Small banks in Rs 4,000-cr fix to raise domestic funds

RBI requires foreign shareholding to be brought down to 49%; Sebi prohibits tapping domestic PE

Nine out of the 10 entities that received the Reserve Bank of India (RBI)’s in-principle licence for small finance bank (SFB) might have to raise an estimated Rs 4,000 crore from domestic investors to bring down their foreign shareholding to 49 per cent.

The foreign shareholding rules for SFBs will be the same as the foreign direct investment (FDI) policy for private sector banks. At present, private banks can have foreign shareholding of up to 49 per cent through the automatic route and can go up to 74 per cent after the Foreign Investment Promotion Board (FIPB) approval.

These nine entities are non-banking finance companies (NBFCs), which are allowed to attract 100 per cent FDI. Entities such as Equitas, Ujjivan Financial Services and Utkarsh Micro Finance have 93 per cent, 90 per cent and 85 per cent foreign holding, respectively.

UPCOMING SFBs

• Au Financiers
• Capital Local Area Bank
• Disha Microfin
• Equitas Holdings
• ESAF Microfinance and Investments
• Janalakshmi Financial Services
• RGVN (North East) Microfinance
• Suryoday Micro Finance Private
• Ujjivan Financial Services
• Utkarsh Micro Finance

Private equity firms such as Warbug Pincus, Kedaara Capital, ChrysCapital, India Value Fund, CX Partners, Sequoia and Lok Capital have invested in these companies through funds raised overseas.

“There are a large number of small finance banks, which will have to raise domestic capital in the next 18 months. Investors will look for quality and companies with sound track record,” says Samit Ghosh, founder and managing director, Ujjivan Financial Services. ICICI Securities, which has been approached by most of the candidates, says these 10 candidates for SFBs would together require about Rs 4,000 crore to meet the regulatory requirement of bringing down foreign holding to 49 per cent.

“This exposes them to a limited pool of family offices and high networth individuals as other large domestic investors such as mutual funds and insurance companies do not usually invest in unlisted companies,” says Ajay Saraf, head of corporate finance and institutional equity at ICICI Securities.  “The other alternative is to go through the IPO route,” he says.

But most of these candidates say they are not looking at a public issue, as it has its own challenges in terms of pricing, as they are just beginning banking operations. There are family offices such as PremjiInvest, Catamaran Ventures and TVS Capital Funds which represent domestic funds and would be keen to invest, but they have their own challenges.

“Securities and Exchange Board of India (Sebi)-registered domestic venture funds (DVCFs), which constitute most of the larger domestic funds, are not permitted to invest in NBFCs,” says Gopal Srinivasan, chairman and managing director of TVS Capital Funds. “This is a serious issue for potential SFBs, as they need rupee capital, but the primary DVCF pools are restrained from investing in them,” he adds.

This has put SFBs in a fix and they are now expecting resolution of the issue from the regulators. “It would be good if the RBI and the Sebi review the situation and give more leeway in terms of time, as they have given to the four private sector banks to reach the target domestic capital requirement,” says Ghosh of Ujjivan.

Utkarsh Micro Finance, where the foreign holding is 85 per cent, is also looking forward to raise Rs 500 crore through private placement and bring down the foreign holding. “We are not yet clear on how to attract investment from family offices at this stage and are still exploring options,” says Govind Singh, managing director and CEO, Utkarsh. “We expect this to be resolved in due course,” he adds.

There are other smaller NBFCs such as Disha Microfinance whose requirement is about Rs 100 crore only to bring down the foreign holding to 49 per cent from the current 74 per cent. “We are expecting to raise a large part of the requirement from the promoter group itself,” said Rajeev Yadav, director, Disha Group. “We may require a small portion through private placement, which should not be an issue,” said Yadav.