Tata Sons – Will it convert itself into an operating company?

Tata Trusts, which holds 66% in Tata Sons, has proposed a strategic reorganization of Tata Sons structure. The idea is to make Tata Sons exempt from the requirements of listing on the stock exchanges; which is the bone of contention!

What is the broad plan for Tata Sons?

According to a press release issued by Tata Trusts, Tata Sons is proposed to be reorganized by merging Tata Electronics Systems and Tata Consulting Engineers into Tata Sons. Just to recall, this was the situation prior to 2004, when TCS was a division of Tata Sons. For the TCS IPO in 2004, it had to be demerged as a separate corporate entity. Since TCS was not a division of Tata Sons post-2004, Tata Sons became classified as a core investment company (CIC). That classification has stayed. By merging Tata Electronic and Tata Consulting Engineers, Tata Sons reverts to the pre-2004 status.

How will the merger make things different?

Once the two companies are merged into Tata Sons, it will report operating revenues of ₹1,05,043 crore and income from financial assets of ₹40,072 crore based on FY26 numbers. With about 70% of its income coming from operating businesses, Tata Sons will obviously not qualify as an NBFC or a CIC, since it would predominantly be an operating company. The second condition to be a CIC is that the investment in group companies must be more than 90% of the net assets of Tata Sons. Once the amalgamation of the 2 entities is completed, the total investments in group companies will be less than 85% of the net assets. Post the reorganization, Tata Sons will automatically cease to be a CIC.

There will be two hurdles in the path

There were will be two key hurdles that this proposal will have to contend with. The first is passing it through the Tata Sons board. The Tata Trusts have a 66% stake and the rest of the board members do not have any skin in the game. However, they have the numbers and will not give up without a fight. Noel Tata may have to play tough to get this decision through the board of Tata Sons, but it will be no mean task. Secondly, this proposal will also require the prior approval of RBI, since Tata Sons has been asked to list on the bourses due to being classified as an upper-layer NBFC. It remains to be seen how smoothly the Tata Trusts are able to navigate this proposal through the RBI.

Did the Tata Trusts have any other options?

Frankly, not too many viable options. With the RBI insisting on a listing and the Tata Trusts unwilling to list, the only other option for Tata Trusts was to take the litigation route. However, that would mean a prolonged battle and will keep the status of a huge holding conglomerate in suspended animation. That is hardly a pragmatic thing to do. The only other option for Tata Trusts to avoid listing Tata Sons was to go back to the status prior to 2004 and make the two largest operating companies into full-fledged divisions of Tata Sons. Tata Sons becomes an operating business plus investment holding company plus an incubator of new businesses. It looks complex, but that was the best option!