Deal Talk: High Stakes, Smart Moves: Upper Layer NBFCs and the Mandatory Listing Requirement

High Stakes, Smart Moves: Upper Layer NBFC’s and the Mandatory Listing Requirement

A. Introduction

On October 19, 2023, the Reserve Bank of India (“RBI”) released the Master Direction – Reserve Bank of India (Non-Banking Financial Company–Scale Based Regulation) Directions, 2023 (“Scale Based Regulations”). This pivotal framework categorizes non-banking financial companies (“NBFCs”) into four distinct “layers” based on their size, activities, and perceived risks: base, middle, upper, and top. This approach is based on a layer-wise increase in regulatory scrutiny. So, for example, a middle layer NBFC is subjected to greater scrutiny than a base layer NBFC.

The Scale Based Regulations mandate the RBI to specifically identify upper layer NBFCs (“NBFC-ULs”) based on certain qualitative and quantitative parameters and supervisory judgment as per their position as on March 31 of the immediately preceding financial year.¹ In September 2022, the RBI had released a list of 16 NBFCs that were categorised as NBFC-ULs for the year 2022-23 (“September 2022 Notification”), which was further revised to 15 for the year 2023-24.²

One of the noteworthy conditions of the Scale Based Regulations requires an NBFC-UL to mandatorily list its shares on the Indian stock exchanges (“IPO”) within three years of being classified as an NBFC-UL (“Mandatory Listing Requirement”). Since the NBFC-ULs were first so categorised in the September 2022 Notification, they are required to comply with the aforesaid requirement within three years of such date (i.e. before September 30, 2025).

In our latest edition of Deal Talk, we explore the diverse structures that these NBFC-ULs have adopted to comply with the Mandatory Listing Requirement.

The current NBFC–ULs can be divided into two buckets: (i) NBFC-ULs which were already listed prior to release of September 2022 Notification and were therefore not impacted by Mandatory Listing Requirement (“Bucket 1”); and (ii) NBFC-ULs which were unlisted and had to get listed as per the Mandatory Listing Requirement (“Bucket 2”).

Let’s look at a brief snapshot of each NBFC-ULs within Bucket 1 and 2:

Bucket 1:

Bucket 2:

B.  “Structuring” the Mandatory Listing Requirement

The NBFC-ULs in Bucket 2 have adopted different strategies to comply with the Mandatory Listing Requirement. These strategies can be broadly classified into three routes:

• The NBFC-UL achieving listing on Indian stock exchanges pursuant to an IPO (“Route 1”); or
• The NBFC-UL merging with an existing listed company within its group (“Route 2”); or
• The NBFC-UL voluntarily surrendering its NBFC license to the RBI (“Route 3”).

Route 1

One of the most recent examples of NBFC-ULs that have achieved listing on the Indian stock exchanges is Bajaj Housing Finance Limited (“Bajaj Housing Finance”). HDB Financial Services Limited (“HDB”) has also recently announced that it is in the process of preparing draft offer documents for submission to SEBI for an IPO pursuant to receipt of approval from the board of its parent company (i.e. HDFC Bank).³

So far as Tata Capital Financial Services Limited (“TCFSL”) is concerned, it undertook a restructuring wherein TCFSL along with Tata Cleantech Capital Limited merged into Tata Capital Limited (“TCL”).⁴ Further, the board of TCL has approved another restructuring wherein Tata Motors Finance Ltd (“TMFL”) will merge into TCL. As a consideration of the merger of TMFL into TCL, TCL will issue equity shares to the shareholders of TMFL. It has been publicly reported that TCL may likely request for an extension of the September 2025 deadline for complying with the Mandatory Listing Requirement owing to the merger of TMFL into TCL.⁵ However, it remains to be seen whether it pursues Route 1 post completion of its merger.

Route 2

To fulfil the Mandatory Listing Requirement, NBFC-ULs such as Piramal Capital and Housing Finance Limited (“PHF”) and Aditya Birla Finance Limited (“ABFL”) have opted for the merger route by merging with an existing listed company within their group structure.

Let’s take PHF’s example: PHF is a wholly owned subsidiary of Piramal Enterprises Limited (“PEL”), a listed company that is registered with the RBI as a non-deposit taking NBFC-ICC. The proposed merger arrangement envisages the reverse merger of PEL into PHF, with the surviving entity (PHF) being subsequently listed on stock exchanges.

ABFL is opting for a similar structure to comply with the Mandatory Listing Requirement. ABFL intends to merge into its parent company Aditya Birla Capital, which is currently registered with the RBI as an NBFC-CIC and is listed.

Route 3

Tata Sons (the parent company of the Tata Group) is currently categorized as an NBFC-CIC and is therefore governed by the Core Investment Companies (Reserve Bank) Directions, 2016 (“CIC Directions”). As per Paragraph 6 of the CIC Directions, NBFC-CICs that fall within either of these categories are not required to be registered with the RBI as a CIC and can operate as an “unregistered CIC”: (a) CICs with an asset size of less than INR 100 crores (irrespective of whether they access public funds), or (b) CICs an asset size of INR 100 crore and above (that do not access public funds).

Earlier this year, Tata Sons applied to the RBI for a voluntary surrender of its NBFC-CIC license and requested for permission to continue as an “unregistered CIC”.⁶ To operate as an unregistered CIC, Tata Sons would effectively have to repay its debt. In its application, Tata Sons has stated that it has already repaid a significant amount of its borrowings. Further, with respect to the residual borrowings and to provide additional comfort to the RBI at the time of evaluation of its surrender application, Tata Sons has provided an undertaking indicating its ability to repay it.

As per the CIC Directions, if an entity is an “unregistered CIC”, the CIC Directions are inapplicable to it.⁷ Accordingly, if Tata Sons is classified as an “unregistered CIC”, it will not need to comply with the Mandatory Listing Requirement since it will no longer be considered as an “NBFC-UL” for the purposes of the September 2022 Notification.

Although its application is currently pending, it will be interesting to see what RBI decides given that Tata Sons is one of the largest NBFC-ULs in India. Interestingly, a right to information request was filed with the RBI seeking clarity as to whether Tata Sons has sought an exemption from the Mandatory Listing Requirement. The response from RBI revealed that no such exemption has been sought.⁸

C. Concluding Remarks

The September 2022 Notification was introduced to mitigate the systemic risk associated with the potential collapse of large-sized NBFCs that have raised substantial public funds. As the September 2025 deadline approaches, most NBFC-ULs are working towards meeting the Mandatory Listing Requirement through Routes 1, 2, or 3. It would be interesting to see how the remaining NBFC-ULs will implement their strategies to comply with the Mandatory Listing Requirement. These structures will also form the bedrock for compliance strategies for NBFCs which are declared as NBFC-ULs in the future.

Authors:

Parina Muchhala, Anurag Shah and Nishchal Joshipura

You can direct your queries or comments to the relevant member.

¹Annex 1, Scale Based Regulations.

²https://www.rbi.org.in/scripts/FS_PressRelease.aspx?prid=54474&fn=14.

³https://www.thehindubusinessline.com/markets/upper-layer-nbfc-hdb-financial-services-prepares-for-ipo/article68693781.ece.

⁴https://www.tatacapital.com/content/dam/tata-capital/pdf/investors-and-financial-reports/scheme-of-arrangement/Revised-Scheme-of-Arrangement.pdf.

⁵https://www.moneycontrol.com/news/business/banks/tata-capital-may-ask-rbi-for-more-time-to-list-12786905.html.

⁶https://www.tata.com/content/dam/tata/pdf/fy24/Tata-Sons-Annual-Report-FY24.pdf (page 9).

⁷Paragraph 2(2), CIC Directions.

⁸https://www.moneylife.in/article/rbi-says-tata-sons-has-not-sought-exemption-from-listing-requirements-ipo-before-september-2025-deadline/75404.html.

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