Piramal Enterprises Ltd announced on Wednesday its decision to merge with its unlisted subsidiary Piramal Capital & Housing Finance Ltd, following in the footsteps of the Aditya Birla group. This move makes Piramal the second financial institution to adopt a structure that avoids a compulsory public share sale by the unlisted arm.
The merger, set to take effect on April 1, 2024, is anticipated to finalize within a timeframe of nine to twelve months. Shareholders of Piramal Enterprises will receive one share of Piramal Capital for every share held in the company. The combined entity will operate under the name Piramal Finance.
Piramal Enterprises announced in a regulatory filing that its board has approved the plan, subject to the necessary approvals from banking and market regulators, shareholders, creditors, the National Company Law Tribunal, and stock exchanges.
The managing director, Piramal Enterprises, explained in the stock exchange filing, "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. 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."
The Reserve Bank of India categorizes NBFCs into four tiers depending on their size, operations, and risk levels. As per the circular issued in October 2021, NBFCs in the top tier must conduct an initial public offering within three years of being classified, adhering to disclosure norms similar to those of publicly traded firms in the meantime. Subsequently, the RBI published a roster of these NBFCs in September 2022, including prominent entities like Tata Sons, LIC Housing Finance, and Shriram Finance.
Piramal Capital is currently undergoing the procedure of submitting an application to the RBI in order to convert from a housing finance company to a shadow bank, specifically an NBFC-ICC.
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.
Piramal Enterprises recorded a combined net income of Rs.137 crore in the final quarter, owing to the profits obtained from the sale of its shares in Shriram Investment Holdings, gains related to taxes, and the reversal of funds allocated for investments in alternative investment funds (AIFs).
Lenders can now invest in AIF schemes with equity investments in debtor companies, but not in schemes with hybrid instruments. Core income increased by 36% to Rs.839 crore, but net interest margins declined to 6.8% due to higher cost of funds.
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