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Equitas Small Finance-Equitas Holdings merger swap ratio questioned by analysts

The analysts say the share-swap ratio is skewed in favour of shareholders of the promoter company, which is smaller than the small finance bank in terms of net worth, turnover and assets.

March 31, 2022 / 08:28 PM IST
Equitas Small Finance Bank | Representative image

Equitas Small Finance Bank | Representative image

Some analysts have questioned the share-swap ratio proposed in the latest merger plan between Equitas Small Finance Bank and Equitas Holdings, saying the transaction benefits shareholders of the smaller promoter company.

The merger proposes allotting 231 shares of Equitas Small Finance Bank for every 100 shares of Equitas Holdings, the promoter company. After the merger, Equitas Holdings will be dissolved and the entire shareholding of Equitas Small Finance Bank will be publicly held.

Institutional investors – mutual funds and foreign portfolio investors – own more than 63 percent of Equitas Holdings.

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Equitas Small Finance Bank is bigger than Equitas Holding in terms of total assets, turnover and net worth, according to stock exchange filings by both the companies on March 21. The market capitalisation of Equitas Small Finance Bank was Rs 6,404 crore on March 31, compared with Rs 3,643.48 crore for Equitas Holdings.

The analysts said given that the promoter company was smaller than Equitas Small Finance Bank, the proposed share-swap ratio wasn’t “convincing.”

“Why should the shareholders of a small company get larger shares of a bigger company in the merger process?” asked a market analyst, who declined to be identified. “This is sending out a very wrong signal.”

The rationale for the merger was to comply with Reserve Bank of India norms that require the promoter of Equitas Small Finance Bank to pare its shareholding to 40 percent within five years of starting the business.

Valuation report

The share exchange ratio was based on a valuation report submitted by Raghuraman Krishna Iyer, a registered valuer. JM Financial provided the fairness opinion and V Sankar Aiyar & Co., the statutory auditor, certified that the accounting treatment in the scheme conformed to the applicable accounting standards, Equitas Holding said in the regulatory filing.

The merger proposal is subject to approval from various regulatory authorities.

Equitas Holding is a non-deposit taking, systemically important core investment company registered with the RBI. Its operations are limited to investing in and providing loans to group companies. It operates two subsidiaries: Equitas Small Finance Bank and Equitas Technologies, which is engaged in the business of freight aggregation.

Equitas Small Finance Bank is engaged in retail banking with a focus on microfinance, commercial vehicle finance, home finance, loan-against-property finance, corporate finance, and financing solutions for individuals and micro and small enterprises.

The RBI’s small finance bank licence norms make it mandatory for such banks to get listed on the Indian stock exchange within three years of their net worth reaching Rs 500 crore.

Equitas Small Finance Bank started operations with a net worth of over Rs 500 crore. It listed on the stock exchanges on November 2, 2020, following an initial public offering.

The proposed amalgamation is aimed at meeting the RBI stipulation of reducing the promoter’s holding in the small finance bank to 40 percent within five years of starting the business. Equitas Holding had a 74.63 percent stake in the small finance bank as of February 21, according to data on the BSE.

The scheme seeks to achieve compliance with the directive of the RBI in a manner that is in the best interests of and without being prejudicial to EHL, ESFBL, their respective shareholders or any other stakeholders, the bank said.

Under the guidelines, a promoter can exit from the small finance bank after completing the lock-in period of five years with approval from the RBI and subject to applicable regulations.

Equitas Holdings had total assets of Rs 1,792.5 crore, turnover of Rs 10.3 crore and a net worth of Rs 1,789.35 crore, as per the unaudited financial statement on September 30, 2021, it said in the stock exchange filing.

The total assets of Equitas Small Finance Bank stood at Rs 25,261.3 crore, turnover of Rs 2,563.4 crore and a net worth of Rs 3,582.7 crore, as per the unaudited statement at the end of December 2021.

KT Jagannathan is a senior journalist based in Chennai
first published: Mar 31, 2022 08:28 pm