In longer run, Ujjivan might seek permission for reverse merger

The reverse merger, which is necessary to meet regulatory norms, would be that of Ujjivan Financial Services and its banking subsidiary

Bengaluru-based micro finance institution Ujjivan will propose to the Reserve Bank of India that it be allowed to go for a reverse merger, of Ujjivan Financial Services and its banking subsidiary, in the long run to meet regulatory norms.

Ahead of the banking foray, Ujjivan's initial public offer (IPO) of equity will open on Thursday, as part of the requirement on equity for a Small Finance Bank (SFB), for which it has been given a licence.

"We had some discussion on reverse merger with RBI. We will propose it formally later, as SFBs are required to go for an IPO at a later date," said Samit Ghosh, founder and managing director, on the sidelines of a press meet here.

According to the present RBI norms, the promoter's minimum initial contribution to the paid-up equity share capital of an SFB shall be at least 40 per cent, locked-in for a period of five years from the date of commencement. This apart, SFBs are required to substantially bring down their foreign shareholding. To meet the twin norms, and given its diversified shareholding pattern, Ujiivan decided on an IPO, through a holding company, Ujjivan Financial Services. Essentially, the latter would be a listed arm, acting as holding entity for the proposed bank. Meaning, the proposed bank would also be a subsidiary of Ujjivan Financial Services.

RBI norms also require that an SFB be listed within three years, once it reaches a net worth of Rs 500 crore. Under the reverse merger proposed, Ujjivan Financial Services and its subsidiary, the proposed bank, could be merged, said Ghosh. Thus, the bank would not be required to be listed separately at a later date.

After this week's IPO (it closes on the coming Monday), the foreign shareholding in Ujjivan would come down to 44-45 per cent. Under the pre-IPO offer, Ujjivan's foreign shareholding had already come down from around 90 per cent to 77 per cent; it raised Rs 290 crore. Under the IPO, the company plans to raise Rs 358 crore. The offer is priced at Rs 207-210 a share.

Ujjivan would formally launch its banking services by April 2017. Initially, nearly 40 per cent of the existing branches would be converted into those of an SFB. This apart, it will open around 80 branches in unbanked areas. At present, Ujjivan has about 470 branches. Apart from banking services, lending and deposit taking, Ujjivan would start remittance services. At present, it has 2.77 million active borrowers, with assets under management of around Rs 4,600 crore.

In the initial phase, it is expected to offer slightly higher than market interest rates on deposits. "Currently, our cost of funds is around 12 per cent. Once we convert into a bank, it would come down as we will be able to raise deposits. Initially, we might offer slightly higher interest rates, to attract deposits," said Ghosh.