Overseas investors max out investments in Equitas, Ujjivan

The IPO of small finance bank licensees had created legroom for FPI investments

In only six months of going public, foreign investors have almost entirely used their investment limit in small finance bank (SFB) licensees Ujjivan Financial Services and Equitas Holdings. The initial public offerings (IPOs) of these two firms had created legroom for investments by foreign portfolio investors (FPIs). According to the shareholding data available on BSE for June quarter, foreign funds now own 48.13 per cent in Equitas Holdings, while in Ujjivan they own 47 per cent of the total equity base. Going by Reserve Bank of India’s (RBI)’s rules for small finance banks (SFBs), the FPI holding in SFBs cannot exceed 49 per cent.

Before the IPO, FPI holding in Equitas and Ujjivan stood at 93 per cent and 77 per cent, respectively. As a result, FPIs were barred from participating in the IPO. On the other hand, some existing foreign investors sold their holdings, which brought down the FPI holding in Equitas and Ujjivan to 35 per cent and 41.07 per cent, respectively.

Ujjivan and Equitas are among the companies that received a small finance bank licence from RBI in 2015.

The high FPI interest in these stocks has led to a surge in the stock prices of both the microfinance lenders. Ujjivan shares have more than doubled since listing on bourses, while Equitas shares have rallied over 60 per cent.

Market participants said this interest of FPIs in both the microfinance companies is due to good business models of operation and high potential of the sector. Further, the investors who wish to take an exposure in the sector have limited choice. Apart from Ujjivan and Equitas, SKS Microfinance and Satin Credit Care are the only listed players in the space.

Market players said a similar situation was seen in HDFC Bank years ago. Lack of investment limits had led to widening of premium between HDFC Bank’s American Depositary Receipts and local shares.

Ambit said in a note to investors that the loan growth of the SFBs is expected to grow at a compound rate of 20 per cent in the next three to five years as the SFBs penetrate the segment of people who have till now accessed informal credit at much higher interest rates. “As a section of the least income earning population in India moves to higher income segments, SFB-like entities will find a large opportunity opening up,” Ambit said in the report.

Ujjivan had tapped primary markets in late April to raise Rs 885 crore. The issue was subscribed more than 40 times. On the other hand, Equitas had launched its IPO to raise Rs 2,170 crore. The IPO was subscribed 17.2 times.