Mumbai: Bandhan Bank Ltd on Monday evening announced the acquisition of HDFC Ltd-owned Gruh Finance Ltd through a share swap ratio, in a deal effective 1 January 2019. Earlier on Monday, Mint had reported that Bandhan Bank and Gruh Finance were in advanced talks to merge the two firms, primarily with an objective to lower the bank’s promoter holding and expand its housing finance portfolio.

Following board meetings of the two firms on Monday, Bandhan Bank in a stock exchange filing said the share swap ratio for the amalgamation will be 568 shares of Bandhan Bank for every 1,000 shares of Gruh Finance. This essentially means a share swap ratio of 0.6, or 3:5, between Bandhan Bank and Gruh Finance.

The Mint report on Monday mentioned that the merger will be consummated through a share swap deal in the ratio of 3:5 between Bandhan Bank and Gruh Finance, which means for every three shares of Bandhan Bank, shareholders of the bank will receive five shares of Gruh Finance.

Anup Kumar Sinha will be appointed as part-time chairman of Bandhan Bank post the merger with Gruh Finance, the company said.

The share swap ratio implies that the pricing for the Badhan-Gruh merger is in line with the six-month weighted average price of the two companies. HDFC and Bandhan Financial Holding Ltd’s (promoter of Bandhan Bank) stakes will come down after the merger.

On Monday, shares of Bandhan Bank tanked 5.21%, or 27.55, to 501.10 apiece on the BSE in a positive market. Gruh Finance shares lost 3.86% to close at 306.20 apiece.

Bandhan Bank’s market cap stands at around 60,000 crore while Gruh Finance has a market valuation of around 22,436 crore. At these valuations, the combined entity will have a total market cap of around 83,000 crore. The six-month weighted average prices of Bandhan Bank and Gruh Finance are at 552.64 and 318.50 apiece, respectively, on the BSE.

HDFC holds 57.83%, or 423.8 million shares, in Gruh Finance as the promoter, while Bandhan Financial holds around 82.28%, or 981.4 million shares, in Bandhan Bank.

Since the merger is being carried out on the basis of six-month weighted average price, the Bandhan-Gruh merger will result in HDFC’s holding falling to around 15.44% in the holding company and Bandhan Financial’s holding will come down to around 60.27%. This final shareholding structure was formally confirmed by the bank on Monday evening.

“The share swap ratio has been arrived at based on the joint valuation report…by SRB & Associates and Desai Haribhakti & Co…supported by fairness opinion submitted by Kotak Mahindra Capital Co. Ltd," said the bank in the exchange filing. JM Financial Ltd gave the fairness opinion for Gruh Finance.

The loan book of the combined lending entity will have 58% micro loans, 28% retail home loans and 14% other loans, the company said in a release.

Sameer Kalra, equity research analyst and founder of Target Investing, feels that the merger with Bandhan Bank will negatively impact the business of Gruh Finance since synergies are low because of the firm’s average loan size of 9.5 lakh and HDFC Ltd emerging as a strong competitor rather than support of the company, post the merger.

Since the proposed deal entails HDFC emerging as a co-promoter for Bandhan Bank, apart from being the promoter of India’s largest private lender HDFC Bank Ltd, HDFC will have to trim its stake further in the merged entity. RBI does not allow the promoter of one bank to hold more than 10% in another bank as a co-promoter.

To meet this requirement, HDFC is in talks with a clutch of institutional investors to offload at least 5.5% in the combined entity, according to the Mint report on Monday.

HDFC has a direct holding of 2.08% in RBL Bank Ltd, according to per BSE records, at the end of September quarter.

However, the Bandhan-Gruh merger won’t really solve the core problem for Bandhan Bank. To meet the bank ownership norms, Bandhan Financial will have lower its stake further from 60.27% to 40%.

In September, RBI restricted Bandhan Bank from opening new branches and ordered a freeze on the remuneration of its managing director and CEO Chandra Shekhar Ghosh for not meeting the bank promoter shareholding norms, which require Bandhan Financial to reduce its stake from 82.3% to 40%. The deadline to dilute the promoter holding was August-end.

Gruh Finance has total assets of 15,970.97 crore, turnover of 1,687.19 crore and a net worth of 1,380.92 crore, as on 31 March, 2018. The home finance company, which is primarily focused on retail segment, recorded a net profit of 220 crore in the first half of the ongoing fiscal.

Bandhan Bank has total assets of 44,310.06 crore, turnover of 5,508.48 crore and a net worth of 9,382 crore as on 31 March 2018, the exchange filing mentioned.

The bank said the Bandhan-Gruh merger will result in enhancement of shareholders’ value, new product development, integration of technology platforms, enabling the two firms to further their socio-economic objectives.

The merger will also help the bank strengthen its housing loan portfolio and increase cash management efficiency, said the exchange filing.

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