Tata Sons outlook: Merger plan could change structure, but RBI decision remains crucial

Tata Trusts has proposed merging two wholly owned operating subsidiaries into Tata Sons to bypass Reserve Bank of India regulations that mandate the holding company to list on the stock exchanges.

The proposal, initiated by Noel Tata, aims to convert Tata Sons from a pure holding company—a status it has maintained since 2004—back into an operating business.

Tata Trusts has proposed merging Tata Electronics Systems Solutions (TESS) and Tata Consulting Engineers (TCE) into Tata Sons, a move that could change its asset and operating structure and potentially take it outside the RBI’s regulatory framework for non-banking financial companies (NBFCs) and core investment companies (CICs). Both companies are wholly owned, non-financial operating subsidiaries of Tata Sons.

The plan has been submitted to the Tata Sons chairman, with the RBI kept informed.

Nitin Potdar, a senior corporate M&A lawyer, welcomed the move, noting that Tata Sons operated as a business from its inception until Tata Consultancy Services went public in 2004.

"What the Tatas have done is they have got two real operating businesses back into Tata Sons," Potdar explained. "Nobody's ownership changes. Nothing is diluted. This house stands exactly as the founders built."

The other positive that Potdar pointed is that the process should be relatively simple to execute, as all three companies are privately held, with no public shareholders or lenders. Once the RBI gives its approval, the NCLT process is expected to be straightforward and could be completed within months rather than years.

However, the path to regulatory clearance remains uncertain. Hetal Dalal, President and CEO at Institutional Investor Advisory Services (IiAS), pointed out that the central bank will ultimately decide the outcome.

“The move that Tata Trust has made is obviously to avoid listing and to get out of the RBI regulatory regime,” Dalal said.

Unlike wholly private global trusts, Tata Sons has external stakeholders, including the Shapoorji Pallonji (SP) Group and listed Tata Group companies.

The proposal must first clear the Tata Sons board, requiring consensus among trust nominees. While Noel Tata supports the plan, Venu Srinivasan's position remains unknown, highlighting current discord regarding the listing approach.

Dalal pointed out that Tata Trust nominees on the Tata Sons board also need to be aligned on the proposal. She said there is currently disagreement over how Tata Sons should approach the listing issue.

This makes the Tata Sons board's decision an important step before the proposal can move to the RBI.

Addressing potential board friction, Potdar recalled that the Tata Sons board had unanimously decided in March 2024, under the guidance of Ratan Tata, that the company should remain unlisted.

He said the proposed restructuring would also take Tata Sons back towards its earlier operating structure, when TCS was part of the company before it was listed in 2004, after which Tata Sons increasingly became an investment holding company.

For the entire discussion, watch the accompanying video

Follow our live blog for more stock market updates