Listing Tata Sons would fundamentally change the Tata Group’s long-term investment model and could affect the structure through which it supports social development, Tata Trusts Chairman Noel Tata said on Tuesday, as the debate over the future of the conglomerate’s holding company intensified.
Tata said the group’s existing structure had allowed it to take a long-term approach to investments while enabling Tata Trusts, which owns around 66 per cent of Tata Sons, to direct dividends towards philanthropic activities. A public listing, he argued, would introduce a different set of shareholder expectations and market pressures.
‘Fundamental change’
Noel Tata said the issue was not simply whether Tata Sons could technically be listed, but what becoming a publicly traded company would mean for the way the group had operated for more than a century.
A listed Tata Sons would have public shareholders and would be subject to greater market scrutiny and disclosure requirements. Tata argued that this could change the holding company’s ability to make investments with longer gestation periods while also altering the relationship between Tata Sons and the charitable trusts that are its controlling shareholders.
His comments come amid differences over how Tata Sons should respond to the Reserve Bank of India’s regulatory framework for upper-layer non-banking financial companies.
Alternative to listing
Tata Trusts has proposed a restructuring under which Tata Electronics Systems Solutions and Tata Consulting Engineers would be merged with Tata Sons. The proposal is intended to transform Tata Sons from predominantly a holding and investment company into a holding-cum-operating company with substantial operating revenues and assets.
The Trusts contend that such a restructuring could take Tata Sons outside the regulatory definitions of both a non-banking financial company and a core investment company, potentially removing the requirement for a stock-market listing.
Noel Tata said the proposal complied with RBI guidelines and expressed hope that the central bank would engage with the group to find a solution that would allow Tata Sons to remain privately held.
RBI at centre
The regulatory question emerged after Tata Sons was classified as an upper-layer NBFC under the RBI’s scale-based regulatory framework in September 2022. Such entities are subject to enhanced regulatory requirements, including listing requirements.
Tata Sons subsequently repaid its borrowings and sought to surrender its core investment company registration. The RBI rejected that request earlier this month and asked the company to comply with regulations applicable to an upper-layer NBFC.
Tata Trusts has maintained that listing is not the only route available and that restructuring or other regulatory options should be examined before Tata Sons considers an initial public offering.
How merger could work
Under the restructuring proposal, the addition of Tata Electronics Systems Solutions and Tata Consulting Engineers would significantly increase Tata Sons’ operating income and assets.
According to figures presented in support of the proposal, the reorganised entity would have operating revenues of around Rs 1.05 lakh crore, compared with financial income of about Rs 40,072 crore. Operating revenue would account for around 64 per cent of its total income.
The addition of operating assets could also bring Tata Sons below the threshold under which at least 90 per cent of the net assets of a core investment company consist of investments in group companies.
The restructuring would require the RBI’s prior no-objection certificate and approvals under the applicable corporate and regulatory framework.
Trusts hold 66%
Tata Trusts collectively owns around 66 per cent of Tata Sons, giving the philanthropic institutions a controlling interest in the holding company. The Shapoorji Pallonji Group is the second-largest shareholder, with an interest of more than 18 per cent.
A substantial portion of the dividends received by Tata Trusts from Tata Sons is used to finance philanthropic programmes spanning healthcare, education, livelihoods, rural development and other social initiatives.
It is this relationship between commercial earnings and philanthropy that Noel Tata argues could be affected by a fundamental change in Tata Sons’ ownership structure.
Century-old model
Tata Trusts has also argued that combining operating businesses with Tata Sons would not represent an entirely new structure. For much of its history, Tata Sons itself housed operating businesses in addition to holding investments in group companies.
Tata Consultancy Services, for instance, operated as a division of Tata Sons before being separated into an independent company ahead of its listing in 2004.
The proposed restructuring would, therefore, effectively return Tata Sons to a model in which it has substantial operating businesses and revenues alongside its role as the principal holding company of the Tata Group.