More upper-layer non-banking financial companies (NBFCs) may follow in the footsteps of Piramal Capital and Housing Finance and Aditya Birla Finance and opt to restructure their businesses in a bid to comply with the Reserve Bank of India(RBI) norms and make operations more efficient, say experts.

“Every organisation is evaluating the scale of the efficiencies possible through the restructuring exercise and taking a call. I am sure all organisations in the upper layer are evaluating but the timing may differ,” Vivek Iyer, partner, Grant Thornton Bharat said.

On Wednesday, Piramal Enterprises announced that its board of directors have approved the merger of Piramal Enterprises with subsidiary Piramal Capital and Housing Finance. The resulting entity will be renamed as Piramal Finance.

“Piramal Capital and Housing Finance is an NBFC-UL and we are mandated to list that company separately by 2025. By pursuing a merger with Piramal Enterprises, the resultant listed entity will automatically meet those requirements,” Piramal Capital and Housing Finance managing director Jairam Sridharan said in a conference call post the March quarter results.

Sridharan added that the structure with two lending entities introduces operational inefficiencies from a shareholder perspective, and is “sub-optimal”. Here, the reverse merger creates a “cleaner” structure from a governance perspective.

In March, the board of directors of Aditya Birla Capital and Aditya Birla Finance similarly approved a scheme of amalgamation between the two entities. The amalgamation is subject to regulatory and other approvals as may be required.

In a press release, Aditya Birla Capital said that the proposed amalgamation will result in compliance with the Reserve Bank of India’s scale-based regulations, which require mandatory listing of Aditya Birla Finance by September 30, 2025. It will also lead to a reduction of legal entities and simplification of the group structure of Aditya Birla Capital.

“Restructuring is done in instances where an existing listed entity in the group has sizeable holding in the NBFC-UL. It ensures that valuation related aspects of the existing listed entity/ proposed to be listed NBFC-UL are adequately addressed,” A M Karthik, senior vice president and co-group head, financial sector ratings, Icra said.

In October 2021, the central bank issued scale-based regulations, which classified NBFCs on the basis of size, activity and perceived weakness. According to these norms, NBFCs are classified as base layer, middle, layer, upper layer, and top layer.

The upper layer comprises those non-bank lenders that specifically identified by the RBI as warranting enhanced regulatory requirement.  According to the RBI’s norms, NBFC-UL must mandatorily list on the stock exchange within three years of being classified as such.

“Once an entity is included in the list, they will be subject to enhanced regulatory framework for a period of five years,” Shiju PV, senior partner, IndiaLaw said, adding that these entities still have an option to move out of this classification before five years by voluntary readjustment of operation in accordance with the board approved policies.

Of the 15 entities that feature on the central bank’s 2023 list of upper-layer NBFCs, six are unlisted. These include Tata Sons, Bajaj Housing Finance, and HDB Financial Services.

With an eye on the deadline, Bajaj Finance and HDFC Financial Services are assessing available options to comply with the upper layer norms. However, Tata Sons is considering an exemption from the 2021 norms, according to media reports.

“Some entities may prefer to opt out of listing to ensure that valuation of an existing listed group entity (having sizeable holding in the NBFC-UL) or unlisted NBFC-UL is not affected,” Karthik said.

Experts feel that with the changing regulatory expectations, some organisations may prefer to take calls that would not necessarily align with public investors.