BoB eyes IL&FS custodian business in Rs 600-cr deal

ISSL custodial clientele includes corporates, institutions, high net worth individuals and NRIs

State-owned lender Bank of Baroda (BoB) is in advanced talks to buy controlling stake in IL&FS Securities Services (ISSL), the custodian arm of Infrastructure Leasing & Financial Services, said two people familiar with the matter. At an enterprise valuation of Rs 750 crore, the deal could fetch the infrastructure major around Rs 600 crore, they added.

“Talks are on. Board-level discussions have happened recently,” said one of them. If concluded, the Rs 600-crore deal would be the first major acquisition by the bank since the new management under P S Jayakumar took over a little over a year ago. Jayakumar, a Citibank veteran and among the first private sector executive hired to lead a public sector bank, did not respond to calls or text messages.

IL&FS executives, too, declined to comment.

ISSL is one of the leading professional clearing members in the derivatives segment in the stock exchanges. ISSL custodial clientele includes corporates, institutions, high net worth individuals and non-resident Indians (NRIs). Under this service, it manages the settlements of all security transactions undertaken by clients on the stock exchanges. It also manages client securities flow in demat form. Custodial service also includes safekeeping of clients’ holdings. It also offers back-office services for broking entities and operates through separate subsidiaries such as ISSL Settlement & Transaction Services, ISSL Market Services and ISSL CPG BPO.

The non-bank custodial services sector is seeing a churn after the Reserve Bank of India made clear its intentions to come up with regulations for custodian banks. Non-bank players are either scouting for additional capital or looking for exit routes opening up investment opportunities. “The possibility of creating new kinds of differentiated banks, such as custodian and wholesale-financing, will also be explored,” said the central bank’s recent report on trends and progress in banking.

The custodian business could augment the bank’s international operations, adding to the bouquet of services available to international clients and bring with it relationships of global institutional and NRI customers, analysts said. While the parent IL&FS and its associated entities hold 81.24 per cent, IL&FS Employee Welfare Trust holds 9.01 per cent. Croupier Privé Mauritius has a five per cent stake, while Japanese leasing firm Orix Corporation owns 4.75 per cent.

According to the latest BoB annual report, international business contributed significantly to the total business. “As on March 31, 2016, it contributed 31.3 per cent of global business. Of the total international loan book, 47.92 per cent comprised buyer’s credit/BP/BD portfolio where the exposure is on the banks. Exposure to India-related corporates and non-Indian entities, by way of syndicated loans/ECBs, was at 22.03 per cent and 4.30 per cent, respectively. Remaining 25.75 per cent exposure was by way of local credit.”

In an interview to Business Standard last year, Jayakumar had said, “The bank is working on a strategy for international operations. It takes a lot of energy and time. We are looking at focused and better quality business in retail banking in the UK, where we have 14 branches. Overall, the bank will focus on local business done locally, the diaspora (non-resident Indians), cross-border trade and investments.”

Both foreign investors have board seats on the ISSL, which is led by Executive Chairman Arun K Saha, and Managing Director & Chief Executive Officer Rengarajan Seshadri, according to the company website. 

The IL&FS custodian business is over two decades old and initially housed a strategic business unit within the infrastructure major. It was spun off as a separate company in 2007. In 2007, Orix had picked stake in the company for Rs 36 crore.