimum adjusted net worth of 30 per cent of its aggregate risk-weighted assets and off-balance sheet items.

 

Finally, going by the RBI’s Master Circular– Regulatory Framework for CICs, a CIC can borrow from the market up to 2.5 times its adjusted net worth. This cap on leverage was prescribed as early as in 2010 and has been in force since then.

 

The cap is meant to address the interconnectedness with the system (market) in case of a failure. Heavyweight infrastructure lender Infrastructure Leasing & Financial Services (IL&FS), a CIC, collapsed in 2019, stretching the borrowings many times more.

 

There are CICs which don’t borrow from the market – they use their own funds. The RBI apparently doesn’t bother about them. Also, a CIC with a net worth of Rs100 crore or less is not a threat to the system.

 

The RBI came out with a comprehensive revised regulatory framework for CICs in August 2020 and followed it up by an overhaul of the broader NBFC/CIC sector in October 2021, introducing scale-based regulation. These were the banking regulator’s response to the IL&FS crisis, designed to reduce conglomerate opaqueness, control excessive leveraging and limit systemic risk.

 

The oversight of NBFCs was restructured on the basis of their size, activity and risk profile. The framework officially took effect on October 1, 2022, eliminating the traditional classification that was based strictly on systemic importance.

 

There are four layers in the framework: Base layer (non-deposit taking entities with assets below Rs1,000 crore); middle layer (all deposit-taking NBFCs regardless of asset size, non-deposit taking NBFCs with assets over Rs1,000 crore, housing finance companies, infrastructure finance companies and primary dealers); upper layer (large NBFCs identified by the RBI which can create systemic risks); and top layer (none of the NBFCs belong this group as yet).

 

The classification criteria for the upper layer was amended through an RBI directive on June 24. It’s now linked only to asset size. The threshold is Rs1 trillion.

 

The classification criteria has changed, not the prudential regulation applicable to the upper layer NBFCs. The listing norms for such NBFCs arenot amended.

 

The same framework also mentions that NBFCs not availing “public funds” and not having “customer interface” bear a different risk profile and hence deserve a differential regulatory treatment. They are called Type 1 NBFCs.

 

Incidentally, before the June directive, on April 29, a new regulatory framework was prescribed for Type I NBFCs (applicable from July 1). Like the concept of ‘unregistered CIC’, this framework has brought in the concept of ‘unregistered Type I NBFC’. Both are exempted from registration with the RBI, provided they access no public funds and have no customer interface.

 

Public funds include funds raised either directly or indirectly through public deposits, commercial paper, debentures, inter-corporate deposits and bank finance. They exclude funds raised by issue of instruments compulsorily convertible into equity shares within 10 years. And, customer interface means interaction between the NBFC and its customers while carrying on its business.

 

Neither the Type 1 NBFCs nor the CICs need the RBI registration. Nothing has changed on this front. 

 

For Type I, an asset size of Rs1,000 crore is the threshold for registration (notified on April 29). The June 24 directive hasn’t changed anything. Similarly, the June directive hasn’t changed anything about an ‘unregistered CIC’.

 

The crux of my argument is that the June 24 directive on the second amendment of registration, exemptions and framework for scale-based regulations relates to the revised qualifying criteria for upper layer NBFCs, under scale-based regulation. The reference to public funds and its definition as mentioned in the RBI (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Amendment Directions, released on 29 April or its removal from the 24 June directive don’t seem to have anything to do with Tata Sons.

 

Postscript: A fresh round of speculation is brewing after RBI’s insertion of the definition of public funds on July 1, which was absent in its updated guideline (on 29 June). Has it redefined public funds? No. The clarification only tells us once more what is already in vogue.

 

In essence, Tata Sons will continue to be a CIC, whether registered or unregistered. It will have to follow the 90:60 principle.

 

If it qualifies as belonging to the upper layer, public listing will be one of the regulatory requirements. However, if it qualifies as ‘unregistered CIC’, it will escape from prudential regulation.

 

For it to qualify as unregistered CIC, Tata Sons has to prove to the RBI that it has no public funds – direct or indirect. There is no change in this position.