😲 The REAL Reason Why Tata Sons Has to List
Tata Sons' IPO could be the biggest Indian IPO ever. But Tata Sons does not want it to happen! Why? Read on to find out!
Will Tata Sons get listed?
Every market enthusiast is eagerly waiting.
And why not?
Expected at Rs. 55,000 crores, Tata Sons’ IPO could be the largest in India's history!
The biggest roadblock?
Tata Sons itself.
The company is leaving no stone unturned to prevent the IPO from happening.
Now you might be wondering:
Why is Tata Sons pressured to IPO?
Can they legally stop it from happening?
Why even oppose the IPO?
In today’s piece, we will attempt to answer all your questions.
Why is Tata Sons Pressured to IPO?
Short answer: RBI said so.
Long answer:
It all began with the big fall of IL&FS in 2018.
IL&FS, which had 169 group companies in Financial Year 2017-18 started struggling to repay debt worth Rupees 91,000 crores.
Reason: Financial mismanagement.
The flame that engulfed IL&FS also burnt the debt and equity market of India.
Within 1 month, 12.5% of the Mutual Fund industry’s assets under management (or Rupees 3.16 trillion) got eroded. It came to be known as the Lehman Brother moment of India.
From playing a major role in infrastructure development and financing in India to becoming a major destructor of wealth, IL&FS taught a big lesson to RBI.
In January 2021, RBI released a discussion paper on “Revised Regulatory Framework for NBFCs - A Scale-Based Approach”, recognising the challenges faced by the economy because of the 2018 crisis.
Now, to address the increased risk posed by the more interconnected world of financial systems, RBI introduced an upper layer NBFC.
Since IL&FS being a CIC (Core Investment Company) had already shaken up India’s financial system, RBI decided to allow CICs to be categorised as NBFC-UL.
Companies (including CICs) that have higher systemic risk will be classified in NBFC-UL and they will have to be more transparent. (If you want to know how RBI decides if a company has higher systemic risk you can check this document)
But what does all this have to do with Tata Sons and its stock market listing?
Tata Sons is a Core Investment Company too.
If our big fat Indian families were to be reimagined as a company, Tata Sons would surely lead the pack.
As on March 31, 2023 it had 289 subsidiaries. Along with the 289 subsidiaries, it has 38 associates and 37 ventures.
On, one hand, it borrows money from banks and the markets. On 31st March 2023 it had borrowings more than Rs. 21,000 crores (standalone).
And on the other, it invests this money in its group companies - fulfilling their financial needs.
More than 90% of its revenue from operations comes from dividends. But mind you. This dividend income is no petty sum. In Financial Year 2022-23, it earned a total dividend income of Rs.33,251 crores (standalone)!
Now in September 2022, as per the new regulations, RBI decided that Tata Sons should be categorised as NBFC-UL along with other companies such as Mahindra & Mahindra Financial Services, Bajaj Housing Finance Limited and Aditya Birla Finance Limited. It is also the only CIC in the list!
But getting categorised as NBFC-UL is not the problem. As per requirements, an NBFC-UL will have to get listed within 3 years of categorisation.
So, Tata Sons is being forced to list by September 2025 (18 months from now).
Wait. Can you really force Tata’s though?
Tata Sons’ Efforts to Prevent Listing
Tata Sons is running post to pillar to avoid listing. As per Business Line, RBI has now asked Tata Sons to repay its bank borrowings and Tata Sons has requested 12-18 months to comply.
It isn’t a special exemption for Tata. It is baked in RBIs framework itself:
Voluntary strategic move to readjust operations can help Tata Sons move out of the framework.
How is it readjusting operations?
Last month, it sold shares of TCS worth more than Rupees 9,000 crores. This could be a move to reduce debts.
In fact, it looks like the company had started reducing its debts since last year itself. From Rupees. 31,000 crores in Financial Year 2021-22, its borrowings went down to Rupees. 21,000 crores in Financial Year 2022-23. That is a 33% reduction in debts.
Why Does Tata Not Want to Go the IPO Way?
As it reads on the website of the company,
“The Tata philosophy of management has always been, and is today more than ever, that corporate enterprises must be managed not merely in the interests of their owners, but equally in those of their employees, of the consumers of their products, of the local community and finally of the country as a whole.” JRD Tata, 1973
Not going the listing route will help Tata Sons operate with autonomy. And not under the pressure of the next quarterly report.
It will let them take long-term bets without worrying about maximising the wealth of shareholders in the short run.
Tata’s live by this philosophy as we can see in their shareholding structure as well. ~66% of Tata Sons’ share capital is held by philanthropic trusts, which support education, health, livelihood generation, and art and culture.
They take bets that they believe in. And the fruits of their labour are distributed for the greater good.
All in all, it looks like Tata Sons might not have to go the listing route afterall.
But… What's your take on this saga? Would you want a bite of Tata Sons, if it lists? And how would you value it?
Let us know!