Tata Sons goes debt-free as it seeks listing exemption

Mumbai/ Bengaluru: Tata Sons, the principal holding company of the Tata Group, has become nearly debt free, with just ₹5 crore of borrowing remaining through non-convertible debentures (NCDs). According to disclosures filed on its website, Tata Sons had no loans from banks and other financial institutions as of 30 June, as against ₹18,809 crore or 44% of its total liabilities in the same period last year.

The move towards becoming debt-free is being seen as a step towards avoiding getting listed under a Reserve Bank of India (RBI) guideline, because loans from financial institutions is one of the metrics assessed by the regulator when it looks at classifying upper-layer NBFCs such as Tata Sons. Upper layer NBFCs like Tata Sons have to get listed by September 2025.

According to an analyst who did not wish to be named, while top 10 NBFCs by asset size would automatically be tagged upper layer, it is unclear whether assets would mean loans or even investments in group companies, as in the case of Tata Sons.

The Economic Times had reported on 2 August that RBI “is said to be agreeable" to a proposed recast for a waiver of Tata Sons' listing.

A plan to shed debt

Under Natarajan Chandrasekaran, who was reappointed chairman for a second five-year term in February 2022, the Tata Group has considered retiring some of the debt of group companies like Tata Steel and Tata Power.

At the same time, the share of dividend income of the group firms has also increased. In fact, it managed to wipe off almost all of its debt on account of the ₹42,536.2 crore it got from IT services bellwether Tata Consultancy Services Ltd. (TCS), as per Mint's research.

Also read | Tata Sons unlocks TCS vaults for second time in four months

Of this amount, ₹33,174.2 crore came through dividends and share buybacks in FY24. Another ₹9,362 crore came in when it sold 0.65% of TCS shares earlier this year.

As per disclosures cited earlier, total assets of Tata Sons stood at ₹1.6 trillion as on 30 June, up from ₹1.3 trillion in the year-ago quarter.

Queries emailed to Tata Sons and RBI remained unanswered till press time.

The upper layer

Tata Sons was classified as an upper-layer non-banking financial company (NBFC) in September 2022 by the RBI, and must be listed on the stock exchanges by September 2025 unless it manages to get an exemption.

RBI regulations classify NBFCs into four layers—base layer, middle layer, upper layer and top layer—based on size, activity, and perceived risks. The upper layer comprises prominent names like Tata Sons, LIC Housing Finance, L&T Finance, and Shriram Finance.

Also read | Excited about Tata Sons' listing? Temper your expectations

The regulator said in its 2021 guidelines that upper-layer NBFCs must be listed within three years of being identified as one. A few, such as Piramal Capital and Housing Finance and Aditya Birla Finance, have tried to sidestep this by announcing mergers with their listed parents.

The complexity of Tata Group

The Tata group has a complex structure under which business and philanthropy are run through three layers.

At the top are the self-governing Tata Trusts that Ratan Tata, chairman emeritus of the Tata Group, chairs. Tata Sons is owned 65.9% by the trusts, 12.87% by half a dozen Tata Group companies, and 18.4% by the Mistry family.

Tata Sons is the holding company of Tata Group companies in the middle layer, which Chandrasekaran runs. It primarily depends on dividend income from about 26 listed companies in which it owns shares, and uses this money to invest in group companies for business expansion.

Also read | Tata’s money spinner TCS needs to show its AI cards

Tata Sons, in turn, owns shares in these 26 companies, forming the third layer. The companies, such as Tata Motors Ltd, Tata Steel Ltd and TCS, among others, cumulatively had over $165 billion in revenue and $365 billion in market capitalisation at the end of March 2024.

"Tata Sons, being the principal holding company of the Tata Group, has been participating in the fund-raising programmes of some of its investee companies. Given that some of its subsidiaries in the digital and aviation space are currently in the investment phase, the funding support to these businesses is likely to continue over the medium term," rating agency Icra said in a note dated 29 February.

Icra further noted that it expects the credit profile of Tata Sons to remain robust despite these investment requirements, supported by healthy dividend income or share buyback inflows and financial flexibility coming from the market value of its investments vis-à-vis its current debt level.