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Shares of small finance banks (SFBs) surged on Monday after the central bank allowed them to apply for amalgamation with the promoter entities on completing five years of operations.

On Saturday, Equitas Holding Ltd and Ujjivan Financial Services said they would initiate steps following the Reserve Bank of India’s (RBI’s) approval to file for a scheme of amalgamation of the promoter entity with the respective SFBs.

Ujjivan Financial Services Ltd and Equitas Holding Ltd surged up to 20% each in early trade on Monday. Equitas SFB gained 7.3% while Ujjivan SFB climbed 1.5%.

“This is positive for listed holding companies Ujjivan Finance & Equitas Holding that may complete five years by 3Q-4Q2021 and trade at 40% holding company discount versus value of stake in the bank," wrote Jefferies India in a note to investors. “Some other SFBs in IPO stage can also gain, but AU SFB doesn’t have (holding company) structure. IDFC Ltd may indirectly benefit but needs to sell stake in AMC to simplify (holding company) structure".

Equitas Holdings and Ujjivan Financial Services currently hold stakes of 82% and 83% each in Equitas and Ujjivan SFB, respectively.

As per RBI banking licensing rules, a promoter needs to dilute its stake in a bank to 40% within five years from the start of business.

“Further, as SFB’s licensing guidelines state that the promoter can decide to exit after a lock-in of 5 years. Thus, this Amalgamation Scheme if implemented will help fulfil the promoter shareholding requirement as well. The investors of the holding company will get the shares of listed SFB through a share swap ratio and the holding companies will thus cease to exist. In this process, the approval of RBI, Sebi and NCLT is required," according to a Motilal Oswal report.

“The Amalgamation Scheme would help unlock significant value for the shareholders of the respective holding companies as the holdco discount narrows," the report said.

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