RBI Keeps Tata Sons in Upper Layer NBFC Framework Amid Rejection of Deregistration Bid

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The Reserve Bank of India (RBI) has rejected Tata Sons' application to surrender its registration as a Non-Banking Financial Company (NBFC). Effectively keeping the company within the NBFC framework, despite its bid to deregister as an unregistered core investment company (CIC).

The RBI's FAQ on NBFCs explains that a company must hold at least 90% of its net assets in investments in group companies. With at least 60% in equity shares. This places Tata Sons within the CIC framework given its primary role of holding equity in group operating companies such as TCS, Tata Motors and Tata Steel.

RBI has highlighted the 50:50 criteria (also known as the Principal Business Test) as the standard it uses to determine whether a company's principal business is financial activity. Thereby requiring it to register and be regulated as an NBFC. To qualify as an NBFC under this rule.

An entity must satisfy both of the following conditions simultaneously: financial assets must constitute more than 50% of the company's total assets (netted off by intangible assets) and income generated from those financial assets must account for more than 50% of the company's total gross income.

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The second provision relates to the asset-size threshold of Rs 100 crore or above. The third relates to the definition of public funds. Which makes clear that access to such funds is not restricted to direct borrowing by the entity itself.

"Public funds are not the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds raised by issue of commercial papers, debentures etc.

Further, indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds," the FAQ said.

Tata Sons had repaid its standalone debt of over Rs 20,000 crore to become a net cash-positive, zero-debt entity. It had pointed out that without direct public borrowings. It was no longer required to remain a filed CIC and could surrender its Certificate of Registration.

RBI's explanation of public funds in the FAQ addresses this argument by stating that an entity is deemed to access public funds indirectly if its group companies and subsidiaries raise funds from the market through bank loans, commercial papers or debentures.

The clarification on the definition of core investment and public funds therefore prevents Tata Sons from claiming an exemption on the basis that it is debt-free and does not directly access public funds. It remains subject to the upper layer framework, including the mandatory public listing requirement.

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The RBI's decision has significant implications for Tata Sons, which had sought to deregister as an unregistered core investment company (CIC). The rejection of its application raises questions about the company's future plans and its ability to operate within the NBFC framework.

Experts say that the RBI's stance on public funds is a key factor in the decision.

The RBI has not specified when it will take further action on Tata Sons' application. However, experts say that the company may need to revisit its plans for deregistration and seek alternative regulatory frameworks.

shared another expert. Tata Sons may need to explore other options. Such as seeking approval from the Securities and Exchange Board of India (SEBI) or the National Stock Exchange (NSE).