When regulatory logic outruns its purpose

The unfolding boardroom drama at Tata Sons has, for months, furnished India’s business media with an inexhaustible supply of commentary, much of it more interested in personalities than in principle. Yet the episode that precipitated the recent dispute — the Reserve Bank of India’s refusal to exempt Tata Sons from its requirement that certain non-banking finance companies seek a public listing — has received remarkably little scrutiny in its own right.

That is a pity, for buried within this obscure corner of financial regulation lies a question of genuine consequence: what, precisely, is the public interest that mandatory listing is meant to serve, and does it survive contact with the entities now being compelled to comply?

Some years ago, the RBI recast its supervisory architecture for non-banking finance companies, moving to what it terms a size-based framework. Under this scheme, the more than 8,000 registered NBFCs are sorted into four tiers — base, middle, upper and top — with regulatory intensity rising at each successive level.

No company currently occupies the top tier, but the upper layer, reserved for those with assets exceeding ₹1 trillion, is subject to the fullest weight of supervisory attention the central bank can bring to bear. Given the systemic footprint of firms at this scale, such vigilance is not merely defensible; it is essential to the stability of the wider financial system.

The case for listing

Among the obligations imposed on upper-layer NBFCs is a requirement to seek a public listing, and the reasoning behind it is, on its face, difficult to fault. Listing subjects a company to an extensive regime of disclosure, and disclosure is the handmaiden of transparency in both governance and conduct. Most large NBFCs are, after all, lenders — institutions that fund their books by tapping the bond markets and the banking system — and for such entities, the integrity of governance and the clarity of conduct are not optional virtues but structural necessities. This is, in essence, the logic of “market discipline,” the third pillar of the Basel framework that underpins prudential regulation across banking and non-banking finance alike.

Markets can discipline errant behaviour only if they can see it, and they can see it only if companies are made to disclose it. Once listed, a company submits to the continuing jurisdiction of the securities regulator — in India’s case, the Securities and Exchange Board — and to the discipline of periodic, public accounting.

It is a clean argument. But it does not travel well to every corner of the regulatory map, and core investment companies (CIC) are a case in point. A CIC is, in essence, a holding vehicle: a structure through which promoters consolidate their stakes across a family of operating companies. It falls under the NBFC umbrella only by virtue of the RBI’s so-called 50:50 rule, which deems any entity a non-banking finance company if more than half of its assets or income derive from financial holdings. That a CIC is captured by this definition is a matter of accounting mechanics rather than economic substance, and the distinction matters.

Consider a CIC that answers to no shareholders beyond its own promoters and carries no external debt. Such a company draws on no public capital, borrows from neither the bond market nor the banking system, and therefore poses no conceivable threat to financial stability. A crucial distinction persists between the two principal sources of public capital: debt and equity. Equity, being risk capital ventured by owners, warrants no special protection—unlike deposits. Should every unlisted subsidiary of a listed parent be forced to list for transparency’s sake? And is listing truly the sole guarantor of sound governance?

On what basis, then, should a CIC not taking public funds be compelled to list? Transparency, after all, is a virtue defined by its beneficiary: transparent to whom, and for what purpose? Where a CIC’s holdings sit in listed companies, those companies already bear their own disclosure obligations. Where its holdings sit in unlisted companies, any question of conduct is a private matter between the CIC’s owners and the businesses they own — one in which no third party has a legitimate claim to visibility, and from which no systemic risk of any kind emanates.

There is, moreover, something more troubling lurking beneath the technical question. To compel such a company to list is to conscript a private entity into an act of public exposure for which no public interest can be coherently articulated. It bears comparison to a municipal authority that, having approved the layout of a large house, proceeds to insist that the owner catalogue and publish an inventory of its furnishings, fixtures and drapery. If the law is prepared to recognise the legal personhood of a company — and it is — then to impose disclosure without a correlative public purpose begins to resemble an intrusion upon that personhood’s privacy, rather than a legitimate exercise of prudential oversight.

None of this is offered as advocacy for either party in the Tata Sons affair, whose merits turn on facts particular to that dispute. It is offered, rather, as a reminder that financial regulation draws its legitimacy from first principles — systemic stability, the protection of depositors and investors, the integrity of markets — and not from the mere fact that a regulator possesses the power to act.

Power exercised without a governing rationale tends, over time, to corrode the very credibility it is meant to protect. The RBI would do well to revisit, with some rigour, the foundations on which its listing mandate for core investment companies actually rests — and to ask whether that mandate still serves the purpose for which such regulation was conceived, or has simply outlived its purpose.

Harsh Vardhan is a consultant and researcher based in Mumbai. He writes on the economy, banking and the finance sector.

Abizer Diwanji is the founder of NeoStrat Advisors, which focuses on creative destruction.