RBI overreach on Tata Sons listing? Why the Trust must remain the ultimate decision-maker

By way of introduction, I have been executive vice-president, New York Stock Exchange, and have the experience of accompanying numerous Indian companies in their listing on the ‘big board’. For a dozen years, I was associated with the Tata Group in an advisory capacity, though that is no longer the case. Most recently, I have been teaching International Banking & Finance at Columbia Law School.

I must admit that I was stunned to read that the Reserve Bank of India (RBI) has filed a caveat petition in the Bombay High Court, seeking that the Court hear it if the Tatas challenge its decision asking the company to list on the bourses. As it were, I will be publishing in November a book (in France) on ‘Central banks on the crossroads’, in which I have raised strong objections to several initiatives of some central banks (including the Federal Reserve) outside their core mission. Now is the time to focus on financial stability and monetary policy, especially when the clouds of a global financial crisis seem to accumulate.  

The RBI has no jurisdiction in matters of listing companies in India: Without being an expert on Indian law, I would say that the notion that the RBI could interfere in decisions by companies to list their shares on stock exchanges raises several questions of principle. The main mission of central banks is monetary policy, aiming at containing inflation. It does so through short-term interest rates and open market policies. Those tools do not include equities. RBI cannot ignore the fact that an Initial Public Offering (IPO) of that size will affect the liquidity of the Indian capital markets.

While I am aware of the jurisdiction of the RBI on NBFC holding companies, that is done in the context of financial stability. In this capacity, it was rightly concerned with the level of indebtedness of those companies, including Tata Sons. The company took steps to deleverage itself and no longer be under this authority. Recent changes to listing rules by the RBI create insecurity. The RBI said at that time that its push to list shadow banks was aimed at introducing more transparency and reducing systemic risks in the financial sector. However, there is nothing in the listing of companies on the Indian exchanges that fits into monetary policy or financial stability.

Is it a matter for the Securities and Exchange Board of India (SEBI)? If I am well-informed, the matter of securities regulation is, in all countries including India, the prerogative of the securities regulator (different from the central banks as a banking regulator). My experience of dealing with securities regulators around the world is that their role is essentially addressing the issues of adequate governance and transparency of companies, which intend to list or are listed on a public exchange. It is a responsibility that they often share with the stock exchanges, which have their own listing criteria.

SEBI’s rules and regulations do not include any jurisdiction to ask or force a company to list. SEBI is approached by a company after the decision has been legitimately taken. It is a matter of securities and commercial law.

Listing on an exchange is a strategic move: Becoming public through an IPO is a strategic step, not just a financial decision. While it is generally motivated by the need to raise fresh equity, this can be achieved without necessarily going through a public listing.

By going public, the company invites the public and investors (not forgetting its own employees) to scrutinise its financial situation and activities. It also requires thorough publication of the risks associated with an investment in its shares. Strategic projects are part of the prospectus that is an important legal document that needs to be approved by SEBI, not by the RBI.

That by itself is a major commitment and takes time. More important, however, is a commitment to publish results and inform investors periodically. It does affect the responsibilities of the Chief Executive Officer and the Chief Financial Officer and the setting up of an investor relations department.

The case of Tata Sons: Tata Sons is a unique company and its importance for the country is critical. The simple fact that 66 per cent of its capital is held by a series of charitable foundations indicates immediately that it is not your usual capitalist enterprise.

While it is a private limited company, Tata Sons is no stranger to listed companies, as 90 per cent of its investments are listed. There is no place for a conspiracy theory on this structure. 

Tata Trust holds a large majority in several companies and disburses its dividends through generous contributions. Tata Trust drives sustainable social impact across India through initiatives in healthcare, education, livelihoods, inclusion, environment and more.

It is therefore the prerogative of the Trust to exercise its control over Tata Sons: it is at the same time a right and a responsibility. The Trust owns Tata Sons’ shares and is therefore the ultimate decision-maker on the issue of making the company public. The Trust has to rely on considerable co-operation in this process from the management of Tata Sons and its affiliated companies. By doing so, it has to assess the consequences of an IPO of Tata Sons, not only financially but also in its governance and its legacy.

Tata Sons and India: Throughout the years, I have been closely associated with the group and could testify that, at all levels, the awareness of the Indian nature of the group has been at the forefront. Ratan Tata has been an iconic figure of the Indian corporate world. His successor, Noel Tata, emphasises that the core identity of the Tata Group is deeply rooted in serving India and improving the quality of life for its communities, rather than merely pursuing corporate scale or wealth accumulation. Also, Tata companies represent an important component of the market capitalisation and indices of the Indian exchanges. They represent the Indian capital market at home and abroad.

Another important aspect to be noted is that they are a major part of the Indian economy. A listing of Tata Sons cannot be ignored by the Indian government.

The fact that a company does not want to go public but is being forced to list is going to affect foreign investment in India seriously. Modi’s government has taken a keen interest in Tata’s stability and rightly so.

Let Tata Sons and its shareholders take the decision to list: It is time to end the frenzy that has surrounded this issue. It has damaged the reputation of India as a country and as a capital market. The RBI should accept that it does not have any legitimate right to force Tata Sons to be listed. The decision to list has important ramifications and cannot be taken without consideration of the complexities of making a company public.

There is ample space for a co-operative approach as long as the undeniable right of the Trust as the ultimate decision maker is respected.

The author is chairman & CEO, Galileo Global Advisors, New York & Lecturer in Law, International Banking & Finance, Columbia Law School