After Aditya Birla, Piramal to merge with private arm

After the Aditya Birla group, it’s now Piramal’s turn. Piramal Enterprises Ltd has decided to merge with its unlisted subsidiary Piramal Capital and Housing Finance Ltd, becoming the second financial institution to embrace a structure that spares a mandatory public share sale by the unlisted arm.

The merger, effective 1 April, is expected to be completed in nine to 12 months. Piramal Enterprises investors will get one share of Piramal Capital for each held in company. The merged company will be named Piramal Finance.

In a stock exchange filing on Wednesday, Piramal Enterprises said its board has cleared the plan, which requires approval of banking and market regulators, shareholders and creditors, as well as National Company Law Tribunal and stock exchanges.

Multi-product retail

“Piramal Capital is an upper layer NBFC and is mandated to list by September 2025. By pursuing a merger, the resultant listed entity will meet that requirement. Other reasons for pursuing a merger are that having two lending entities introduces operational inefficiencies,” Jairam Sridharan, managing director, Piramal Enterprises, said in the exchange filing.

"We think it’s a cleaner structure from a governance perspective and ongoing operating inefficiency to have one entity. Our business model is a multi-product retail, which means a pure housing finance licence can end up being restrictive," he added.

Also read: Piramal Enterprises to stay away from future investment in AIFs

The Reserve Bank of India classifies NBFCs in four layers based on size, activity and perceived risks. Under its October 2021 circular, all upper-layer NBFCs are required to go public within three years of classification, adopting disclosure standards akin to those of listed companies in the interim. 

Following this, RBI released a list of such NBFCs in September 2022, which comprises the likes of Tata Sons, LIC Housing Finance and Shriram Finance.

Piramal Capital & Housing Finance is among the 15 upper-layer NBFCs mandated by RBI to go public. Merging with the listed parent averts the need for the subsidiary to be separately listed. In March, Aditya Birla Capital had decided to merge Aditya Birla Finance Ltd with itself to meet the same requirement.

Piramal Capital is in the process of making an application to the RBI for conversion from a housing finance company to a shadow bank, an NBFC-ICC (Investment & Credit Company).

Piramal Capital was supposed to comply with guidelines on Principal Business Criteria (PBC) by March 2024, which mandate a minimum 60% of loans to housing finance and minimum 50% of loans to individuals for housing finance. 

Since PCHFL has not been able to fulfil the requirement, it is required to convert itself an NBFC, for which it applied to RBI for an NBFC-ICC licence. Piramal decided on the merger since there cannot be two distinct NBFC licences within the same group.

The mandatory listing requirement has also thrown Tata Sons in a quandary. The Economic Times reported on 8 March that Tata Sons might be planning an internal restructuring to comply with the RBI norms. The report said the rejig could include transferring the holding in financial services company Tata Capital to another entity.

Piramal Enterprises posted a consolidated net profit of ₹137 crore for the fourth quarter, thanks to gains from sale of its shares in Shriram Investment Holdings, tax-related gains and reversal of funds set aside for its investments in alternative investment funds (AIFs).

Also read: Piramal Alternatives invests ₹110 cr in Biodeal Pharmaceuticals

The company had reported a loss of ₹2,378 crore in the December quarter, when it set aside ₹3,540 crore for provisions against AIF investments.

In December, the RBI asked lenders to stay away from investing in AIFs that have investments in existing and recent borrowers. The central bank also urged lenders to liquidate their investments in such AIFs or to make 100% provisions on such investments. However, RBI eased these rules in March, after receiving feedback from stakeholders.

According to the latest circular, lenders are now permitted to invest in AIF schemes that have downstream equity investment in debtor companies. Investments in schemes with hybrid instruments in debtor companies are, however, not allowed.

Core income is up 36% year-on-year to ₹839 crore. Net interest margins (NIMs), however, fell 55 basis points to 6.8% from 7.35% in the previous quarter, owing to higher cost of funds.

The company reported strong fee income growth of 111% year-on-year to ₹190 crore.