The fact that the SFBs would need to list the banks, rather than their holding companies, was highlighted by recent examples of Ujjivan and Equitas. The two SFBs had listed the holding companies of the SFBS in 2016. However, RBI asked the two entities to list the banks directly for meeting the banking regulations. RBI regulations say that the SFBs need to be listed in stock exchanges within three years of reaching Rs 500 crore net worth-mark.
At present, out of 10, only three SFBs — Au Financiers (India) Ltd, Capital Local Area Bank and Suryoday — operate in direct ownership model, while rest have a holding company structure. Apart from Ujjivan and Equitas, which have listed their holding companies, AU Financiers is the other listed entity in the SFB space.
Under the holding company structure, the SFB is a subsidiary of the microfinance institution (MFI) or the holding company. The route helped SFBs meet the RBI requirement of having minimum 40 per cent paid up equity capital by promoters. As in most of the SFBs, a large part of the shareholding was held by private equity firms and the founders’ holding had been very low. Hence, with the MFIs as a designated promoter, the SFBs could comply with the RBI norm.
While Ujjivan needs to get listed by the end of January 2020, Equitas’s listing deadline is September 2019. For most SFBs, the listing deadline is around middle of 2021.
The problem with the listing of banks, in case the promoter is the listed holding company, lies in a significant erosion of shareholder value.
“If one business has two listed entities, one set of shareholders will be under pressure, and this case that of holding company. We are working on a plan to reduce this loss of value by working out our IPO in such a way that a portion of bank’s shares are reserved for shareholders of the holding company in different categories,” said Samit Ghosh, founder, Founder, Ujjivan Small Finance Bank,
Ujjivan is planning to list only about 10 per cent of the bank.
This apart, Ujjivan is also closely watching Equitas, which is required to list by September. Equitas Holdings, which is the promoter of Equitas Small Finance Bank, is proposing to offer about 47 per cent of its ownership in Equitas Small Finance Bank to its existing shareholders. The bank would then list the shares on the stock exchanges using a provision that allows companies to get listed without making an IPO. The proposal is yet to get regulatory clearances.
“We will closely watch if RBI allows Equitas to get listed through this route. If it agrees, we will do the same. However, if it doesn’t, we will list close to 10 per cent of the bank," said Ghosh.
Notably, after five years of operations as SFBs, RBI norms allow the SFBs to go for reverse merger, which allows the bank and the holding company to merge, thus restoring the shareholder value. Most SFBs, including Equitas and Ujjivan, are looking to opt for a reverse merger in future.
Other SFBs, which are not yet listed at any level, and operate in the holding company structure, will now have to move the investments in holding company to the bank itself. According to K Paul Thomas, MD and CEO, ESAF, the SFB is looking to raise capital at the bank, and different plans like share swap and buy back are being discussed ahead of listing. The bank is looking to start listing preparations by next month.
“We are evaluating all options of capital raising, and we need to comply with RBI listing norms by 2021,” said Rajeev Yadav, Managing Director and CEO, Fincare Small Finance Bank.