Aditya Birla Capital merger: Reasons and perceived benefits

Introduction to Aditya Birla Capital and Aditya Birla Finance

Aditya Birla Capital Limited (ABCL) is a listed holding company of the financial services business of the group led by Kumar Mangalam Birla. Through its listed and unlisted subsidiaries and joint ventures, ABCL provides a wide array of products that include loans, investments, insurance, payments, and credit cards to serve customers. It has a market cap of close to Rs. 45,000 crore.

As of December 31 last year, Aditya Birla Capital managed aggregate assets under management of over Rs. 4.10 lakh crore with a consolidated lending book of about Rs 1.15 lakh crore.

Aditya Birla Finance Limited (ABFL) is an unlisted wholly-owned subsidiary of ABCL. It is classified as a non-banking financial services company that provides end-to-end lending and wealth management solutions. It caters to the varied needs of a diverse set of customers across retail, HNIs and ultra HNIs (high networth individuals), micro, small and medium enterprises (MSMEs) and mid and large corporates.

ABFL offers customized solutions in the areas of personal finance, mortgage finance, MSME and corporate finance, wealth management, debt markets and loan syndication. Based on assets under management, it is amongst the top five largest private diversified NBFCs. As of December 31, 2023, ABFL had a total AUM of Rs. 98,601 crore and total equity of Rs. 14,650 crore.

As per the group’s decision, ABFL will merge with ABCL in about a year.

RBI's scale-based regulations

The Reserve Bank of India (RBI) came out with scale-based regulations in October 2021 on the premise that many non-banking finance companies had grown to a respectable size over the years, and had thus become systematically important.
The central bank felt there was a greater need for regulatory oversight of NBFCs, considering their risk profile. The guidelines, effective October 1, 2022 onwards, covered their capital requirements, governance standards, prudential regulation, etc.
The RBI classified NBFCs into four layers based on size, activity and perceived risks. The four layers are: base layer (NBFC-BL), middle layer (NBFC-ML), upper layer (NBFC-UL) and top layer (NBFC-TL).
According to the October 2021 circular, the RBI will specifically identify upper layer NBFCs as those warranting enhanced regulatory requirement. The top ten eligible NBFCs in terms of their asset size shall always reside in the upper layer, irrespective of any other factor, the RBI said.
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.
The top layer will ideally remain empty, according to RBI. This layer will get populated only if the RBI feels there is a substantial increase in the potential systemic risk from specific NBFCs in the upper layer. Such NBFCs shall move to the top layer from the upper layer.
Given the RBI’s directive, companies like Tata Sons and ABFL, which come under upper layer, will have to either list or explore options for a way out.

Reasons for Aditya Birla Capital Merger

As per the October 2021 circular of the RBI, ABCL is a listed systemically important non-deposit taking core investment company that is NBFC CIC. ABFL is a systemically important non-deposit taking NBFC that is NBFC ICC. ABFL is in the RBI’s list of 15 upper layer NBFCs issued on September 23, 2023. It is thus now subjected to enhanced regulatory requirements.
One of the RBI’s norms mandate compulsory listing of upper layer NBFCs like ABFL within three years of being identified as on. That date is September 30, 2025. Hence, the merger with ABCL will take care of ABFL’s listing.
Also, Aditya Birla Capital, the parent entity of ABFL, is a holding company. It thus suffers from a holding company discount and doesn’t get the desired valuation in the public markets.
ABFL’s merger into ABCL will simplify the group structure and convert ABCL into a listed operating NBFC from a holding company.
The merger will dissolve the holding company discount that ABCL suffers from and earn it the right valuations. It will consolidate the businesses, create operational synergies, and reduce regulatory complexities.
The merger will bring down the leverage sharply. According to the company, ABCL’s leverage is around 5.9. For the consolidated entity, it will be around 4.15. This will give the company huge headroom for leveraging its balance sheet for growth.
The merger will not lead to issuance of any new shares and there will be no change in ABCL’s shareholding. The merger will take 9-12 months to take effect.

Benefits of amalgamation to Aditya Birla Finance

ABFL will not have to go through a separate listing requirement to meet the RBI norms. The merger will help it achieve that.
In the case of ABCL, it will get converted from a holding company to an operating NBFC, removing the holding company discount that it suffers from in the equity markets.
The merger will create a unified large entity with a greater financial strength and flexibility enabling direct access to capital.
The proposed amalgamation will lead to operational synergies and result in expansion and long-term sustainable growth. This will enhance value for various stakeholders of the company.
The proposed amalgamation will lead to seamless implementation of policy changes and reduction in the multiplicity of legal and regulatory compliances.
The merger will enhance ABCL’s networth and bring down the leverage sharply.