Tata Sons ends debt support for new businesses, focus on independent financing

Mumbai: Tata Sons has directed the management of all group companies, especially new businesses such as Tata Digital, Tata Electronics and Air India, to independently manage their debts and liabilities, discontinuing the practice of providing letters of comfort and cross-default clauses to lenders, officials aware of the development told ET.

All future capital allocation into these new ventures will be via equity investments and internal accruals, Tata Sons told lenders concerning the holding company's new financing approach.

Tata Sons voluntarily surrendered its certificate of registration with RBI last year, after it repaid more than ₹20,000 crore in debt to remain unlisted.

Going forward, funding for its new businesses will largely be sourced from dividends and support from Tata Consultancy Services (TCS) - the biggest listed company within the salt-to-software conglomerate, said officials aware of the plans.

Tata Sons has submitted its application to surrender its core investment company registration in March 2024.

This has come as Tata Sons, classified as a CIC under the Reserve Bank of India's Scale-Based Regulation framework, is expected to list by September 30, 2025.

According to the rules laid down by the regulator, upper-layer NBFCs are expected to list within three years of the list being created.

Tata Sons' application to surrender its CIC status is seen as a potential way to sidestep the RBI’s regulations, which will allow the company to remain private.

Tata Sons has told lenders that in each segment-such as steel, power, chemicals or technology-the leading listed company will act as a holding entity, and not the holding company of the group, said people aware of the new financing approach.

New Businesses in Focus

Tata Sons did not respond to ET’s requests for a comment.

Traditionally, most of the older listed group companies — Tata Steel, Tata Motors, Tata Power and Tata Consumer, among others — have always managed their own debt, so the change in Tata Son’s stance is unlikely to significantly impact them, officials said.

The businesses launched by Tata Sons in the past few years, though, have been dependent on the holding company for capital allocation. “Once they achieve significant scale, these companies, too, will manage their own capital requirements," said an official, who declined to be named.

Tata Sons is preparing these companies to be among its top businesses in a couple of years and the funding in these has been significant.

Banks comfortable

Lenders to the operating companies remain confident about extending credit. Their confidence is primarily driven by Tata Sons’ substantial ownership stakes in its subsidiaries, which serve as an implicit assurance of support. The holding company's financial stability and large equity interests in its subsidiaries provide reassurance to creditors, even without explicit guarantees, bankers said.

Most large banks allow Tata exposure at the maximum levels allowed by the regulator.

“Lenders typically evaluate two critical factors when approving a loan — ‘intent to pay’ and ‘ability to pay.’ That is assured on both fronts when it comes to Tata group,” said a banking industry official. “The group has a clear ‘intent to pay,’ and its ‘ability to pay’ is demonstrated by the substantial cash flows generated by TCS, as well as the strong financial foundation built through its steel and power projects.”

Another key advantage of Tata group is that it is not involved in the EPC (engineering, procurement and construction) business, meaning the parent company does not need to provide guarantees or letters of comfort for the execution of projects.

In September 2022, RBI classified Tata Sons as a non-banking financial company – upper layer (NBFC-UL). Under this classification, companies are required to list within three years. Tata Sons has sought an exemption from RBI’s UL classification under the regulatory framework for NBFCs

Between March 2023 and March 2024, Tata Sons achieved a significant financial turnaround, transitioning from a net debt of Rs 20,642 crore to a net cash position of Rs 2,670 crore.

In March 2024, Tata Sons sold 23.4 million shares in TCS, raising about Rs 9,300 crore. Following the equity dilution, its stake fell to 71.74%, from 72.38%. The funds were largely used to retire its debt, officials close to the matter said.