
Tata Sons, the holding company of Tata Group, has reportedly reached a solution with the Reserve Bank of India (RBI) that could help it avoid mandatory listing requirements and the non-banking finance company – upper layer (NBFC–UL) classification. The RBI has asked Tata Sons to remove the ‘on-lending’ tag on its bank borrowings.
To comply with the regulator’s request, Tata Sons has presented a plan to reduce its loans and has requested 12-18 months of time to do so. The quality of collaterals offered by Tata Sons is not a concern due to the strong position of Tata Consultancy Services. However, as a holding company and a systemically important non-deposit taking core investment company (CIC) without its own income-generating operations, Tata Sons primarily takes loans to support its group companies that may have difficulty accessing bank borrowings at attractive interest rates. These loans are considered ‘on-lending.’
As of FY23, Tata Sons had approximately ₹21,000 crore in outstanding loans. While on-lending was a common practice for holding companies, banks have become cautious about these loans following the asset quality crisis in 2015. On-lending can lead to layers of debt and an asset-liability mismatch, posing systemic risks.
By repaying the loans to banks, Tata Sons can potentially reduce the perceived risk in its loan obligations. Reorganizing debt and relinquishing control could help Tata Sons avoid the on-lending tag and navigate the strict regulations imposed on CIC-upper layer NBFCs. The recent sale of a 0.65% stake in Tata Consultancy Services by Tata Sons is seen as a step towards remedying the situation. However, there may be challenges for group companies that rely on Tata Sons for bank loans to secure favorable deals in the market.
In October 2022, when the scale-based regulatory framework was introduced for NBFCs, Tata Sons was classified as an NBFC-UL despite being a CIC, due to its exposure to bank loans and inter-corporate advances.