Same Threshold, Different Rules

**Kushagra Jaiswal and Vaishnav Bhat

Introduction

The Reserve Bank of India (RBI) has made significant changes to how it identifies Upper Layer Non-Banking Financial Companies (NBFCs) under its Amendment Directions to the Scale Based Regulatory (SBR) Framework. The amendments replace the existing classification methodology with a single asset size threshold of ₹1,00,000 crore for Upper Layer status. They also extend the Upper Layer framework to government owned NBFCs, which the RBI describes as an ownership neutral approach. Yet government owned NBFCs that qualify for Upper Layer classification remain exempt from the mandatory listing requirement that applies to private Upper Layer entities (Emphasis Supplied).

This shift in how systemically important NBFCs are regulated raises real questions about the consistency of the revised framework and what it means for regulatory policy. This post examines the RBI’s recent amendments, focusing on the ownership neutral approach and the listing exemption carved out for government owned NBFCs. Its argument is that while the amendments are a step in the right direction and do improve regulatory certainty, the differential treatment given to government owned entities still falls short of the very ownership neutrality the RBI seeks to pursue. 

The argument proceeds in four parts. Firstly, it traces the shift from the erstwhile two-limb methodology, comprising the top-ten rule and parametric scoring, to the new single asset-size threshold, and situates the extension of Upper Layer status to government owned NBFCs within that change. Secondly, it argues that exempting government owned NBFCs from the mandatory listing requirement creates an internal inconsistency within the framework, since these entities are treated identically to private NBFCs for prudential purposes but differently for transparency, even though listing is arguably the one mechanism capable of supplying the market discipline that state owned entities structurally lack. Thirdly, it contends that this unexplained distinction is vulnerable to challenge under Article 14 of the Constitution. Finally, it tests the most plausible justification for the exemption, that government ownership itself supplies adequate accountability, against international standards and India’s own regulatory practice.

The Former Framework For Identification Of Upper Layer NBFCs

The erstwhile SBR Framework rested on a straightforward premise that the intensity of regulation should track an entity’s size, complexity and systemic importance. Introduced in 2021, it sorts NBFCs into four regulatory layers: Base, Middle, Upper and Top. The Upper Layer holds the systemically significant NBFCs, which face stricter capital adequacy requirements, governance standards and risk management obligations than entities below them.

Before the amendments, the RBI identified Upper Layer NBFCs through a twofold process. First, the ten largest eligible NBFCs by asset size were automatically classified as Upper Layer entities, regardless of any other consideration. Second, the RBI applied a parametric scoring methodology to identify additional NBFCs warranting enhanced supervision, weighing size, leverage, interconnectedness, complexity and supervisory judgment together. This let the RBI capture institutions that were not among the ten largest but still posed real systemic risk. Government owned NBFCs, however, were kept out of the Upper Layer altogether and could only be placed in the Base or Middle Layer.

The New Amendment: A Shift Towards Objective Classification

The Amendment Directions rework this methodology by replacing the combination of asset ranking and parametric assessment with a single, objective asset threshold. Under the new framework, any NBFC with assets of ₹1,00,000 crore or above would be automatically classified as Upper Layer. This abandons the relative “top ten” approach in favour of a fixed numerical benchmark. The RBI states the change is meant to simplify the identification process, improve regulatory certainty, and ensure that entities of comparable scale are subject to a uniform regulatory framework.

The Amendment Directions also mark a real departure in the treatment of government owned NBFCs. Under the erstwhile framework, such entities could not be placed in the Upper Layer at all. The amendments remove this exclusion, so government owned NBFCs that meet the asset threshold would become eligible. But while these entities would face the same enhanced prudential norms as any other Upper Layer NBFC, including capital, governance and concentration requirements, the RBI exempts them from the mandatory listing requirement that applies to private Upper Layer NBFCs.

Ownership Neutrality or Regulatory Asymmetry?

The RBI presents the extension of the Upper Layer framework to government owned NBFCs as an ownership neutral reform. In principle, this is a welcome shift towards regulating institutions by systemic significance rather than ownership. If financial stability is the underlying objective, there is little reason to treat government owned entities differently merely because of who owns them.

The framework, however, falls short of complete ownership neutrality the moment it exempts government owned Upper Layer NBFCs from mandatory listing. Private and government owned NBFCs above the ₹1,00,000 crore threshold are treated alike for prudential purposes, but not for transparency. This is an inconsistency worth pausing on asmandatory listing is a key mechanism for market discipline, continuous disclosure and stronger corporate governance.

This inconsistency matters because it has been argued that government owned entities simply don’t face the market test that private companies do. A private firm that keeps misallocating capital or fails to deliver value eventually loses business or shuts down. A government owned entity, by contrast, can carry on inefficiently for years, since public funds are there to absorb the losses. Janos Kornai’s term for this is the “soft budget constraint”, meaning the guarantee of a bailout removes much of the pressure to perform well in the first place. Listing is one of the few external checks that can stand in for that missing pressure as it forces continuous disclosure and puts the entity in front of shareholders and analysts who scrutinize it regardless of who owns it. Exempting government owned NBFCs from listing leaves that gap open, since these entities meet every other prudential requirement a private NBFC does, but not the one designed to compensate for the discipline a soft budget constraint takes away.

The Rational Nexus Problem

The absence of reasoning creates another problem as the distinction created by the RBI fails the test laid down in State of West Bengal v. Anwar Ali Sarkar.The Apex Court held that a valid classification must rest on an intelligible differentia that has a rational nexus with the object of the law. If the purpose of the listing requirement is transparency, governance, or investor protection for large NBFCs, ownership by the government has no obvious logical connection to that purpose since a government-owned NBFC of a given size raises essentially the same concerns as a privately owned one of the samesize. Without any stated justification, the rational nexus requirement is left unsatisfied 

Therefore, unless the regulator can produce a rational justification for the ownership-based distinction that does not appear in the Directions themselves, this provision remains susceptible to being struck down or read down under Article 14 scrutiny.

Further, the Supreme Court’s decision in Internet and Mobile Association of India v. RBI further reinforces that RBI’s regulatory directions are not immune from judicial review and may be invalidated where they fail constitutional standards of reasonableness and proportionality. Together, these decisions suggest that an ownership-based exemption unsupported by a discernible regulatory rationale may struggle to withstand constitutional scrutiny.

The Indian Position: Listing And Government Ownership Are Not Mutually Exclusive

A possible justification is that government ownership itself supplies the accountability that listing is meant to provide. Government-owned NBFCs already answer to their ministries, face parliamentary scrutiny, and undergo public audit, so the RBI may have treated market discipline through listing as unnecessary on top of that.

That justification does not really hold up. The OECD Guidelines on Corporate Governance of State-Owned Enterprises, which are widely treated as the leading international standard in this area, exist precisely to promote transparency, accountability, integrity, and efficiency in State Owned Entities (SOEs). Read alongside the G20/OECD Principles of Corporate Governance, they have become the benchmark most countries turn to when reforming their SOE governance frameworks. The key point they make is that state ownership cannot substitute for transparency and market discipline. State-owned enterprises are still expected to meet disclosure and governance standards comparable to listed companies, because ministerial oversight and state control simply do not produce the same accountability that continuous public disclosure and independent market scrutiny do.

India’s own practice bears this out. SBI and other public sector banks have stayed listed for decades even with the government holding majority ownership. Likewise, the Life Insurance Corporation of India (LIC) went public in 2022 despite the Union Government retaining an overwhelming majority stake, and has since complied with the disclosure and corporate governance obligations applicable to listed entities. This demonstrates that majority government ownership and public listing have long coexisted within India’s financial sector.

Given this, exempting government-owned NBFCs from mandatory listing is hard to defend. If listing and market disclosure have worked fine alongside majority government ownership in banking and insurance, there is no obvious reason to spare NBFCs the same requirement. The Amendment Directions do not explain the departure from this established practice. The exemption therefore weakens the RBI’s claim to an ownership-neutral framework and suggests the distinction is based on ownership alone, not on any real difference in regulatory objectives, governance needs, or systemic risk.

Conclusion

The RBI’s latest amendments make the process of identifying systemically important NBFCs more objective, which is a genuine improvement. But the listing exemption for government owned NBFCs sits uneasily beside the stated goal of ownership neutral regulation. Reconsidering this exemption would go some way toward making the framework consistent with the rationale it claims to serve.

**Kushagra Jaiswal and Vaishnav Bhat are third-year B.A., LL.B. (Hons.) students at NALSAR University of Law, Hyderabad, with interests in corporate, commercial, and financial regulation.

**Disclaimer: The views expressed in this blog do not necessarily align with the views of the Vidhi Centre for Legal Policy.