Axis Bank changes contours of Enam deal to meet RBI terms

Axis Bank changes contours of Enam deal to meet RBI terms

Mumbai: Axis Bank Ltd on Friday said its board approved a revised two-stage deal to acquire the investment banking and broking units of Enam Securities Pvt. Ltd after the Reserve Bank of India (RBI) had raised objections to the structure of the 2,070 crore all-stock transaction, announced in November 2010.

Under the new structure, which the bank said “was formulated to comply with the conditions of the RBI", Enam’s investment banking and broking arms will be merged into the bank by issuing 5.7 shares of Axis Bank for each share held by Enam shareholders in the first stage. As a result, shareholders of Enam will get 13.78 million shares of the bank, or 3.35% of its stake. Under RBI norms, no single shareholder can hold more than 5% stake in a bank without the regulator’s clearance. In the second stage, the business will be sold to Axis Securities and Sales Ltd (ASSL), a wholly owned subsidiary of Axis Bank.

The earlier proposal envisaged Enam shareholders getting the same proportion of shares, but the business was supposed to be shifted directly to ASSL.

“This step (first selling to Axis Bank and then passing it on to the subsidiary) is done to justify the issuance of equity shares of Axis Bank, which RBI had objected to," said an investment banker with a domestic bank.

RBI had asked Axis Bank why its shares would be transferred to Enam shareholders when the company was actually being acquired by a subsidiary.

“ASSL shall pay the bank a cash consideration of 274 crore, which represents the book value of the Enam’s financial services business," an Axis Bank release said. The cash consideration was never a part of the original deal and was introduced to fulfil RBI conditions.

As the business will be subsidiarized at book value to ASSL, there will be no tax implication, the investment banker said. According to him, if the business would have been sold at real value, there would have been a tax liability. The banker did not want to be named as he is not authorized to speak to the media.

Though the deal is “formulated in compliance with the conditions prescribed by RBI", it is subject to “necessary approvals", including that of the shareholders and creditors of the bank, Enam and ASSL, apart from the high courts of Mumbai and Gujarat.

Approval by capital market regulator Securities and Exchange Board of India will also be needed to complete the deal.

Nilanjan Karfa, an analyst at Brics Securities Ltd, said the likely completion of the deal is not revenue accretive and, hence, won’t impact the stock much.

“The idea was to ensure Axis Bank’s business becomes more holistic like that of ICICI Bank Ltd and HDFC Bank Ltd, so in that sense it does not impact revenues," he said. Karfa said the deal will take another six months to be completed.

Axis Bank could not convince RBI to allow Enam Securities chairman Vallabh Bhansali to become a director on its board.

“Bhansali is a market broker, and perhaps the RBI wanted to keep him out of the board for that reason," Karfa said.

Bhansali could not be reached for comment. No Axis Bank official was available for comment.

Axis Bank’s shares rose 1.56% to 1,133.15 on Friday on BSE. The exchange’s bellwether equity index, the Sensex, rose 0.34% to close at 16,933.83 points.