Tata Sons’ Deregistration Pitch Draws Flak

Our regulatory framework has been developed with a focus on safeguarding the rights of investors. The move by Tata Sons to sidestep the RBI’s regulations, including the recently enacted Scale Based Regulatory (SBR) Framework, sets a dangerous precedent - Justice MM Kumar, founding President, NCLT

Mumbai: Tata Sons’ recent move to deregister as a core investment company from Reserve Bank of India (RBI) is drawing sharp criticism from governance experts and minority investors alike.

Justice MM Kumar, founding president of the National Company Law Tribunal (NCLT), has warned that this decision ‘is a retrograde step by the House of Tatas’ that could undermine decades of progress in investor protection and regulatory oversight.

Justice Kumar explained that India’s corporate regime has evolved significantly over the years, with stringent laws ensuring transparency, accountability, and fairness.

“Our regulatory framework has been developed with a focus on safeguarding the rights of investors. The move by Tata Sons to sidestep the RBI’s regulations, including the recently enacted Scale Based Regulatory (SBR) Framework, sets a dangerous precedent,” he said.

The SBR Framework was introduced in the wake of the 2018 IL&FS crisis - a financial debacle comparable to the Lehman Brothers collapse of 2008- that exposed critical vulnerabilities in India’s financial system. Designed as a multi-tiered system, the framework categorizes non-banking financial companies (NBFCs) by risk level and imposes progressively stricter compliance norms.

“The SBR Framework is essential for preventing future financial misadventures and for protecting both investors and depositors,” Kumar emphasized.

A key aspect of the RBI’s mandate is encapsulated in its preamble, which states: “The Reserve Bank of India having considered it necessary in the public interest and being satisfied that, for the purpose of enabling the Reserve Bank to regulate the financial system to the advantage of the country and to prevent the affairs of any non-banking financial company from being conducted in a manner detrimental to the interest of investors and depositors or in any manner prejudicial to the interest of such NBFCs.”

This clear articulation of investor protection underlines the RBI’s commitment to maintaining a stable financial system and safeguarding public trust.

Adding to the controversy are concerns over corporate governance and potential conflicts of interest. Justice Kumar pointed to an ‘unsettling overlap in directorship,’ noting that a common director - Venu Srinivasan - serves both Tata Sons and RBI, raising serious questions about the impartiality of any regulatory decision.

“Such conflicts not only compromise the decision-making process but also put minority shareholders at a significant disadvantage,” he asserted.

Minority investors, who hold a substantial stake in Tata Sons, have formally opposed the deregistration move. They argue that the decision appears to be driven by the interests of the majority shareholder, the Tata Trusts, which is keen to avoid the listing requirements that might force a mandatory exit for smaller stakeholders.

“Deregistering from RBI supervision would strip away the crucial regulatory protections that minority investors depend on,” Kumar stated.

“Without these safeguards, the balance of power would shift decisively in favor of the majority, leaving minority shareholders exposed and their rights undermined.”

The evolution of corporate governance in India - from the unregulated era before the Companies Act of 1913, through the implementation of the Companies Acts of 1956 and 2013, to the regulatory oversight provided by Sebi has progressively fortified investor rights. These developments have not only ensured transparency and accountability, but have also helped build trust among the country’s 1.2 crore public shareholders who invest in the Tata Group companies.

As regulators deliberate on Tata Sons’ request, the implications of granting this exemption could extend far beyond one corporate house.

The decision holds the potential to reshape the standards of corporate governance and investor protection across the nation. Justice Kumar cautioned, “If the RBI allows Tata Sons to bypass these well-established safeguards, it could set a precedent that weakens our regulatory regime and diminishes the trust of investors, especially those who are already in the minority.”

The debate over Tata Sons’ deregistration is not just a corporate matter -it is a critical test of India’s commitment to upholding the rule of law, protecting minority investors, and maintaining a level playing field in its financial ecosystem, another expert opined.