Proposed banks make a beeline for equity markets

Big institutions plan IPOs, smaller ones seek alternative fundraising

As foreign-owned microfinance institutions seek to become domestic-owned small finance banks, garnering fresh equity is becoming a mammoth task, especially for big institutions.

At least two MFIs, Ujjivan and Equitas, have firmed up initial public offering plans, while another big MFI, Janalakshmi, is examining the possibility of an IPO among other options.

Ujjivan and Janalakshmi refused to comment on the issue. Equitas has filed a draft prospectus for an IPO with the Securities and Exchange Board of India (Sebi). Among the smaller and medium-sized institutions, Suryoday, Disha and ESAF are looking to raise capital through private placement of equity. Jalandhar-based Capital Local Area Bank is planning a rights issue. Jaipur-based Au Financiers is examining all options, including an IPO, to raise capital.

Bigger institutions have limited options of raising capital, as a majority of their shareholding is held by foreign investors. “Bigger MFIs will have to go in for IPOs to meet the Reserve Bank of India (RBI) norms on domestic equity,” said Ratna Vishwanathan, chief executive officer, Microfinance Institutions’ Network.

According to RBI rules, small finance banks should have domestic equity of not less than 51 per cent, with 40 per cent domestic equity locked up for five years. With only 18 months in hand, the MFIs planning IPOs are pressed for time to meet the RBI deadline. “The MFIs will have to start operations as banks in the next 18 months, and they will need at least six months to procure regulatory approvals for an IPO,” said Manoj Nambiar, president, MFIN.

About month after receiving an approval in principle from the RBI, Equitas has filed a draft red herring prospectus to raise Rs 1,200 crore through an IPO.

However, with a number of IPOs of the proposed small banks expected to hit the market at the same time, experts warn of increased competition among the offers. “The timing and pricing of IPOs will need to be handled with care. The last time an MFI came out with an IPO was in 2010. Since then much has changed, but not the core sensitivities around financial institutions focused on the poor,” said Alok Prasad, an industry expert.

Among the mid-size institutions, Varanasi-based Utkarsh Micro Finance is planning to raise Rs 500 crore through private placement of equity. Nearly 85 per cent of its equity is held by foreign investors, and its net worth is close to Rs 230 crore, which will increase to Rs 800 crore over the next 18 months.

Jaipur-based Au Financiers was examining all funding plans, including an IPO, to raise capital, said Sanjay Agarwal, managing director of the company. About 62 per cent of its shares are held by foreign investors. “We will have 7-8 per cent of our foreign investments moving to domestic investors. We are exploring all options like employee stock options, warrants, and IPOs,” Agarwal said.

Kerala-based ESAF is planning to raise Rs 200 crore through private placement of equity. Nearly 60 per cent of the equity in the MFI belonged to foreign investors who might sell their stakes to ESAF Staff Welfare Trust and ESAF Credit Cooperative, said K Paul Thomas, chairman and managing director of ESAF.

Capital Local Area Bank, majority owned by individuals, was planning a rights issue to raise Rs 18 crore, said Sarvjit Singh Samra, its managing director. After the issue, the firm’s net worth will be about Rs 124 crore.

Disha Microfinance is looking to raise Rs 100 crore through private placement and is also exploring the option of foreign investors buying more stakes in the company. About 74 per cent of Disha Microfinance’s equity is with India Value Fund, a Mauritius-based private equity firm.

JOINING THE IPO BANDWAGON

• Ujjivan and Equitas, have firmed up initial public offering plans, while another big MFI, Janalakshmi, is examining the possibility of an IPO
   
• Among the smaller and medium sized institutions, Suryoday, Disha and ESAF are looking to raise capital through private placement of equity
   
• Since foreign-owned MFIs seek to become domestic-owned small finance banks, garnering fresh equity is getting tougher
   
• Bigger institutions have limited options of raising capital as a majority of their shareholding is held by foreign investors
   
• According to RBI rules, small finance banks should have domestic equity of not less than 51 per cent
  

 

With only 18 months in hand, the MFIs planning IPOs are pressed for time to meet the RBI deadline