To avoid listing, Tata Sons may have to provide undertaking not to access public funds

Tata group has several large investments lined up in the coming years. Most notably it has plans to set up two semiconductor units with an investment of over Rs 1 lakh crore.

Tata Sons has offered to provide an undertaking in the form of a board resolution to not access public funds as part of its application seeking to declassify itself as an “upper layer NBFC” and core investment company to avoid a listing on bourses by 2025, people familiar with the matter have said.

These steps may restrict its ability to provide corporate guarantees to its new businesses, many of which are currently at a growth and incubation stage, sources aware of the ongoing talks at the salt-to-software conglomerate told Moneycontrol.

Sources of public funds include deposits, bank finance, non-convertible debentures and commercial papers.

Earlier this year, Tata Sons, the holding company for the diversified Tata Group, pared its outstanding public debt in the form of debentures and bank loans to the tune of Rs 20,000 crore and applied to the banking regulator Reserve Bank of India (RBI)to declassify itself as an upper layer NBFC.

While the RBI is yet to make its final decision known, sources said Tata Sons, as part of the application, provided an undertaking not to access public funds.

“While Tata Sons may be compliant in giving the undertaking as mandated by RBI regulation, it is also not clear whether it can still, however, give corporate guarantees to various group companies as and when required” said a person familiar with the discussion. “This raises a question whether by giving corporate guarantees, Tata Sons will be in implicit breach of RBI regulations if it ever needed to raise debt to honour these guarantees,” the person said.

Tata Sons recorded a 74 percent increase in consolidated net profit for FY24 at Rs 49,000 crore, which effectively rules out any financial strain in the foreseeable future and underscores its ability to backstop loans taken by subsidiaries. “Nonetheless, Tata Sons has written to RBI seeking a clarification over this matter,” the person quoted above said.

An email sent to a Tata Sons spokesperson did not elicit a response.

The 2025 deadline

Suspense continues to build on whether Tata Sons will be able to avoid listing by September 2025.

The RBI first classified Tata as NBFC-Upper Layer in September 2022. Under RBI regulations, an NBFC-Upper-Layer entity needs to be listed within three years of such a categorisation.

Tata Sons also featured as an upper layer NBFC in a second list issued in September 2023.

The list for 2024 is yet to come out. So, it is still unclear whether the central bank has accepted Tata Sons' application for declassifying it as an upper-layer NBFC.

The debt repayment by Tata Sons was crucial for the holding company to avoid a mandatory public listing. An Economic Times report in August said Tata Sons repaid over Rs 20,000 crore worth of debt.

Tata group has several large investments lined up in the coming years. Most notably are the plans to set up two semiconductor units with an investment of more than Rs 1 lakh crore.

Earlier this year, the Centre approved Tata Electronics Private Ltd’s plan to set up a semiconductor fab in a consortium with Taiwan’s Semiconductor Manufacturing Corp.

The project, which will come up in Gujarat’s Dholera, will need an investment of Rs 91,000 crore. The fab will produce power management chips for electric vehicles, telecom, defence, consumer electronics among others.

Tata Semiconductor Assembly and Test Private Ltd plans to set up a semiconductor unit in Assam with an investment of Rs 27,000 crore. The Assam unit will cater to segments such as auto, electric vehicles, consumer electronics and telecom.

Upper layer NBFCs and IPOs

In October 2021, the RBI came up with a four-layered regulatory structure for NBFCs for a better regulatory oversight of the shadow banking sector to minimise risks for the financial system.

Apart from Tata Sons, the other entities classified as NBFC-Upper-Layer include Piramal Capital & Housing Finance, HDB Financial Services, Aditya Birla Finance and Tata Capital Financial Services.

Such NBFCs need to list on the bourses by September 2025.

In May, the board of directors at the diversified non-bank finance company Piramal Enterprises approved its merger with wholly owned subsidiary Piramal Capital & Housing Finance, which will now be rechristened Piramal Finance.

HDFC Bank’s NBFC arm HDB Financial Services on October 30 filed a draft red herring prospectus with SEBI for an IPO worth Rs 12,500 crore.

Tata Capital is merging with Tata Motors Finance Limited, the lending arm of Tata Motors, and the merged entity is expected to go public next year.