Who Benefits From RBI’s Decision To Allow Small Finance Banks To Merge With Holding Companies?
A customer withdraws a stack of rupee notes at a bank branch in Mumbai. (Photographer: Dhiraj Singh/Bloomberg)

Who Benefits From RBI’s Decision To Allow Small Finance Banks To Merge With Holding Companies?

The Reserve Bank of India’s decision to allow small finance banks to begin the process of merging with their holding companies could reduce the discount at which the latter are trading in the market.

Over the weekend, both Ujjivan Small Finance Bank Ltd. and Equitas Small Finance Bank Ltd. informed exchanges that they had been permitted to do so.

The Association of Small Finance Banks of India had made a representation to the RBI seeking prior in-principle approval for small finance banks to reverse merge with their respective holding companies on completion of initial five years from the date of commencement of business.

“…RBI vide its letter dated July 9, 2021 has informed the said association that it has decided to permit small finance banks and respective holding companies to apply for the amalgamation of holding company with small finance bank, three months prior to completing five years from the date of commencement of business of small finance bank,” Ujjivan said in its notice to exchanges.

“Accordingly, the bank would be initiating necessary steps for the amalgamation of Ujjivan Financial Services with the Bank in accordance with applicable laws and guidelines,” it added.

In a similar alert, Equitas Small Finance Bank also said it is beginning the process of amalgamation and intends to seek the RBI approval for it.

“Equitas Small Finance Bank had sought to submit this prior to the expiry of the said five years, to take effect after the initial promoter lock-in expires,” it said in its exchange notice.

The RBI has permitted this and the bank will now proceed with finalising details of the same, Equitas said.

The RBI’s decision is positive for listed holding companies which are currently trading at a discount, said Jefferies in a note on Monday.

“This is positive for listed holding companies Ujjivan Financial Services and Equitas Holding that may complete five years by Q3-Q4 2021 and trade at close to a 40% holding company discount versus value of stake in bank,” Jefferies said.

Some other SFBs in IPO stage can also gain, the brokerage house said. “IDFC Ltd. may indirectly benefit, but needs to sell stake in the asset management company to simplify holding company structure,” Jefferies said.

The RBI’s decision could have a number of implications, said Macquarie Securities.

First, by allowing a merger of the holding company with the bank, issue of diluting promoting shareholding to 40% within five years should be easier to address for entities such as Ujjivan.

However, there may be an exemption required from the SEBI rule that a promoter needs to hold 20% in the bank three years from the date of listing. “By virtue of this reverse merger process Ujjivan Financial Services Ltd, the promoter will cease to exist and will no longer hold any stake in Ujjivan Bank,” Macquarie said.

The note added that many other banks in India have a holding company structure. “Hence this move by RBI could be indication of mindset of RBI to allow collapse of holding companies into its operational entities,” Macquarie said.

Stock Reaction

  • Equitas Holdings Ltd. jumped as much as 20.1%, the most in over a year, while its subsidiary Equitas Small Finance Bank Ltd. gained as much as 17.9% to a record high of Rs 76.80 apiece.

  • Ujjivan Financial Services jumped 20%, the most since Nov. 23, 2020. While Ujjivan Small Finance Bank climbed 10.8%, the most since March 21, 2021.

  • IDFC Ltd gained as much as 13.7%, while IDFC First Bank Ltd. rose nearly 2%

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