Equitas and Ujjivan share hope of RBI merger with SFB
Shares of Equitas Holdings Ltd and Ujjivan Financial Services Ltd rose 17% and 20% respectively in the first trades Monday on the National Stock Exchange.
The Reserve Bank of India (RBI) has authorized small financial banks (SFBs) to apply for the merger with their holding companies after a period of five years from the date of commencement of activity. This development is positive for the two aforementioned companies, which are respectively the promoters of Equitas Small Finance Bank Ltd and Ujjivan Small Finance Bank Ltd.
“Ujjivan Financial Services & Equitas Holdings could end five years by 3Q-4Q2021 and trade at a discount of around 40% to the value of their stake in the bank,” analysts at Jefferies India Pvt said. . Ltd in a report released on July 12. .
With the reverse merger, the so-called holding discount will disappear, which explains the strong rise in equities. Based on Friday’s stock prices, Equitas Holdings’ stake in its operating SFB was valued at a discount of 35%; in Ujjivan’s case, the discount was 43%, according to Jefferies’ calculations.
Note that Equitas Holdings now owns 82% of the capital of Equitas SFB and that the promoter’s initial foreclosure for five years expires on September 4, 2021. Ujjivan Financial holds 83.3% in Ujjivan SFB and the promoter’s initial foreclosure expires on September 31st. January 2022.
But as analysts at JM Financial Institutional Securities Ltd point out, “It is important to note that the RBI is moving forward with respect to the program request and is“ not a program approval. ”RBI will review the request on the merits and will transmit No Objection to such merger based on the satisfactory outcome of a due diligence exercise. “
Nonetheless, the news flow so far has been positive, which explains the strong rally in stocks.
“While the RBI will follow its own process before a final deal, its agreement to consider the promoter’s exit may imply that the outlook for a reverse merger has likely improved further,” analysts from Kotak Institutional Equities said in a report. July 12. “While the RBI is silent on the temporary reduction in attendance to 40% (a major risk), progress so far offers greater optimism for a positive outcome on this issue,” analysts said. by Kotak.
Jefferies also added, “Some other SFBs in the IPO phase may also benefit, but AU Small Finance Bank Ltd does not have a holding structure. IDFC Ltd may benefit indirectly, but must sell its stake in AMC to simplify the structure of the holding company. »IPO is the abbreviation of the initial public offering.
Equitas SFB, in a stock market notification, said it had asked RBI if a proposed merger of Equitas Holdings with itself, resulting in the exit of the promoter, could be submitted to RBI for approval. RBI has now given clearance for the same.
Meanwhile, from a short-term perspective, investors will closely monitor the performance of the June quarter. SFBs such as AU Small Finance Bank and Equitas Small Finance Bank reported a sharp drop in collections for the June quarter in early performance updates. This means that microfinance companies may report a trend similar to that of banks and NBFCs – a decline in collections and an increase in defaults in the June quarter.
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