Home / Companies / Equitas Holdings IPO subscribed more than 17 times on final day

Mumbai: Equitas Holdings Ltd’s 1,525 crore initial public offering (IPO) drew demand for more than 17 times the number of shares on sale because of strong interest from local financial institutions.

The share sale sailed through smoothly on the final day of subscription even though foreign institutional investors were not allowed to participate in the first IPO of a small finance bank licencee. The share sale is the largest primary issue which was open only to domestic subscriptions, said bankers.

Equitas, one of the eight microfinance institutions that won small finance bank licence by the Reserve Bank of India (RBI) last year, received bids worth 26,000 crore, data from the stock exchanges showed.

As of 6.50pm, the institutional investors’ category was subscribed nearly 15 times the 39.8 million shares on offer. The retail and high net worth individuals (HNIs) categories were subscribed 1.4 times and 57.3 times, respectively, the data showed.

The company raised 652.18 crore by way of anchor allotment at 110 per share, the upper end of the 109-110 price band. The public issue was worth 2,176 crore in total.

Investment bankers to the Equitas IPO also pointed out that investors were undeterred by the untested business model of small finance banks and the fact that the company does not have the backing of any prominent promoter group.

“The success of the deal is a reflection of investors’ confidence in the business, management, and fundamentals of the company. It is also a testimony to the depth in our markets, considering that this IPO was restricted only to domestic investors, and yet received a very positive interest. The investors appear to have appreciated the strengths of a board- and professionally run company with a track record of performance," said Sanjay Bajaj, managing director and head equity capital markets, HSBC Securities and Capital Markets (India) Pvt. Ltd.

Foreign portfolio investors, or FPIs, were not allowed to buy shares in the IPO as their holdings already exceed the limit stipulated by RBI. The guidelines for small finance banks limit foreign shareholding to 49%. At all times, at least 26% of the paid-up capital will have to be held by residents or domestic investors, said the statutory guidelines for small finance banks.

Foreign holding in Equitas currently stands at 92.64%, according to information made available in the red herring prospectus.

Dharmesh Mehta, managing director and chief executive of Axis Capital Ltd, attributed the success of Equitas IPO to the quality of the issue and right valuation.

“The response shows confidence in the financial sector and proposed small finance bank model. Also, this is the largest domestic-investors only IPO ever. The response shows if the valuations are correct, investors are willing to put money," Mehta said.

In the so-called grey market, Equitas’s shares were quoting at a premium of 20 per share, indicating significant investor interest, dealers said.

“It is attracting huge interest. This IPO is an interesting one, and we haven’t seen such interest for some time now," a dealer said, requesting anonymity.

The grey market, which is largely driven by rich investors subscribing to a large quantity of shares, is a over-the-counter market where IPO shares are bought and sold before a company officially lists on the stock exchange. It gives a broad indication of the appetite for a public issue.

Post the stock market listing, Equitas may garner a market capitalization of 3,700 crore, the company said in a press conference last week. The company received approval for its IPO from capital markets regulator Securities and Exchange Board of India on 29 December.

As part of IPO, six foreign investors will fully exit their holdings. They are Sequoia Capital India Investments III, Aavishkaar Goodwell India Microfinance Development Co. Ltd, Aquarius Investment Advisors Pte Ltd, MVH SpA, Lumen Investment Holdings Ltd and WestBridge Ventures II Llc.

Other foreign investors selling part of their shares include World Bank arm International Finance Corporation, Dutch development finance institution FMO and Helion Venture Partners Llc. Equitas’s founder P.N. Vasudevan, who owns 3.17% stake in the firm, will also sell a part of his holding, according to the RHP.

The way forward

Vasudevan said the IPO was one of the steps towards attaining the final licence from RBI.

“We have to merge three of our subsidiaries under one company. The merger process is underway. Once all the processes are complete and compliant with the RBI guidelines, we can apply for the final licence. We have time until April 2017 to complete all formalities," said Vasudevan, adding that investors’ response to the IPO is a positive sign.

Indian brokerage firms are of the view that Equitas will face several challenges on the way to becoming a small bank.

According to a note by Religare Capital Markets Ltd on 5 April, Equitas’s loan book (excluding microfinance) is still at a very nascent stage. Conversion into a small bank may also drag medium-term return on equity, the note added.

“It would be too soon (for Equitas) to project sustainable, industry-leading growth with superior profits in the long term," said Religare analysts Parag Jariwala and Vikesh Mehta, adding that the 300 basis points advantage in cost of funds is likely be passed on to microfinance customers once it becomes a small finance bank (SFB). A basis point is 0.01%.

According to Prabhudas Lilladher, Equitas will have to create new product offerings to meet priority sector lending (PSL) targets.

“Although, it has a high share of PSL book, PSL requirement of 75% for a SFB of which 40% has to be allocated to priority sectors in the manner specified by the RBI and will be hard task especially in agriculture where Equitas does not have any strength of operations," the brokerage firm said in 4 April note. The company will also have to invest heavily in technology upgradation and branch expansion, the brokerage firm said.

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