LIC to be Dethroned from Biggest IPO if this Co. Decides IPO Route for 55,000Cr

In October 2021, the RBI announced that it would establish a four-layered regulatory framework for NBFCs to maintain a stronger watch on the shadow banking industry and reduce risks for the entire financial system. These four categories are - Base Layer (NBFC-BL), Middle Layer (NBFC-ML), Upper Layer (NBFC-UL), and Top Layer (NBFC-TL).

According to RBI regulations, an 'upper-layer' NBFC that is not listed, must list within three years of being so categorized. The NBFC will be subject to stricter and higher regulatory compliance after being categorized. Recently (just last week on 14th September 2023) RBI released a new list of NBFCs in the Upper Layer under Scale Based Regulation for NBFCs for the year 2023-24.

The following stocks are on the list: LIC Housing Finance (NS:LICH), Bajaj Finance (NS:BJFN), Shriram Finance, L&T Finance, Piramal Capital & Housing Finance, Indiabulls Housing Finance, Mahindra & Mahindra Financial Services, PNB Housing Finance (NS:PNBH), Aditya Birla Finance, Muthoot Finance (NS:MUTT), Bajaj Housing Finance, HDB Financial Services, and Cholamandalam (NS:CHLA) Investment and Finance Company.

Tata Sons, led by chairman N Chandrasekaran, had explored the possibility of getting an exemption from the RBI, which first issued the list in September 2022. However recently Tata Sons was added to the Core Investment Company (CIC) category therefore as per the upper-layer category, requiring higher regulatory compliance.

As per the framework, once an NBFC is classified as NBFC-UL as in the case of Tata Sons as per September 2022 list, it shall be subject to enhanced regulatory requirements, at least for a period of three years from its classification in the layer, even in case it does not meet the parametric criteria in the subsequent year/s.

Tata Sons is the principal investment holding company and promoter of Tata Companies. 61% of the equity share capital of Tata Sons is held by philanthropic trusts, which support education, health, livelihood generation, and art and culture.

If Tata Sons proceeds with its listing through IPO, it could indeed result in a substantial windfall for its shareholders, including Tata Trusts. Based on an estimated valuation of Rs 11 lakh crore for Tata Sons, a 5 percent offering could be valued at approximately Rs 55,000 crore, making it one of India's biggest IPOs.

Currently, the record of the biggest IPO in India is being held by the government-backed Life Insurance Corporation of India (NS:LIFI) (LIC) with its Rs 21,000 crore worth IPO in 2022, followed by Paytm (NS:PAYT)'s Rs 18,000 crore IPO in November 2021, and Coal India's (NS:COAL) Rs 15,200 crore IPO which was launched in November 2010.

Although Tata Sons has time (till September 2025) to follow the RBI directive, the company is actively exploring various avenues, possibly including restructuring to avoid the upper-layer category and mandate IPO.

J2K (Justified to Know)

Despite qualifying for identification as NBFC-UL as per scoring methodology, TMF Business Services Limited (formerly Tata Motors (NS:TAMO) Finance Limited) is not included in the list of NBFC-UL in the current review due to its ongoing business reorganization. This could also be implemented by Tata Sons as discussed above.

Apart from Tata Sons, its indirect subsidiary, Tata Capital Financial Services, is also included in the NBFC list. Tata Sons are merging Tata Capital Financial Services into Tata Capital, which is making itself “listing-ready”. Tata Sons, in its FY23 report, said: “The simplified corporate structure will create a larger unified entity with a stronger capital and asset base, and shall help us move towards a listing-ready structure aligned with the RBI’s regulations.”

"Bees Sal pehele" Way back almost 20 years ago In December 2004, Ratan Tata, who was then chairman of Tata Sons, told The Sunday Times in Mauritius that he would like to list the holding company of the conglomerate. “It would not be very different from Berkshire Hathaway (NYSE:BRKa) (founded by Warren Buffett),” Tata said. He added: “One option was to use funds to buy or grow another TCS-style company and use it as a springboard to float Tata Sons itself.” Tata Sons became aggressive on overseas M&As after 2004, snapping up companies like Corus, Jaguar Land Rover, Eight O’Clock Coffee, and British Salt.

In 2017, late Tata Sons chairman Cyrus Mistry said in a court affidavit that his family, the single-largest individual shareholder of the company, had objected to Tata Trusts’ 2014 plan of listing Tata Sons in London. The plan was to issue shares with differential voting rights (bonus non-voting shares) through primary and secondary listings on the LSE. Mistry said he was against the proposal as legacy hotspots were not fully resolved and that shares with differential voting rights were denounced globally as investor-unfriendly. He added that the IPO could be re-looked at a more appropriate time. At a Rs 11-lakh crore valuation, the Mistry family’s 18.4% stake in Tata Sons would be worth just over Rs 2 lakh crore.

Finally, Tata Sons shares if listed will get converted into a liquid currency through the IPO and thus we expect there will be a disconnect on the valuation front as investors typically apply a discount to holding companies.

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