The Reserve Bank of India on Thursday retained Tata Sons Pvt Ltd on its list of upper-layer non-banking financial companies. The central bank said the holding company’s inclusion would not affect its pending application to surrender its NBFC registration.
The RBI published a list of 17 upper-layer NBFCs under its Scale-Based Regulation framework, which subjects systemically important non-bank lenders and core investment companies to enhanced regulatory oversight.
“Inclusion of Tata Sons Pvt Ltd in the list is without prejudice to the outcome of its application for de-registration, which is under examination,” the RBI said. The central bank did not give a timeline for a decision on the application.
Why it matters
Tata Sons, the holding company of the $400-billion Tata Group, was first classified as an upper-layer NBFC in 2022. The classification requires compliance with stricter norms on capital, governance and disclosure and would have required the company to list on the stock exchanges unless it restructured.
Tata Sons’ response
The company subsequently sought an exemption from the classification. It has also reduced its borrowings, cut its exposure to financial businesses and reorganised parts of the group, including separating its financial services operations from its core investment activity.
Tata Sons is registered as a Core Investment Company, which means its principal business is holding investments in group companies rather than lending. It holds stakes in listed entities including Tata Consultancy Services, Tata Motors, Titan Company and Indian Hotels Company, and derives a substantial part of its income from dividends paid by those companies.
The upper layer covers non-bank financial companies and core investment companies that the RBI considers systemically important on account of their size, complexity and interconnectedness with the financial system. Entities in the category face tighter requirements on capital adequacy, governance, disclosures and risk management than other NBFCs.
The RBI selects companies for the layer on the basis of asset size, complexity of business, interconnectedness, leverage, public deposits and potential systemic importance.
Rest of the list
Other companies on the list include infrastructure financiers REC, Power Finance Corporation, Indian Railway Finance Corporation and Housing and Urban Development Corporation.
Deposit-taking NBFCs Bajaj Finance and Shriram Finance are on the list, as is housing finance company LIC Housing Finance.
The non-deposit taking NBFCs named are Tata Capital, Cholamandalam Investment and Finance, Muthoot Finance, Aditya Birla Capital, L&T Finance, Bajaj Housing Finance, HDB Financial Services Ltd and Piramal Finance Ltd.
The four tiers
Under the Scale-Based Regulation framework, the RBI classifies NBFCs into four layers based on size, activity and potential risk to the financial system.
The base layer comprises smaller NBFCs with simpler operations. The middle layer covers larger entities such as investment and credit companies, housing finance companies, infrastructure finance companies and microfinance institutions. The upper layer consists of systemically important NBFCs regulated in a manner similar in many respects to banks.
The top layer is reserved for NBFCs that the RBI believes pose exceptionally high systemic risk. It remains empty.