Ujjivan, Equitas promoter holdings to fall to zero post mergers with SFBs

Predictably, share prices of Ujjivan Financial Services, and Equitas Holdings jumped 20 per cent each after the two entities received the nod to reverse merge with their small finance bank entities

The reverse merger of Ujjivan Small Finance Bank (SFB) and Equitas SFB with their respective holding companies will bring down promoter shareholding to zero, thereby helping the entities comply with the Reserve Bank of India (RBI) guidelines and reap rich rewards for the shareholders of the holding entities.

Predictably, the share prices of Ujjivan Financial Services, and Equitas Holdings jumped 20 per cent each after the two entities received the nod to reverse merge with their small finance bank entities. When the central bank issued guidelines on SFBs, it had said the holding company structure could be allowed to merge back with the bank after five years, subject to regulatory approvals.

In the interim, the holding company discounts on both the firms reached more than 55 per cent in the market, as shareholders were not sure if the RBI would eventually allow a reverse merger.

Getting a regulatory approval cleared all doubts.

“The reverse merger is beneficial for the shareholders of the holding company because they will now get shares of the bank on a particular share swap ratio, which is yet to be decided,” said Samit Ghosh, chairman of Ujjivan Financial Services, and founder MD & CEO of Ujjivan SFB.

The holding company structure, in theory, is a necessity for universal banks that offer full services to their clients. The Non-Operative Financial Holding Company (NOFHC) structure basically says if a promoter entity has financial businesses other than the bank, for example, if the promoters also run an insurance company, or a mutual fund company, then all the businesses must operate under a common umbrella, but as separate silos in order to to protect the bank. Industrial groups are not yet allowed banking licences to start with.

However, for a firm that only has a bank to run, the NOFHC structure is not required.

"The guidelines do not require setting up of a holding company to set up the SFB. If there is an intermediate company, it should be an NOFHC and conform to all requirements relating to NOFHC stipulated in our guidelines on licensing of new banks in the private sector dated February 22, 2013,” the RBI had clarified in a frequently asked questions (FAQ) section on its website on January 1, 2015.

The NOFHC, it was clarified in the FAQ, has to be the promoter, and non-promoters were not allowed in the NOFHC.

In case of Ujjivan SFB, promoter shareholding, or the shareholding by the NOFHC was 83.32 per cent as in June 2021. For Equitas, the NOFHC held 81.98 per cent of the bank in March this year.

RBI rules stipulate that the SFB promoters must bring down their shareholding to 40 per cent in five years.

The reverse merger, in this case, brings down the promoter shareholding to zero as post merger, the holding companies would cease to exist.

“The holding company was trading in the market at a discount of 40-50 per cent, as people were not certain if the holding company could reverse merge with the bank after five years. Now it has been approved, and so the shareholders of the holding company will now be direct shareholders of the bank,” Ghosh said.

Since the holding company will not exist any more, the entire board of the holding company will have to be disbanded. However, few members of the holding board can join the bank board. Ghosh, currently the chairman of the holding company, will have to cut his association with the microfinance institution-turned bank he floated.

“I will be free of all my burden after the merger,” said Ghosh. However, if the shareholders want, Ghosh can still get his foothold in the bank.

Ghosh turned 70 in November 2019, and became ineligible to continue as the MD & CEO in accordance with rules. However, he can be appointed as the bank's director again, as the age limit is 75 for such positions.

The shares of Ujjivan Financial Services were down 3 per cent, and Equitas Holding shares were up 0.31 per cent on Wednesday. But they were still higher than their Friday’s closing price  - Rs 203.50 and Rs 115.50 a share. At 1.30 pm, Ujjivan Financial and Equitas holding was trading at Rs 236.30, and Rs 128.95 per share on the NSE.

Ujjivan SFB and Equitas SFB were trading at Rs 30.95, and Rs 67.25 a share on NSE.