If synergies of Bandhan and Gruh are so good, why didn't HDFC and HDFC bank think of this synergy to create a real giant with tremendous economic power.
Mergers, demergers and other business restructuring decisions are complex and best left to the wisdom of the board. But some of these restructurings make us - and the markets - question the wisdom of company boards. The proposed merger between Bandhan Bank and Gruh Finance is one such example.
Experience tells that often the arguments for such restructuring is more a matter of convenience rather than a proper rationale. Often in case of demergers, one would hear that two businesses are different, their valuation metrics are different, investors do not choose or prefer to invest in companies with a portfolio of business etc. But if the same two businesses were to be merged, the key arguments would be synergies of cost, strategy, complementing resources, concentration, economic power etc.
All such words look very nice in reading and speaking but may not really mean much. If synergies of Bandhan and Gruh are so good, it merits several questions. Why didn't HDFC and HDFC bank think of this synergy to create a real giant with tremendous economic power? Why didn’t HDFC think of merging Gruh with itself or HDFC Bank? Were the boards of HDFC and Gruh not interested in growth and shareholder value creation?
The other logic is the growth potential in rural home loans and low-cost housing. Both Bandhan and Gruh have skills in tapping this potential. That further raises questions. By giving up Gruh, is HDFC giving a hint that it does not want to grow in that segment? Or does it feel that it can grow rural and low-cost housing business better in HDFC itself and thus exiting Gruh make economic sense?
That said, look at the group’s track record, it would be foolish to question the competence of the boards of HDFC or HDFC Bank. With the same logic, even Gruh’s board may not be questioned.
The market cap of the combined Bandhan-Gruh entity will be Rs 75,000 crore as on 8 January assuming a straight sum of their individual market caps. HDFC’s stake of around 15 percent will be valued at Rs 11,250 crore. With leverage, HDFC will be able to have a loan book of 5-6 times this value if it decides to liquidate its investment in the combined entity. Contrast this with current total assets of Gruh which are only about Rs 16,000 crore.
Gruh has a net worth of Rs 1,380 crore. Thus, even a 5 percent stake sale by HDFC in the combined entity will fetch it around Rs 3,800 crore. It’s a clear win for HDFC despite the market’s negative reaction. It gives HDFC additional cushion for capital adequacy ratio.
But a win for HDFC doesn’t automatically mean that the board of Bandhan was incapable of seeing this. The logic for deal is certainly under question, as almost 26 percent dilution is taking place in Bandhan, but the net worth accretion is only about Rs 1,400 crore. That’s just a 15 percent increase over the existing net worth of Rs 9,390 crore. If Bandhan had issued the same number of fresh shares at its current market price, it would have increased its net worth by Rs 21,000 crore.
But it would be naïve to assume that the Bandhan board would not have made these calculations. In that scenario, it is clear that something else forced their hands on the merger. That is the compulsion of complying with Reserve Bank of India’s ownership norms.
If that’s the case, the first question is whether the deal makes business sense or regulatory sense? While regulatory compliance is of paramount importance, should regulations guide business decisions? Are regulations forcing banks to become desperate buyers? Can such desperate decisions do any good to the system?
Fundamentals do not support or makes sense from Bandhan's perspective, if one takes away pressure of promoter to dilute their stake. Regulations exist to protect stakeholders and maintain the integrity of the market. In this specific case, they are not achieving their objective. As Bandhan cannot find any other practical solution to comply with RBI rules, stakeholders are suffering.
Bandhan could afford to commit this sort of hara-kiri for its shareholders, for two reasons. One, it relatively small. Two, it has only 17 percent public shareholders and about 12 percent institutional shareholders.
Can Kotak Mahindra Bank, which is facing a similar problem, do the same? Not really. Firstly it has about 70 percent public shareholders who wouldn’t allow such a deal to go through. Secondly it is much bigger and would not find any suitable match.
Does that mean that RBI should drop its dictate? Certainly not. Regulations are difficult to comply but they are a must for maintaining the integrity of the market and stakeholder protection. However regulations must be rational and realistic. Overregulation is as dangerous as under regulation.
In pre-liberalised India, all local businesses used to tailor-make their decision around regulations. If licence for cement was available everyone would manufacture cement regardless of any other factor. It seems our banking regulations are still from that era. The time has come for RBI to have a relook at bank ownership regulations and address important issues. It should look at whether governance structures should be ownership agnostic. It should evaluate whether conflict of interest is more dangerous to the system than high ownership without conflict?
For instance, how can concentrated ownership through diversified non-operating holding company be better compared to direct ownership? Is the voting right cap not a neutralising factor for risks of high ownership coupled with restriction on board seats? Does a very low limit of promoter ownership not create an agency problem which is worse than ownership problems?
It is high time that RBI gives a temporary reprieve to all affected banks while it is studying these issues so that their stakeholders are not affected.(The author is founder of Stakeholder Empowerment Services, a proxy advisory firm. Views are personal.)