Small finance banks eye listing even as peers face challenges

So far, three SFBs have listed on the stock markets—Equitas Financial Holdings Ltd, Ujjivan Financial Services Ltd and AU Small Finance Bank Ltd. Of these, Equitas and Ujjivan are holding companies for their respective small finance banks.

In October, the Reserve Bank of India (RBI) asked Equitas and Ujjivan to list their SFB units to comply with its norms, which mandated that a small finance bank must be listed within three years of the launch of operations. Further, it said, the promoter shareholding should be brought down to 40% within five years of launch. For Equitas and Ujjivan, it meant listing their SFBs by September 2019 and January 2020, respectively. In September 2015, RBI issued 10 SFB licences.

“The holdco structure was created to comply with RBI norms of having a designated promoter for the SFB. Since most of these companies had raised a lot of private equity capital over the years, their founders’ stakes had been reduced to low single digits, and thus the need for this holdco structure to act as a promoter of the SFB," said an investment banker who has advised a small finance bank on its IPO.

The trouble for SFBs who have this holdco structure is that if they list the small finance bank (while the holdco is also listed) separately then the holding company investors will see a sharp loss of value in the shares, as it will be valued with a holding company discount, which could be anywhere around 40-50%, the first person added.

Given the loss their investors are likely to face, SFBs have been in talks with the RBI to relax these norms.

However, last week, Business Standard reported that the central bank has informed SFBs that it will not be diluting the listing norms.

Despite these headwinds, a few unlisted small finance banks have started work on their initial public offerings.

Among these, Fincare Small Finance Bank is currently in the process of appointing investment banks and other advisers for its IPO. Like Equitas and Ujjivan, Fincare too is likely to list its holding company, Fincare Business Services Ltd, said the people cited above.

“Fincare is expected to soon appoint a banker syndicate to work on its IPO. These SFBs, which have a holdco structure, are working on their IPOs, hoping that in due course of time the central bank will offer some relaxation in the listing norms," said the second person aware of the IPO plans of these SFBs, requesting anonymity

Rajeev Yadav, MD and chief executive officer of Fincare, declined to comment on Mint’s queries. To be sure, not all SFBs that are working on listing plans have a holding company structure. Maharashtra-based Suryoday Small Finance Bank is one such SFB, which too has been talking to investment banks to start preparations for an IPO. Suryoday will directly list its small finance bank through an IPO.

“We have had preliminary discussions with a few merchant bankers but we are yet to close anyone. We have recently closed a round of capital raise and are in the initial stages of planning for the IPO. Hence we still have to evaluate the quantum of capital to be raised. Suryoday Small Finance Bank does not have a holding company structure," said a spokesperson for Suryoday. SFBs that are yet to go public include Jana Small Finance Bank, Utkarsh Small Finance Bank and Capital Small Finance Bank.