After months of negotiations with the Reserve Bank of India, Tata Sons is said to have worked out a solution which may not only help the tech to FMCG behemoth avoid the requirement for mandatory listing but also shun the non-banking finance company – upper layer (NBFC–UL) classification. According to sources, RBI has asked Tata Sons to delink the ‘on-lending’ tag on its bank borrowings.
This would mean that bank borrowing by Tata Sons, the holding company of Tata Group, be fully repaid.
In a presentation made to the regulator on how it plans to reduce these loans, Tata Sons has sought 12-18 months’ time to comply with the regulator’s ask. An email sent to Tata Sons remained unanswered till press time.
Problem with on-lending
For banks, collaterals offered, and end use of loans are critical aspects which are closely monitored.
In Tata Sons’ case, quality of collaterals isn’t a concern given the positioning of Tata Consultancy Services. However, by virtue of being a holding company, and more specifically, a systemically important non-deposit taking core investment company (CIC) with no income generating operations of its own, loans availed by Tata Sons are largely to support its group companies which may have not been able to access bank borrowings easily and/or at lucrative interest rates availed by Tata Sons. End use of such loans is tagged as ‘on-lending’.
In FY23, Tata Sons’ loan outstanding stood at approximately ₹21,000 crore. While on-lending was a prevalent corporate finance practice for holding companies, banks have turned cautious on these loans post the 2015’s asset quality crisis.
“This (on-lending) ultimately leads to layers of debt and a huge asset - liability mismatch thus posing systemic risks,” explains Ankita Singh, corporate lawyer and founder, Sarvaank Associates. If such loans are squared off with banks, the perceived risk in Tata Sons loan obligations may reduce. “Reorganising debt and ceding control can be looked at for sidestepping the on-lending tag and steer clear of the stringent CIC-upper layer NBFC regulations,” Singh adds.
Remedial steps
The recent 0.65 per cent stake sale in TCS by Tata Sons is believed to be a step in the direction of remedying the situation. Experts, however, believe that the challenge may be for group companies which are assessing bank loans through Tata Sons to directly get a good deal in the market. “This is why Tata Sons has sought time to unwind the loans,” said a person aware of the situation.
In October 2022, when scale-based regulatory framework was introduced for NBFCs, Tata Sons was classified as NBFC-UL despite being a CIC because of its exposure to bank loans and inter-corporate advances.