RBI’s pre-emptive HC move raises questions over its own confidence in Tata Sons case

In an unprecedented move, the Reserve Bank of India (RBI) has filed a caveat in the Bombay High Court (HC) in connection with the rejection of Tata Sons’ application of voluntarily surrendering its Core Investment Company (CIC) registration.

The RBI has filed a caveat in the HC, seeking to be heard before any court grants a stay or interim relief on a petition challenging its September 11 rejection that forces the privately held holding company of the salt-to-chips conglomerate to go in for a public listing, since its falls under the category of an upper layer non-banking finance company (UL-NBFC).

It’s unprecedented because never in its history has the RBI ever taken such a pre-emptive legal step for a decision that it has taken as a regulator, and that too even before the aggrieved party moved court!

According to legal observers, it marks a distinct departure from how the regulator has handled high-profile and hard-fought confrontations with regulated entities in the past and view the move as a deeper weakness in the RBI’s underlying case involving Tata Sons.

“Generally, when a regulator makes a policy decision, it takes into consideration all probabilities. When it files a caveat, it suggests something is amiss somewhere,” P R Ramesh, a practicing HC advocate, tells Fortune India. Ramesh is a former official with Sebi with expertise in securities and financial matters and has also served as a defence legal counsel in leading market misconduct cases.

In a letter, dated September 11, to Tata Sons, Sudarsana Sahoo, the chief general manager, department of regulation at the RBI’s central office in Mumbai, rejected Tata Sons application to be exempted from the CIC category.

The regulator mentioned in the letter that after examining all aspects for a voluntary surrender of its CIC registration and to be classified as an unregistered CIC, the request “cannot be acceded to”.

“As such, we advise you to take necessary actions to ensure full compliance with all guidelines/instructions, as applicable to NBFC-Upper Layer (UL) issued by the RBI, immediately," states the letter.

A caveat is typically filed by a party that anticipates being dragged to court and wants advance notice before any order is passed against it. In this case, it appears the RBI was expecting Tata Sons, Tata Trusts or any of the affected shareholder to legally challenge the RBI move, and it wanted to be heard before any interim relief is granted even though no petition has yet been filed by any party.

The RBI did not respond to Fortune India’s queries on why it chose to move court even before Tata Sons had contemplated legally challenging the rejection and what were the grounds on which the regulator had rejected the application.

A departure from precedent

The RBI, as the country’s apex financial regulator, does not ordinarily need to anticipate or pre-empt legal challenges to its classification and compliance directions: its decisions are expected to be stand on their own footing, addressed through the normal course if and when a petition is actually filed.

That the regulator chose to move court within four days of its letter of rejection, even before Tata Sons has taken a formal decision to legally challenge the rejection, shows that the regulator is uncertain about how it’s rejection would hold up in the court of law.

“A regulator confident in the soundness of its decision would ordinarily wait to defend it if and when challenged, rather than proactively moving court in anticipation of a right that has not yet begun,” says a legal luminaire on the condition of anonymity.

Legal experts point out that this is not how the RBI has approached previous confrontation with large, well-resourced promoters and institutions, and even disputes that ultimately went on for years.

Even in the decade old stand-off with Uday Kotak over the promoter shareholding dilution at Kotak Mahindra Bank, a dispute that saw the bank in 2018 file a writ petition in the Bombay HC against the RBI stance, the regulator had not pre-emptively filed a caveat in anticipation of a litigation. It only responded once the petition was filed.

Similarly, in the RBI’s supersession of the Yes Bank board, and the broader reconstruction of the bank in 2020, the regulator did not file a caveat anticipating litigation even as a majority of AT-1 bondholders filed a writ petition against the RBI's decision to cancel the AT-1 bonds as part of the reconstruction exercise.

Even in 2021, when the RBI superseded the board of Srei Infrastructure Finance and Srei Equipment Finance, citing governance concerns and defaults, it did not file a caveat anticipating any litigation, even as the Kanoria family, eventually, filed a writ in the Bombay HC against the RBI move.

Why Tata Sons case looks shaky

Interestingly, the RBI’s rejection letter itself comprised just four short paragraphs that offered no reasoning on what grounds the application was rejected. The letter said that the request “cannot be acceded to,” beyond a bare reference to “all the relevant factors” having been examined.

In fact, Tata Sons application made in 2024, was pending for 29 months till it got rejected, during which period the regulator revised aspects of NBFC regulatory framework more than once.

More fundamentally, Tata Sons insiders and old timers argue that the RBI’s underlying classification framework itself rests on a criterion that does withstand close scrutiny when applied to CICs such as Tata Sons.

The scale-based regulation of Rs 1 lakh crore in asset size that came about during the 29 months, placed Tata Sons and other non-banks in the UL-NBFC basket, without distinguishing between a conventional lending non-bank and a pure non-lending CIC.

For a lending institution, a larger balance sheet is reasonable proxy for genuine systemic risk, since it correlates directly with credit exposure and potential defaults in the system. Tata Sons, by contrast, does not lend to the public, does not accept deposits and has been debt free since clearing all its borrowings in 2024. The holding company's asset size crosses the regulatory threshold purely because of the market value of its long-held equity stakes in listed and unlisted group companies. In other words, a fundamentally different kind of “size” that does not carry the same systemic risk involving an UL-NBFC in the lending business.

In fact, the fact that RBI allowed Shanghvi Finance, the investment vehicle of Sun Pharmaceutical promoter Dilip Shanghvi, which was grouped alongside Tata Sons in the RBI’s original 2022 list of UL-NBFCs, and was likewise required to list by September 2025. But the NBFC repaid its outstanding loans, which comprised short-term borrowings and promoter loans, and was subsequently granted deregistration by the RBI in May 2023, allowing it to remain a private company without having to list.

Some legal experts believe that Tata Sons could also challenge the ruling on similar lines, since it followed an identical path of repaying debt and formally requesting declassification to the RBI. That the regulator chose to grant relief to one CIC and decline the opportunity to another similar kind of entity, without any reason, is precisely the kind of unequal and unexplained treatment that Article 14 challenges are built on. "The policy culminating in the forced listing of Tata Sons seems to be directed towards a particular entity, and not a policy of general application," Ramesh tells Fortune India.

The questions that can be asked of the regulator are:

What was the substance of its rejection and why Tata Sons was treated differently from Shanghvi Finance?

What took the RBI an unusually long and unexplained 29-month delay?

Why does its scale-based classification on asset-size fails to distinguish between lending and non-lending non-banks, especially a CIC with no-operational business whatsoever?

"A selective policy can be challenged. It [in Tata Sons’ case] appears to be a selective policy, and therefore challengeable. RBI, in its own wisdom, would have thought it better to file a caveat," feels Ramesh.

Whether the CIC rejection can withstand scrutiny in the court of law is an altogether different matter, but for now the RBI clearly comes across as a regulator that looks rattled even before it has been sued.