Equitas Holdings has 82% stake in Equitas SFB and the initial promoter lock-in for five years expires on 4 September 2021. Ujjivan Financial holds 83.3% in Ujjivan SFB and the initial promoter lock-in expires on 31 January 2022
Shares of Equitas Holdings Ltd and Ujjivan Financial Services Ltd rallied 17% and 20% respectively in early deals on Monday on the National Stock Exchange.
The Reserve Bank of India (RBI) has allowed small finance banks (SFBs) to apply for amalgamation with their holding companies on completion of five years from the date of commencement of business. This development is positive for both the above-mentioned companies, which are the promoters of Equitas Small Finance Bank Ltd and Ujjivan Small Finance Bank Ltd respectively.
“Ujjivan Financial Services & Equitas Holdings may complete five years by 3Q-4Q2021 and trade at around a 40% holding company discount versus the value of their stake in the bank," said analysts from Jefferies India Pvt. Ltd in a report on 12 July.
With the reverse merger, the so-called holding company discount will disappear, which explains the sharp rally in the stocks. Based on Friday’s share prices, Equitas Holdings’ stake in its operating SFB was valued at a 35% discount; in the case of Ujjivan, the discount was 43%, according to Jefferies’ calculations.
Note that Equitas Holdings now has 82% stake in Equitas SFB and the initial promoter lock-in for five years expires on 4 September 2021. Ujjivan Financial holds 83.3% in Ujjivan SFB and the initial promoter lock-in expires on 31 January 2022.
But as analysts at JM Financial Institutional Securities Ltd point out, “it is important to note that the RBI go ahead is regarding applying for the scheme and is “not an approval of the scheme". RBI will examine the request on merit and will convey No-Objection for such amalgamation based on satisfactory outcome of a due diligence exercise."
Nevertheless, the news flow so far is positive, which explains the sharp rally in the stocks.
“While the RBI will follow its own due process before a final go-ahead, its agreement to consider promoter exit can imply that prospects of a reverse merger have likely improved further," said analysts from Kotak Institutional Equities in a report on 12 July. “While the RBI is silent on interim stake reduction to 40% (a key tail risk), the progress so far provides higher optimism on a positive outcome on this issue," said Kotak’s analysts.
Jefferies also added, “Some other SFBs in IPO stage can also gain, but AU Small Finance Bank Ltd doesn't have a holding company structure. IDFC Ltd may indirectly benefit, but needs to sell stake in AMC to simplify holding company structure." IPO is short for initial public offering.
Equitas SFB, in a stock exchange notification, said it had requested RBI if a scheme of amalgamation of Equitas Holdings with itself, resulting in the exit of the promoter, could be submitted to RBI for approval. RBI has now given permission for the same.
Meanwhile, from a near-term perspective, investors will closely track the June quarter performance. SFBs such as AU Small Finance Bank and Equitas Small Finance Bank have reported a sharp drop in collections for the June quarter in early updates of their performance. This means that microfinance companies may report a similar trend as banks and NBFCs - of a fall in collections and a rise in defaults in the June quarter.
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