MUMBAI: Even as Reserve Bank of India rejected Tata Sons’ application to surrender its registration as an NBFC in a terse letter on Friday, it updated its FAQ on NBFCs on Monday, setting out the regulatory provisions that have effectively kept the company within the NBFC framework.RBI’s requirement that Tata Sons be classified as an upper layer NBFC (NBFC-UL), and its rejection of the company’s bid to deregister as an unregistered core investment company (CIC), are anchored in three provisions explained in the FAQ.The first relates to the definition of a CIC, which requires a company to hold at least 90% of its net assets in investments in group companies, with at least 60% in equity shares. This places Tata Sons within the CIC framework given its primary role of holding equity in group operating companies such as TCS, Tata Motors and Tata Steel.RBI has highlighted the 50:50 criteria (also known as the Principal Business Test) as the standard it uses to determine whether a company’s principal business is financial activity, thereby requiring it to register and be regulated as a Non-Banking Financial Company (NBFC).To qualify as an NBFC under this rule, an entity must satisfy both of the following conditions simultaneously: financial assets must constitute more than 50% of the company’s total assets (netted off by intangible assets) and income generated from those financial assets must account for more than 50% of the company’s total gross income.The second is the asset-size threshold of Rs 100 crore or above. The third relates to the definition of public funds, which makes clear that access to such funds is not restricted to direct borrowing by the entity itself.“Public funds are not the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds raised by issue of commercial papers, debentures etc… Further, indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds,” the FAQ said.Tata Sons had repaid its standalone debt of over Rs 20,000 crore to become a net cash-positive, zero-debt entity. It had argued that without direct public borrowings, it was no longer required to remain a registered CIC and could surrender its Certificate of Registration. RBI’s explanation of public funds in the FAQ addresses this argument by stating that an entity is deemed to access public funds indirectly if its group companies and subsidiaries raise funds from the market through bank loans, commercial papers or debentures. Since Tata Sons controls and finances entities such as Tata Capital, Tata Motors and Tata Power, RBI treats it as having indirect access to public funds.The clarification on the definition of core investment and public funds therefore prevents Tata Sons from claiming an exemption on the basis that it is debt-free and does not directly access public funds. It remains subject to the upper layer framework, including the mandatory public listing requirement.
