Proposed small finance banks opt for holding firm

According to RBI norms, the promoter's minimum initial contribution to the paid-up share capital of an SFB should be at least 40 per cent

As the proposed small finance banks (SFBs) inch towards the deadline for launch, a number of them are opting for a holding company structure, in which the bank would be the subsidiary of their microfinance institution (MFI) or the holding company.

The route will help them meet the Reserve Bank of India (RBI) requirement of a minimum 40 per cent promoter and 51 per cent domestic holding in the proposed bank, among other things.

According to the present RBI norms, the promoter's minimum initial contribution to the paid-up share capital of an SFB shall be at least 40 per cent, locked in for five years from the date of commencement. Also, since in most cases the original promoters have very little shareholding in MFIs, it is not possible for them to raise their equity to 51 per cent without substantial investment. Hence, with the holding company as the promoter of the bank, the twin regulations are met.

Paid-up share capital is the amount of money a company has received from shareholders in exchange for shares of stock. Paid-up capital is only created when a company sells its shares on the primary market (such as through IPO or initial public offering of shares) to investors.

Kerala-based ESAF Microfinance will have the MFI entity as holding company or the core investment company for the bank. Thus, effectively, the microfinance entity would be the promoting company of the bank, said K Paul Thomas, chairman and managing director, ESAF Microfinance.

Another proposed SFB, Disha Microfinance, will have Fincare Business Services as the holding company for the proposed bank. At present, Fincare Business Services is the central holding company operating a clutch of businesses including microfinance venture Disha.

Ujjivan 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. Thus, the proposed bank would also be a subsidiary of Ujjivan Financial Services.

"In case of Ujjivan, there is no dilution of shareholding in the banking entity, as it will be 100 per cent owned by the holding company, which will be a listed arm," said Rajat Singh, head of strategy and planning, Ujjivan.

RBI norms require an SFB be listed within three years, once it reaches a net worth of Rs 500 crore.

However, one issue with the SFBs which got listed recently to raise funds is that their banking arm would have to be listed separately at a later date. To avoid this, Ujjivan, which recently got listed recently, will explore the option of a reverse merger. Under the reverse merger proposed, Ujjivan Financial Services and its subsidiary, the proposed bank, could be merged, Samit Ghosh, founder, Ujjivan had said earlier. Thus, the bank would not be required to be listed separately at a later date.