Small finance banks with a net worth of more than ₹500 crore were mandated by the central bank to list within three years of launching operations.
That deadline is now approaching for many of the 10 small finance banks who won in-principle approvals in September 2015.
Small finance banks that have started work on their IPOs include Fincare Small Finance Bank, which has appointed investment banks to start working on its proposed IPO of more than ₹1,000 crore and Kerala-based ESAF Small Finance Bank, VCCircle reported on 22 August.
Utkarsh Small Finance Bank is looking to hire investment banks to advise on its ₹500 crore initial share sale, Mint reported on 18 September.
As they queue up to go public, small finance banks could face several challenges, given their ownership structure.
Small finance banks such as Equitas and Ujjivan, which listed their holding companies Equitas Holding Ltd and Ujjivan Financial Services Ltd, are currently facing these challenges as the central bank has asked them to separately list their operating small finance bank subsidiaries, as per licence requirements.
Many small finance banks are held by private investors through a holding company structure, which was created to comply with RBI norms of having a designated promoter for such bank.
Ujjivan’s small finance bank subsidiary has already filed its draft IPO papers for a ₹1,200 crore share sale, while Equitas notified the stock exchanges on 13 September that its small finance bank subsidiary will go public by March 2020.
For these entities and others with a similar structure, the challenge is that if they list the small finance bank (while the holding company is also listed) separately, then the holding company investors will see a loss of value in the shares, as it will be valued with a holding company discount.
“There will be two listed companies, so the issue clearly is that investor interest will be more towards the operating subsidiary once it gets listed, given the parent is a pure holding company with no other business. To that extent, the holding companies could become vulnerable and their pricing may come under pressure once the SFB subsidiary gets listed," a person advising a small finance bank that is planning to go public said, seeking anonymity.
“One potential solution to it is that at a subsidiary level, one does a small float to keep shareholding in the parent company more liquid and, hence, relevant, even after the SFB unit gets listed," the person added.
Other industry experts say that banks who have shorter deadlines to list are also exposed to potential valuation headwinds.
“Investors know that SFBs have an IPO deadline to meet, while some only have a few months left, for others there still some time. Depending on when an SFB’s IPO deadline ends, the investors could try to go for a hard bargain and that could be quite a challenge," said Jibi Jacob, head of equity capital markets, Edelweiss Financial Services Ltd.
However, he said that unlike previous instances, there is enough headroom for foreign investor participation in these IPOs and that could help support valuations.
Jacob added investor appetite will also depend on whether it is the bank or the holding company that is seeking to go public.
“Another important aspect for the investor would be whether it is the SFB or the holding company that is going public. Holding companies would find it tough to get investors as it will be a case of once bitten, twice shy," he added.
So far, only one small finance bank is directly listed on the stock exchanges. In June 2017, Jaipur-based AU Small Finance Bank Ltd went public in a ₹1,900 crore IPO.