Tata Sons Clears Debt, Eyes Listing Exemption from RBI as Upper Layer NBFC

Mumbai/Bengaluru: Tata Sons, the main holding company of the Tata Group, has almost completely paid off its debt, leaving only ₹5 crore remaining through non-convertible debentures (NCDs). As of June 30, Tata Sons had no outstanding loans from banks or other financial institutions, a significant change from the ₹18,809 crore it owed a year earlier, which was 44% of its total liabilities.

Avoiding Listing Requirement

This move towards becoming debt-free is seen as a strategic effort to avoid mandatory listing on stock exchanges under the Reserve Bank of India (RBI) guidelines. One of the criteria for classifying upper-layer non-banking financial companies (NBFCs), like Tata Sons, is their level of borrowing from financial institutions. According to these rules, upper-layer NBFCs must be listed by September 2025. An unnamed analyst mentioned that it is still unclear if the assets considered by the RBI include just loans or also investments in group companies, as is the case with Tata Sons.

It was reported on August 2 that the RBI might be open to allowing Tata Sons an exemption from this listing requirement.

Debt Reduction Strategy

Under the leadership of Natarajan Chandrasekaran, who was reappointed as chairman for another five-year term in February 2022, the Tata Group has focused on reducing debt in its companies, such as Tata Steel and Tata Power.

The company’s efforts to reduce debt were helped by a significant increase in dividend income from its group companies. Tata Sons was able to nearly eliminate its debt thanks to a substantial ₹42,536.2 crore payout from IT giant Tata Consultancy Services Ltd. (TCS), which included ₹33,174.2 crore from dividends and share buybacks in FY24, and an additional ₹9,362 crore from selling a 0.65% stake in TCS earlier this year.

As of June 30, Tata Sons’ total assets had grown to ₹1.6 trillion, up from ₹1.3 trillion in the same period last year. The company and the RBI did not respond to queries before the press deadline.

The Upper Layer Classification

In September 2022, the RBI classified Tata Sons as an upper-layer NBFC, requiring it to list on stock exchanges by September 2025 unless an exemption is granted. RBI regulations divide NBFCs into four categories: base layer, middle layer, upper layer, and top layer, based on their size, activities, and associated risks. The upper layer includes well-known companies like Tata Sons, LIC Housing Finance, L&T Finance, and Shriram Finance.

Other companies, such as Piramal Capital and Housing Finance and Aditya Birla Finance, have avoided listing by merging with their already listed parent companies.

The Complex Structure of the Tata Group

The Tata Group operates through a complex structure with three main layers involving business and philanthropy.

At the top are the Tata Trusts, self-governing entities chaired by Ratan Tata, chairman emeritus of the Tata Group. Tata Trusts own 65.9% of Tata Sons. Another 12.87% is owned by several Tata Group companies, and 18.4% is held by the Mistry family.

Tata Sons serves as the holding company for the Tata Group’s many businesses, overseen by Chandrasekaran. The company’s primary source of income is dividends from about 26 listed companies in which it holds shares. This income is reinvested into the group companies for growth and expansion.

These 26 companies, including Tata Motors Ltd, Tata Steel Ltd, and TCS, among others, generated over $165 billion in revenue and had a combined market capitalization of $365 billion as of March 2024.

According to a note by rating agency ICRA, despite ongoing investments in the digital and aviation sectors, Tata Sons’ credit profile remains strong. This is supported by a steady flow of dividends, share buybacks, and the financial flexibility provided by the market value of its investments relative to its current debt level.