IDFC, IDFC First Bank Shares Rally On RBI’s New Banking Proposals

Shares of IDFC Ltd. and IDFC First Bank Ltd. rose to multi-month highs after the Reserve Bank of India’s internal working group suggested raising promoter holding threshold among lenders and changes in ownership structure.

IDFC’s stock posted its biggest intraday gain since May 2009 to end at an upper circuit of 20%. The shares also closed at a 19-month high. IDFC First Bank ended 9.7% higher at Rs 36.85 apiece—the highest in over eight months.

The RBI panel proposed that the cap on promoters’ stake in the long run may be raised from the current levels of 15% to 26% of the paid-up voting equity share capital of the bank. The group, however, suggested a long 15-year transition for this change, according to a report published on Nov. 20.

Based on the current shareholding pattern, Warburg Pincus holds 10% stake in IDFC First Bank. “Assuming that the regulations are implemented as suggested by the working committee, Warburg Pincus can increase their stake,” Nidhesh Jain of Investec told BloombergQuint over the phone. “[But] it remains to be seen whether they do so,” he said.

Another recommendation by the working group was that the non-operative financial holding company should continue to be the preferred structure for all new licences to be issued for universal banks. It, however, should be mandatory only if promoter or promoter group owns the other group entities. Banks currently under a non-operating financial holding company structure may be allowed to exit from such a structure if they do not have other group entities in their fold.

“This means that IDFC and IDFC First Bank can merge into one entity. Earlier there was an expectation that IDFC will cut its stake in IDFC First Bank and there will be selling pressure in the stock, but now it won’t be needed,” Investec’s Jain said. The research firm had previously said the suggestion, if implemented, will be positive for stocks like IDFC Ltd. and Bandhan Bank.

According to Kajal Gandhi of ICICI Direct, the holding company discount may narrow and the structure may collapse. “They have already indicated their plans of selling their AMC business and reverse merge. Such a move will be positive for them,” Gandhi told BloombergQuint over the phone. Gandhi also has a ‘buy’ recommendation on IDFC and IDFC First Bank.

Of the eight analysts tracking IDFC First Bank, two have a ‘buy’ rating, one suggests a ‘hold’ and the rest recommend a ‘sell’.