RBI should rethink its rules instead of pushing Tata Sons to go public and list its shares

It has been caught in RBI’s regulatory cleft stick, though not for any fault of its own. The privately held firm has been defined by RBI rules as a core investment company (CIC) and slotted as a non-banking finance company (NBFC) in the ‘upper layer’; as RBI rules mandate, companies in this category must change their ownership status by going public and listing their shares on a stock market.

The deadline for doing that was 30 September. While Tata Sons had applied for a change in classification more than a year ago, RBI offered no indication of how this matter could be resolved in its statements of 1 October, which covered moves to liberalize rules for lenders, NBFCs included.

Predictably, RBI’s radio silence on the status of Tata Sons evoked questions about its future at the post-policy press conference. Governor Sanjay Malhotra offered no direct answer, given an age-old RBI policy of not speaking about company-specific issues. On being pressed, however, he stated that “an entity which has a registration, till it is not cancelled, will continue to do its business."

While this could be read either way, it does suggest an RBI reluctance to clear up what is evidently a muddled policy. It is amply clear by now that Tata Sons finds itself in this predicament because of RBI’s regulatory overreach.

It has also been observed that RBI typically tightens rules in reaction to a breach or violation by a player (or group acting in concert), and the extent of it is often excessive. Indeed, this regulatory pattern has prevailed in India’s financial services sector for decades.

The dodgy actions of a single perpetrator invites catch-all clamps. An example is the burden of compliance placed on retail bank customers after know-your-customer norms were abused by a few rogues. It was the collapse in 2018 of an infra finance company, IL&FS, acting as a CIC with many of its subsidiary units defaulting on their loans, that prompted RBI to tighten rules for all CICs, including Tata’s holding company.

Ironically, while Tata Sons is a large player that’s deemed to be ‘systemically important’, it does not seem to pose any significant risk of setting off a system-wide crisis of solvency via knock-on effects across its web of financial links.

Unlike typical NBFCs, its basic business is not to borrow money for on-lending—and it has reportedly pared its debt into a safe zone—but instead to hold equity stakes in Tata firms and help finance them. Should a solvency gap somehow arise, it would spell far less contagion risk than in the case of a widely-linked non-bank lender in financial trouble.

This is not to say that RBI is unwilling to revise its policies. Its policy statement of 1 October was accompanied, to its credit, by a slew of regulatory changes in support of the ease of doing business; among other moves, it eased some rules it had tightened earlier, such as its cap on the exposure of lenders to large corporate borrowers.

The ungainly saga of Tata Sons’ status deserves a similar denouement. The group’s holding company is not only a storied member of India Inc, but also a fellow traveller on India’s curve of investment-driven growth. The country’s central bank should rationalize its rules and grant Tata Sons the space it needs to make the best use of its enterprise energies.