Why IDFC Investors Are Unhappy With The Board And Management
An "informal" investor call organised by IDFC Ltd. on Tuesday morning was intended to inform shareholders of the company's value-unlocking plans. The call, hosted by Vinod Rai, non-executive non-independent, chairman of the firm; and Sunil Kakkar, managing director & chief executive officer, went downhill almost as soon as it started.
For over an hour, investors questioned the board and management on issues ranging from delays in value unlocking, to the chairman's re-designation and the CEO's salary. The call ended with domestic and foreign shareholders asking the board and management for clear guidance on when IDFC would merge with IDFC First Bank.
At the core of shareholder discontent is the underperformance of the IDFC stock. It is frustrating to be a shareholder of IDFC, lamented veteran investor Madhusudan Kela, founder of MK Ventures. There has been a lot of wealth destruction for investors, he added.
Kela's concerns are not unwarranted. IDFC shares, trading at Rs 60 apiece on Sept. 16. 2016, are now at Rs 57.40. That's a fall of about 4%. That may not sound like much but the underperformance is stark when compared to the broader Nifty, which has risen from 8,779 to 17,380 over the period.
Is A Merger With IDFC First Bank The Answer?
Shareholders believe a reverse merger of IDFC Ltd. with IDFC First Bank Ltd. is the answer to end the underperformance of the former.
This became possible because the Reserve Bank of India, in July, said that it would allow for amalgamation between holding companies and subsidiary banks. At the time, analysts said IDFC and IDFC First Bank would benefit from such a reverse merger as well.
The five year lock-in period for promoter IDFC had already ended in September 2020. According to the RBI's licensing guidelines, promoters have to hold minimum 40% for five years in a non-operating holding company structure. As such, there are no restrictions from the RBI in such a merger anymore.
IDFC, the holding company, owns 36.56% stake in IDFC First Bank. The Government of India owns 16.37% stake in the holding company. Other large investors in IDFC include ICICI Prudential Life Insurance Co., HDFC Life Insurance Co., 1729 Capital, East Bridge Capital, Theleme Partners and Baobab Global.
Selling The Asset Management Business
What is coming in the way of an easy division is IDFC's asset management business. The sale of this unit could pave the way to the merger and it could also potentially mean a one-time dividend for the shareholders.
On the call, some shareholders suggested that a way to unlock value would be to sell the asset management business, distribute sale proceeds to shareholders and then merge the holding company into the bank.
Rai seemed to differ.
"This is one option to maximise shareholder value. Now the question is, what is the attraction we bring to that entity? If we have cashed out, distributed all the revenue earned from the sale of one entity, there is no attraction for the entity with whom you have sought our merger," Rai told investors during the call. Without any capital on its books, the holding company would become less attractive for the bank as a merger candidate, he added.
Moreover, such a transaction would attract both capital gains tax for the entity and dividend distribution tax for the shareholders, Rai explained.
According to a senior analyst who spoke on conditions of anonymity, IDFC might be looking to keep the sale proceeds in the company till the merger is completed to get a better swap ratio with the bank. While this seems unfair to IDFC's own shareholders, it would eventually help them with more favourable terms during the merger, the analyst said.
The sale process for the AMC had been in the works for nearly three years, but IDFC is yet to find a bidder at the desired price, the analyst quoted above said. In November 2018, Mint newspaper had reported that frontrunner Avendus Capital was willing to pay Rs 2,000 crore for IDFC's asset management business, where the seller expected a valuation of Rs 3,500-4,000 crore.
Investors are now losing patience.
"By the end of this call we expect the board and management to share a clear timeline of when the AMC business would be sold. Even if the taxation is high, it is something the shareholders have to consider," said Kela.
IDFC Foundation A Complicating Factor
Complications won't end with the sale of the AMC business.
Another stumbling block is IDFC Foundation, under which there are two joint ventures with the Delhi and Karnataka state governments, Rai told investors. Unless both state governments agree to induct new partners for IDFC's 50% stake in the ventures, the sale won't go through and the merger would be stalled.
So far, the Delhi state government has identified a potential partner who could take over IDFC's stake in the joint venture, Rai said. The discussions are on going.
"We will give them (state governments) a very short amount of time to respond to the sale process so we can put this behind us. We are seeing light at the end of the tunnel," Rai said during the call.
Here again, shareholders were not willing to give IDFC much time. The board at IDFC has been working on the IDFC Foundation issue for years without a solution and this has caused a lot of value destruction for shareholders, an investor said on the call.
According a person familiar with the matter, the two joint ventures under IDFC Foundation needed to be resolved before the merger talks can even begin. Without them being addressed, the bank may not be keen on discussing the merger, the person said.
The main reason behind the unhappy shareholders is the tardiness of the existing board and management of IDFC in closing key issues preceding the merger, this person said. Now that investors have expressed their displeasure, things should move quickly and IDFC should speed up the merger process, the person added.
In the course of the call, other questions were also raised by investors.
For instance, why was Rai re-designated at non-executive, non-independent chairman. This was done because Rai had already completed two terms as independent director.
"The board and the nomination and remuneration committee felt it is in the best interest of the company to ensure continuity of Vinod Rai's tenure," said Ajay Sondhi, chairman of the NRC. The technical process of Rai's resignation and appointment was discussed by the board with legal counsel and all regulations and corporate governance processes were followed, Sondhi added.
Another shareholder questioned the salary of the chief executive officer, wondering why the income of a holding company chief is equal to that of the CEO of IDFC First Bank.
Rai, while taking all questions on board, said the company intends to present a plan at its annual general meeting on Sept. 22.