Tata Trusts propose merger of two firms with Tata Sons to shed NBFC tag

Tata Trusts has proposed merging two operating companies with Tata Sons as part of a restructuring plan aimed at changing the holding company’s regulatory classification and preserving its status as an unlisted private company.

The proposal involves merging Tata Electronics Systems Solutions (TESS) and Tata Consulting Engineers (TCE) with Tata Sons, potentially transforming the Tata Group holding company into an operating entity as well. The plan is being explored against the backdrop of the Reserve Bank of India’s (RBI) directive requiring Tata Sons to comply with regulations applicable to an upper-layer non-banking financial company.

Merger plan takes shape

Under the proposal, TESS and TCE would be merged into Tata Sons, increasing the holding company’s operating revenue while reducing the proportion of its assets represented by investments in group companies. The restructuring is intended to alter the financial profile that currently places Tata Sons within the NBFC and core investment company regulatory frameworks.

If the restructuring satisfies the applicable regulatory thresholds, Tata Sons could seek to shed its classification as a core investment company (CIC). Such a change could have significant implications for the requirement that the company list its shares on a stock exchange.

The proposal, however, cannot be implemented solely through a decision by Tata Trusts. It would require consideration and approval by the Tata Sons board as well as regulatory clearances, including a prior no-objection certificate from the RBI.

Listing question at centre

The restructuring proposal comes after the RBI rejected Tata Sons’ request to surrender its Certificate of Registration as an NBFC. The central bank subsequently asked the company to comply with the regulatory framework applicable to upper-layer NBFCs, which includes listing requirements.

Tata Trusts, which holds around 66 per cent of Tata Sons, has consistently opposed a public listing of the holding company. It has maintained that Tata Sons should remain privately held, arguing that its existing ownership structure is central to the character and functioning of the Tata Group.

Tata Trusts chairman Noel Tata had earlier asked Tata Sons to examine alternatives to a listing, including a wider restructuring of the holding company. The latest merger proposal provides a more specific route through which such a restructuring could potentially be pursued.

Operating income could rise

The proposed merger would fundamentally alter the composition of Tata Sons’ business. While the company is primarily the principal investment holding company and promoter of major Tata Group businesses, absorbing operating companies would give it a larger direct operating presence.

This could help increase the proportion of income generated through business operations rather than investments and dividends. The regulatory classification of a core investment company depends, among other conditions, on the nature and composition of its assets and investments.

The ultimate determination of whether a restructured Tata Sons could move outside the NBFC-CIC framework would rest with the RBI. Any restructuring would therefore have to satisfy the central bank that the company no longer meets the regulatory criteria requiring its existing classification.

RBI awaits response

The RBI is meanwhile awaiting Tata Sons’ formal response on how it intends to comply with the upper-layer NBFC requirements. The central bank has sought updates from the company following its September 11 communication rejecting the deregistration request.

Tata Sons is expected to submit a compliance roadmap to the RBI. The company’s board had earlier considered the listing question following the central bank’s decision, while Tata Trusts continued to press for all legally permissible alternatives to be examined before proceeding with a public offering.

The Trusts had said earlier that Tata Sons’ board should assess all available options rather than treat listing as the only route to regulatory compliance. It has argued that the group’s century-old ownership model, under which charitable trusts are the majority shareholders of Tata Sons, should be preserved.

Plan needs regulatory approval

Even if Tata Sons approves the proposed mergers, regulatory scrutiny is likely to be crucial before the restructuring can proceed. The RBI would have to assess whether the resulting entity qualifies to move outside the NBFC-CIC regulatory structure.

The proposal consequently does not automatically remove Tata Sons’ existing regulatory obligations or the listing requirement. Until a restructuring is approved and the RBI accepts any resulting change in classification, Tata Sons remains subject to the regulatory framework currently applicable to it.

The merger proposal nevertheless marks a significant development in Tata Trusts’ effort to find an alternative to listing Tata Sons, setting the stage for further deliberations between the group’s holding company, its controlling shareholder and the banking regulator.