The Reserve Bank of India’s (RBI) criterion covering “indirect access to public funds” has emerged as a key issue in Tata Sons’ pending application to surrender its registration as a core investment company (CIC). Legal experts, however, differ on whether equity investments by Tata group companies that have access to public funds would bring the holding company within the scope of the rule.
Tata Sons applied to surrender its CIC registration after repaying all outstanding debt. If the RBI accepts the application, the holding company could avoid the listing requirement applicable to upper-layer NBFCs. If the application is rejected, Tata Sons may have to pursue a listing.
Equity vs. Debt
One interpretation is that the public-funds criterion is primarily intended to cover funds that a CIC is obliged to repay, such as bank loans, debentures, inter-corporate deposits and public deposits, where tighter regulation is required to safeguard public money.
Group companies like Tata Steel and Tata Consumer Products Limited (TCPL), which have access to such fund-raising instruments, also hold varying degrees of stake in Tata Sons.
“Tata Sons is not expected to return the equity investment as a fixed income or floating rate security generally covered under the definition; and accordingly, it may be argued that despite the group companies mentioned above having access to ‘public funds’, the obligation to undertake compliances to secure repayment of such ‘public funds’ does not extend by way of an equity investment to Tata Sons,” said Kaushik Mukherjee, partner at CMS INDUSLAW.
He also pointed to cross-holdings within the Tata group, arguing that a broader interpretation could create an inconsistency: listed operating companies are not subject to NBFC regulations merely because they raise public funds, but their downstream equity investments could potentially bring Tata Sons within that framework.
Another legal expert said the distinction between the letter and the intent of the rule would be important. “One needs to separate letter and intent/spirit when interpreting the criteria. The question is whether the ‘spirit’ of the rule is to capture the ultimate beneficiary of public funds, even if the legal chain of ownership separates it from the actual borrowing,” the expert said.
Experts also pointed to the principle of the corporate veil in considering the RBI’s criteria. “Owning shares in a company does not make an investor personally liable for its debts. Otherwise, every shareholder of a bankrupt listed company would be expected to repay its creditors,” one expert said.
Another expert said the criterion could also be examined from a threshold perspective. Tata group companies collectively hold around 13% in Tata Sons, while individual group companies hold no more than about 3%, the expert noted.
There is, however, an opposing view that the indirect-access criterion could weigh against Tata Sons’ deregistration application. InGovern, in a report, argued that the RBI’s clarification adopts a “look-through” approach, under which funds received through associates and group companies that have access to public funds should also be treated as indirect public funds.
The report contends that listed Tata group companies collectively hold around 13-14% in Tata Sons, creating a structural linkage to public funds that remains even after the holding company’s standalone deleveraging.
The competing interpretations mean the outcome could ultimately depend on whether the RBI applies the criterion primarily through the legal form of the transactions or looks through the ownership structure to assess the underlying flow and source of funds.