Tata mulls merger of arm for exemption from RBI as NBFC upper layer tag

Tata Sons, the holding company of the Tata group, is studying the option to merge one of its 100 per cent operating subsidiaries with itself to get an exemption as the NBFC (non-banking finance company) upper layer tag from the Reserve Bank of India.

With the NBFC upper layer tag having been introduced in September 2022, legal sources said Tata Sons will have to submit audited financial data of each subsidiary and its step-down subsidiaries, taking the total to about 1,300 firms. "The NBFC upper layer tag opens up RBI scrutiny on every company and their subsidiaries spread all over the world making the exercise tedious," said a legal source close to the development.

"The merger of a 100 percent subsidiary has been suggested by the lawyers so as the parent company can get an exemption," the source said and added that no final decision has been taken so far.

Tata Sons did not comment on the issue. A recent media report said Tata group chairman N Chandrasekaran met with top Reserve Bank of India officials to get an exemption as NBFC upper layer. The Indian banking sector has one of the largest exposure to the Tata group companies via debt and equity.

In October 2021, the RBI had said the upper layer will comprise of those NBFCs that have been specifically identified by the Reserve Bank as warranting enhanced regulatory requirement based on a set of parameters and scoring methodology. The top ten eligible NBFCs in terms of their asset sizes shall always reside in the upper layer, irrespective of any other factor, RBI had said. In September last year, the RBI named Tata Sons as NBFC–upper layer, along with 15 others, including Tata Capital Financial Services.

Tata will have to raise funds from various sources at home and abroad to fund its investment plans worth $90 billion in the next five years in new businesses such as semiconductors and electronics. Additionally, Air India, bought by the Tata group last year, is planning to invest $100 billion in acquiring 500 new planes.

Tata Sons was earlier registered as a Core Investment Company (CIC) with RBI, while its subsidiary, Tata Capital, a financial services company, was registered as a CIC and an NBFC. The RBI classified the Tata group’s holding company, Tata Sons, and Tata Capital as upper-layer non-banking finance companies (NBFC). Post the classification, Tata Sons was mandated to approve a compliance policy applicable to NBFCs, including appointing a new chief compliance officer (CCO) reporting to the top management.

The banking regulator gave two years to all companies to put in place a board-approved policy for the adoption of the enhanced regulatory framework and chart out an implementation plan for new regulations.

As per the RBI circular on NBFCs, every company will have to appoint a Chief Compliance Officer who has to ensure compliance with RBI’s directions within a deadline. In the circular, the RBI had said it expects an effective compliance programme where all risk mitigation plan and monitorable action plan points are complied with in prescribed deadline. The RBI also warned any unsatisfactory compliance may invite penal action.

The Tata Trusts currently own 66 per cent in Tata Sons. The billionaire Mistry family owns another 18.4 per cent. The remaining stake is held by Tata group companies and small shareholders. The company turned private in 2018 after a corporate war between the Mistry family and Tata group broke out. The Supreme Court in early 2021 ruled in favour of the Tata group. Any merger proposal plan would require shareholders’ approval.

To-do list

Tata Sons will have to submit data on 1,300 companies

Tata Sons will have to appoint a compliance officer

Risk mitigation plan has to be implemented by Tata Sons