The Reserve Bank of India (“RBI”) with effect from July 1, 2026, has introduced certain amendments to the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Directions, 2025 (“Updated Directions”). The Updated Directions, inter alia, bring in a modification to the criteria for determination of Non-Banking Financial Companies (“NBFCs”) in the Upper Layer (“NBFC-UL”). The Updated Directions have replaced the erstwhile parametric scoring methodology (based on size, leverage and interconnectedness) with an asset size threshold of INR 1,00,000 crore (Rupees One Lakh crore) (approximately USD 10 billion at an exchange rate of 1 USD to INR 100) and above for identification of an entity as an NBFC-UL.

This note discusses the framework for scale based regulation of NBFCs and the implications of the latest amendments on the NBFC-UL with specific focus on the mandatory listing requirement for such NBFCs.

Scale Based Regulation Framework

The RBI introduced the Scale Based Regulation Framework (“SBR Framework”) for NBFCs effective October 1, 2022, which classified NBFCs into four layers – Base Layer, Middle Layer, Upper Layer and Top Layer, based on their size, activity and perceived risk. The SBR Framework also prescribed a two-pronged methodology for identification of NBFC-UL: (i) the top ten eligible NBFCs in terms of asset size automatically resided in the Upper Layer, irrespective of any other factor; and (ii) the remaining NBFCs were assessed through a parametric scoring methodology comprising quantitative parameters (70% weightage) and qualitative parameters/supervisory judgment (30% weightage).

The SBR Framework was subsequently consolidated into the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023 (“2023 Master Direction”), issued on October 19, 2023, which superseded the earlier Master Directions issued in 2016. Thereafter, the 2023 Master Direction (insofar as it related to registration, exemptions and the SBR framework) was repealed and replaced by the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Directions, 2025 (“2025 Directions”), issued by the RBI on November 28, 2025. The 2025 Directions carried forward the four-layer regulatory structure and the aforesaid parametric methodology for NBFC-UL identification.

Recent Changes

On April 10, 2026, the RBI issued a press release inviting public comments on the draft amendment directions proposing to replace the existing parametric methodology for NBFC-UL identification with an asset size criterion of INR 1,00,000 crore (Rupees One Lakh crore) and above. Based on comments received and internal deliberations, the RBI issued the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Amendment Directions, 2026 dated April 29, 2026 (“First Amendment”), with effect from July 1, 2026, which inter alia clarified the definition of “public funds” to specify that indirect receipt of public funds would mean funds received not directly but through associates and group entities which have access to public funds. Thereafter, on June 24, 2026, the RBI issued the Reserve Bank of India (Non-Banking Financial Companies – Registration, Exemptions and Framework for Scale Based Regulation) Second Amendment Directions, 2026 (“Second Amendment”), which inter alia substituted the criteria for identification of NBFC-UL from parametric scoring to an asset size threshold of INR 1,00,000 crore (Rupees One Lakh crore) and above as per the latest audited balance sheet of the relevant entity. The First Amendment and the Second Amendment are consolidated in the Updated Directions, updated as on July 1, 2026.

NBFCs and Core Investment Companies

Non-banking financial companies

An NBFC is a company registered under the relevant provisions of the Companies Act, 1956 or the Companies Act, 2013, as applicable and is engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures, securities, leasing, hire-purchase, insurance business or chit business, as its principal business. The RBI applies the principal business criteria (the “50-50 test”) to determine whether a company is an NBFC: a company is treated as an NBFC if its financial assets constitute more than 50% of its total assets (netted off by intangible assets); and income from such financial assets constitutes more than 50% of its gross income. NBFCs are required to obtain registration under the Reserve Bank of India Act, 1934 and maintain the category-specific minimum net owned fund prescribed by the RBI.

Core investment companies

A core investment company (“CIC”) is a type of an NBFC carrying on the business of acquisition of shares and securities satisfying the following conditions:

1. it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, debt or loans in group companies;
2. its investments in equity shares in group companies constitutes not less than 60% of its net assets;
3. it does not trade in its investments except through block sale for dilution or disinvestment;
4. it does not carry on any other financial activity except investment in bank deposits, money market instruments, government securities, bonds or debentures of group companies, granting loans to group companies and issuing guarantees on behalf of group companies;
5. its asset size is INR 100 crore (Rupees One Hundred crore) or above; and
6. it accepts public funds.

CICs are placed in the Middle Layer or the Upper Layer (and not in the Base Layer) under the Updated Directions. A CIC with total assets of not less than INR 100 crore (Rupees One Hundred crore) either individually or in aggregate along with other CICs in the group and which raises or holds public funds, requires registration with the RBI.

Upper Layer NBFCs

Under the Updated Directions, the Upper Layer comprises NBFCs having an asset size of INR 1,00,000 crore (Rupees One Lakh crore) and above as per the latest audited balance sheet for the financial year. Once classified and listed by the RBI as NBFC-UL, an NBFC shall be subject to enhanced regulatory requirement for at least 5 (five) years, even if it does not meet the threshold in the subsequent years. The criteria for identification as an NBFC-UL shall be reviewed by the RBI every 3 (three) years. An NBFC-UL may move out of the enhanced regulatory framework before the period of 5 (five) years only through a voluntary strategic move to readjust operations as per a board-approved policy (not due to adverse situations such as business contraction or loss of value).

Systemically Important NBFCs

Historically, non-deposit taking NBFCs with an asset size of INR 500 crore (Rupees Five Hundred crore) or more were treated as systemically important, while deposit-taking NBFCs were separately subject to stricter prudential regulation. The Updated Directions specify that from October 1, 2022, all references to NBFC-ND-SI (systemically important non-deposit taking NBFC) would mean middle layer NBFC (NBFC-ML) or NBFC-UL, as the case may be. The current framework classifies NBFCs into the Base Layer, Middle Layer, Upper Layer and Top Layer, with regulatory intensity increasing based on size, activity, complexity, interconnectedness, customer interface and perceived systemic risk.

The rationale for this layered approach is that larger and more interconnected NBFCs may transmit stress to the wider financial system if they fail or experience financial distress, even though they are not banks. Accordingly, NBFCs in the Middle Layer and Upper Layer are treated as systemically significant for regulatory purposes and are subject to enhanced prudential, governance, liquidity, disclosure and supervisory requirements. The Upper Layer is intended to capture NBFCs whose failure may have significant systemic consequences and once classified in the Upper Layer, such NBFCs are subject to additional regulatory requirements, including mandatory listing requirements, intended to strengthen transparency, market discipline and accountability.

Case for Mandatory Listing

Paragraph 43 of the Reserve Bank of India (Non-Banking Financial Companies – Governance) Directions, 2025, as amended (“Governance Directions”) mandates that an NBFC-UL shall be mandatorily listed within 3 (three) years of its identification by the RBI in the Upper Layer. The Governance Directions further specify that disclosure requirements shall be put in place on the same lines as applicable to a listed company even before the actual listing. A proviso (inserted by the RBI Governance Amendment Directions dated June 24, 2026) exempts NBFC-UL which are fully owned and controlled by Government from the mandatory listing requirement.

The mandatory listing requirement is one of the most consequential obligations for an NBFC classified in the Upper Layer. It compels private entities with significant systemic presence to submit to market discipline and public scrutiny, with an aim to enhance corporate governance and protect the interests of all stakeholders in the financial system.

Indirect Public Funds and the Tata Sons Conundrum

Indirect public funds

The definition of “Public Funds” as amended by the Updated Directions, is central to determining whether an entity qualifies as a CIC requiring registration and consequently whether it falls within the regulatory perimeter of the Updated Directions. Under the 2025 Directions, “Public Funds” was defined to include funds raised either directly or indirectly through public deposits, inter-corporate deposits, bank finance and all funds received from outside sources such as funds raised by issue of commercial papers, debentures, etc., but excluded funds raised by issue of instruments compulsorily convertible into equity shares within five years from the date of issue.

In the First Amendment (April 29, 2026), the RBI inserted the following explanation to the definition of Public Funds: “Indirect receipt of public funds means funds received not directly but through associates and Group entities which have access to public funds.” Critically, in the Second Amendment (June 24, 2026), this explanation regarding indirect public funds was not included and the Second Amendment focused primarily on substituting the Upper Layer criteria. The omission attracted significant market commentary, including discussions around the possible rationale for such omission.

However, the regulator brought back the explanation to the definition of “Public Funds” in the Updated Directions (effective July 1, 2026) which incorporate both the First Amendment and the Second Amendment.

Relevance to Tata Sons

Tata Sons Private Limited (“Tata Sons”) is the principal holding company of the Tata Group and is registered with the RBI as a CIC. As a CIC, its primary business is holding investments in group companies.

In September 2022, the RBI included Tata Sons in the list of Upper Layer NBFCs (NBFC-UL). This classification triggered the mandatory listing requirement for Tata Sons under the Governance Directions, necessitating it to list its equity shares on a recognized stock exchange within 3 (three) years from the date of inclusion in the NBFC-UL (i.e., by September 2025).

Interestingly, Tata Sons after becoming debt free, made an application to the RBI in 2024 for surrendering its CIC certificate of registration which remains pending before the RBI, as on date.

In such a scenario, the clarification added to the definition of “Public Funds” assumes significant implication for entities like Tata Sons. In terms of the Reserve Bank of India (Core Investment Companies) Directions, 2025, a CIC can remain unregistered under two circumstances:

1. If the CIC has an asset size below INR 100 crore (Rupees One Hundred crore), irrespective of whether it is accessing public funds or not;
2. If the CIC has an asset size of INR 100 crore (Rupees One Hundred crore) and above but is not accessing public funds.

Based on the above, even if Tata Sons no longer directly accesses public funds (such as bank loans or public deposits) having repaid all outstanding debt, its group entities and associates extensively access public funds through bank borrowings, debentures, commercial papers and other market instruments. Under the expanded definition, Tata Sons would be deemed to be availing ‘indirect’ public funds through its group entities, thereby requiring continued registration as a CIC and accordingly its classification in the Upper Layer, mandating listing of its shares.

Possible Options for Tata Sons

In light of the regulatory developments discussed above, some of the potential measures that entities like Tata Sons could consider if they intend to remain unlisted are set out below:

1. Reduction of Asset Size Below Threshold: The entity could restructure its operations to bring its asset size below INR 1,00,000 crore (Rupees One Lakh crore). However, for conglomerates with massive group investments, this would require a fundamental restructuring of group holdings.
2. Conversion to Non-CIC Structure: The entity could restructure itself to not meet the CIC conditions (e.g., reducing investments in group companies below 90% of net assets or reducing equity investments below 60%). However, this would fundamentally alter the holding company structure and may not be acceptable to promoters.
3. Voluntary Strategic Move: Under paragraph 29 of the Updated Directions, an NBFC-UL may move out of the enhanced regulatory framework before the period of 5 (five) years if the movement is on account of a “voluntary strategic move” to readjust operations as per a board-approved policy. However, the entity is required to ensure that it is a genuine readjustment and not merely driven by the desire to avoid regulatory requirements. We assume that such a “voluntary strategic move” would involve 1. and/or 2. above or a combination of them.

Conclusion

The Updated Directions represent a shift in RBI’s approach to regulation of systemically important NBFCs. By replacing the parametric scoring methodology with an asset size threshold, the RBI has attempted to introduce clarity and predictability to the NBFC classification process. For NBFCs crossing the INR 1,00,000 crore (Rupees One Lakh crore) threshold, the implications are clear: they must prepare for enhanced governance, disclosure requirements and mandatory listing within 3 (three) years.

However, for entities such as Tata Sons, which are essentially private holding companies with no public-facing financial intermediation, the requirement to list poses fundamental questions about the proportionality of regulation by the financial regulator.

This insight has been authored by Rajat Sethi and Ayushi Singh from S&R Associates. They can be reached at [email protected] and [email protected], respectively, for any questions. This insight is intended only as a general discussion of issues and is not intended for any solicitation of work. It should not be regarded as legal advice and no legal or business decision should be based on its content.