3 weeks ago
Tata Sons deregistration hinges on RBI's 'public funds' rule
Tata Sons is a big Indian company that owns shares in many other businesses.
Earlier, it was considered a special finance company by the central bank of India, called the RBI.
Tata Sons has now paid back all the money it borrowed from banks and others.
It has asked the RBI to stop calling it a finance company.
If the RBI agrees, Tata Sons will not have to sell shares to the public.
The RBI has a rule about companies that can get money from the public in an indirect way.
Some Tata companies, like Tata Steel and Tata Consumer Products, hold small parts of Tata Sons and can collect money from the public.
Experts do not agree on whether this should count as indirect public money for Tata Sons.
One expert says owning shares in another company does not make you responsible for that company's money.
The final answer depends on how the RBI reads its own rule.
Tata Sons has applied to surrender its core investment company (CIC) registration with the RBI after repaying all outstanding debt.
The RBI's criterion on 'indirect access to public funds' is the central issue in the pending deregistration decision.
Tata group companies with access to public funds, including Tata Steel and Tata Consumer Products, collectively hold around 13% of Tata Sons.
Legal experts disagree on whether equity investments by group companies that raise public funds bring Tata Sons within the scope of the rule.
InGovern argues for a 'look-through' approach, while other experts say equity ownership does not make Tata Sons liable for the funds; rejection could force Tata Sons to pursue a listing.
- Who
- Tata Sons, the Tata group holding company, and the Reserve Bank of India (RBI).
- What
- Tata Sons seeks RBI approval to surrender its core investment company (CIC) registration; the outcome hinges on whether equity investments from group companies with access to public funds bring it within RBI's 'indirect access to public funds' rule.
- Where
- India, in a matter before the Reserve Bank of India.
- When
- Not specified in the article.
- Why
- To avoid the listing requirement that applies to upper-layer NBFCs, after repaying all outstanding debt.
Equity investments excluded from the rule
Look-through interpretation
Indirect access to public funds
Equity investments excluded from the rule
The public-funds criterion covers funds a CIC must repay, such as bank loans, debentures, inter-corporate deposits and public deposits; equity stakes from group companies are not fixed-income obligations, so the rule should not apply to Tata Sons.
Look-through interpretation
The RBI's clarification adopts a look-through approach, so funds received through associates and group companies that have access to public funds should be treated as indirect public funds for Tata Sons.
Letter vs. spirit of the rule
Equity investments excluded from the rule
Rules should be read by their letter: listed operating companies are not subject to NBFC regulations merely because they raise public funds, so their downstream equity investments should not bring Tata Sons within the framework.
Look-through interpretation
The spirit of the rule is to capture the ultimate beneficiary of public funds, even if the legal chain of ownership separates it from the actual borrowing.
Corporate veil principle
Equity investments excluded from the rule
Owning shares in a company does not make an investor personally liable for its debts, or every shareholder of a bankrupt listed company would have to repay its creditors.
Look-through interpretation
The structural linkage between listed Tata group companies and public funds remains even after Tata Sons' standalone deleveraging, so the indirect-access criterion should weigh against deregistration.
Key facts
- Company
- Tata Sons
- Regulator
- Reserve Bank of India (RBI)
- Registration type
- Core Investment Company (CIC)
- Key issue
- RBI's 'indirect access to public funds' criterion
- Group stake in Tata Sons
- ~13% per one expert; ~13-14% per InGovern
- If deregistration is accepted
- Tata Sons avoids the listing requirement for upper-layer NBFCs
- If deregistration is rejected
- Tata Sons may have to pursue a listing
- Prior condition
- All outstanding debt repaid
Quotes
Kaushik Mukherjee
Partner at CMS INDUSLAW, legal expert
“"Tata Sons is not expected to return the equity investment as a fixed income or floating rate security generally covered under the definition; and accordingly, it may be argued that despite the group companies mentioned above having access to ‘public funds’, the obligation to undertake compliances to secure repayment of such ‘public funds’ does not extend by way of an equity investment to Tata Sons."”
financialexpress.com
Unnamed legal expert
Legal analyst quoted by the article
“"One needs to separate letter and intent/spirit when interpreting the criteria. The question is whether the ‘spirit’ of the rule is to capture the ultimate beneficiary of public funds, even if the legal chain of ownership separates it from the actual borrowing."”
financialexpress.com
Sources
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