Tata Sons restructuring explained: How Tata Trusts’ plan could sidestep the listing issue

Tata Trusts has proposed a restructuring of Tata Sons that could change the holding company's regulatory status and potentially allow it to remain unlisted.

The proposal involves merging Tata Electronic Systems Solutions and Tata Consulting Engineers with Tata Sons. The Trusts' objective is to ensure that Tata Sons is neither classified as a non-banking financial company (NBFC) nor as a core investment company (CIC).

The proposal comes after the RBI rejected Tata Sons' application to surrender its registration and asked the company to comply with the applicable regulations for an upper-layer NBFC.

The proposal has been sent to Tata Sons Chairman N Chandrasekaran, who will place it before the board. The RBI has also been kept informed. The proposed merger would require the central bank's prior no-objection approval.

So, how would the proposed restructuring work, and why could it affect the listing issue?

What is Tata Trusts proposing?

The central idea is to change the nature of Tata Sons by bringing operating businesses into the company.

The two companies proposed to be merged are Tata Electronic Systems Solutions and Tata Consulting Engineers. Both are wholly owned within the

Tata Group and have no outside shareholders.

Tata Sons would therefore continue to be the holding company of the group, but would also have substantial operating businesses and operating revenue of its own.

Abizer Diwanji, Founder of Neostrat Advisors, said the proposal is aimed at changing Tata Sons' classification under RBI rules.

“The whole target seems to be not being classified as an NBFC within RBI rules,” Diwanji said.

The proposal would also leave the existing ownership structure of Tata Sons unchanged because the companies being merged do not have outside shareholders.

The Tata Trusts hold 66% of Tata Sons, while the Shapoorji Pallonji Group holds a little over 18%.

How would the merger change Tata Sons' regulatory status?

There are two parts to Tata Trusts' argument: the NBFC classification and the core investment company classification.

On the NBFC issue, the Trusts' position is that the merged Tata Sons would have operating revenue of more than ₹1 lakh crore, compared with income from financial assets of just over ₹40,000 crore.

Around 64% of the revenue would come from the amalgamated operating businesses.

The Trusts therefore believes Tata Sons would no longer meet the criteria to be treated as an NBFC because its operating income would be greater than its investment income.

The second issue is whether Tata Sons would qualify as a CIC.

The Trusts' argument is that the net assets of the amalgamated entity would be more than ₹2 lakh crore, while investments in group companies would be around ₹1.77 lakh crore. That would represent less than 90% of the aggregated assets, according to the proposal.

On that basis, Tata Trusts believes Tata Sons would also fall outside the conditions applicable to a CIC.

The proposed restructuring is therefore aimed at changing the company's underlying business and asset profile rather than simply seeking an exemption from the existing regulatory framework.

Why does this matter for the listing issue?

The listing question follows from Tata Sons' regulatory classification.

Tata Trusts has maintained that Tata Sons should remain private. Its argument is that if Tata Sons no longer falls within the relevant NBFC or CIC framework, the regulatory basis for a listing requirement would no longer apply.

HP Ranina, Senior Lawyer at the Supreme Court, also questioned whether the RBI has the legal power to compel a private company to list.

He said Section 45-IA of the Reserve Bank of India Act, 1934, covers matters such as capital, capital adequacy and investments in group companies, but does not specifically deal with listing.

“Listing is not a point which is covered under Section 45-IA of the Reserve Bank of India Act,” Ranina said.

He argued that even if the proposed restructuring does not work, the question of whether Tata Sons can be forced to list would remain a separate legal issue.

Diwanji took a similar view from a commercial perspective, arguing that listing should not necessarily be treated as the only way to provide an exit to shareholders or raise funds.

“Listing needs to be a business and a commercial requirement only,” he said.

He pointed to the fact that the Tata Group could potentially use other mechanisms to address the needs of shareholders without necessarily having to list Tata Sons.

Why these two companies?

The proposed merger brings two operating businesses into Tata Sons.

Tata Electronic Systems Solutions is part of Tata Electronics. Tata Consulting Engineers is an older engineering company with operations in India and overseas.

Their importance to the restructuring is that they bring operating revenue into Tata Sons. Their wholly owned status is also significant because there are no outside shareholders whose interests would need to be addressed as part of the proposed internal restructuring.

The proposal would also take Tata Sons back towards the way it operated historically.

Before TCS was spun out of Tata Sons in 2004, TCS operated within Tata Sons as an operating division. Tata Trusts is using that history to argue that Tata Sons has previously functioned as both an operating company and a holding company.

The proposed structure would similarly combine those two roles.

What approvals are required?

The restructuring would not happen immediately if the Tata Sons board accepts the proposal.

The board would first have to consider the recommendation from Tata Trusts. If it agrees to proceed, the merger process would then involve shareholder and creditor approvals.

Separate shareholder meetings would be required for Tata Sons and the companies proposed to be merged. The merger would ultimately have to go before the National Company Law Tribunal (NCLT) for approval.

Ranina described the process as a lengthy one.

“The merger will take a lot of time,” he said.

The RBI has been kept informed of the proposal, but the restructuring itself would have to go through the relevant corporate approval process.

What is the Charity Commissioner issue?

One of the hurdles concerns the Tata Trusts' ability to take certain decisions and the holding of Tata Sons' annual general meeting (AGM).

The trust has not been able to make a board decision since May 15. And according to experts this could become relevant because shareholder approvals are required as part of the restructuring process.

Ranina said that if permission to hold the AGM is not received from the Charity Commissioner, Tata Sons could approach the NCLT for directions to hold the meeting.

He said Tata Sons has time until December 31 to hold the AGM and could seek NCLT directions if the impasse continues.

What happens next?

The immediate next step is for the Tata Sons board to consider Tata Trusts' restructuring proposal.

If the board agrees to proceed, the proposed mergers would have to move through shareholder and creditor approvals before going to the NCLT.

The key question is whether the resulting Tata Sons structure will satisfy the conditions that Tata Trusts is relying on to take the company outside the NBFC and CIC classifications.

If it does, Tata Trusts' argument is that the listing issue would no longer arise on the same regulatory basis.

For now, however, the proposal is just that — a restructuring plan put forward by Tata Trusts that still has to go through the corporate approval process.