Promoter IDFC writes to IDFC First Bank on unlocking value for shareholders

IDFC Financial Holding Company, a subsidiary of IDFC Ltd, has triggered a conversation with IDFC First Bank on its eventual exit from the promoter position after the expiry of the five-year lock-in period. IDFC Ltd is the promoter of IDFC First Bank.

In a letter titled, "Unlocking Value for IDFC Ltd. shareholders", IDFC through its holding company has sought the bank's views on the way ahead, which essentially means about the mode of parent's exit from the bank. The promoter has sought an 'early response' from the bank.

The letter begins with a reminder to the bank about the RBI rule that permits the promoter to exit the bank after a five-year lock-in period. IDFC Limited is the promoter of IDFC FIRST Bank and is currently holding through its wholly owned subsidiary, IDFC Financial Holding Company Limited (FHCL) around 36.50 percent equity in IDFC FIRST Bank.

"Under the 2013 guidelines of RBI, IDFC, as a promoter, was required to hold a minimum 40 per cent share-holding for a period of 5 years from commencement date of operations of the bank. This five-year lock-in period ended on September 30, 2020. RBI vide their letter dated July 20, 2021 has clarified that after the expiry of the lock-in period of 5 years IDFC Limited can exit as the promoter of IDFC FIRST Bank," the IDFC letter said.

"The Board members of IDFC Ltd. and NOFHC are considering next steps and look forward to remaining in touch with IDFC First Bank. It would help us in our deliberations if IDFC First Bank were to provide us with their views," the IDFC letter addressed to IDFC First Bank Chairman Sanjeeb Chaudhary says.

According to RBI rules, the shareholding of the non-operative financial holding company, which is the promoter of the bank, should be a minimum of 40 percent of the paid-up voting equity capital of the bank which will be locked in for a period of five years from the date of commencement of the business of the bank.

IDFC Bank was given a licence by the RBI along with Bandhan Bank in 2014. In 2018, IDFC Bank Ltd and Capital First Ltd announced the completion of merger to become IDFC First Bank.

This is the second time IDFC Ltd is making an open comment about the expiry of the lock-in period and the likely exit from the bank as promoter.

Earlier, on July 21, IDFC Limited had said it can now exit as the promoter of IDFC First Bank, as the five-year lock-in period has ended.

"We would like to inform you that the Reserve Bank of India (“RBI”) has, vide its letter No. DOR..HOL.No.SUO‐75590/16.01.146/2021‐22 dated July 20, 2021, clarified that after the expiry of lock‐in period of 5 years, IDFC Limited can exit as the promoter of IDFC FIRST Bank Limited," said the company in a communication to stock exchanges on July 21.

The latest IDFC letter also makes a detailed mention of the structure of the holding company and other investments of IDFC Ltd.

Besides holding this investment in IDFC First Bank, IDFC FHCL also holds around 100 percent in the IDFC Asset Management Company Limited (IDFC AMC). IDFC Ltd’s Board of Directors at its meeting held on September 17, 2021, had approved the sale of IDFC AMC and is taking necessary steps to complete the same.

"At a group level, we have two listed entities, IDFC Ltd as well as IDFC First Bank. After the sale of IDFC AMC, IDFC Ltd. will hold its investment in IDFC First Bank and the post-tax cash realized on sale of IDFC AMC," the letter says.

In addition, the IDFC Ltd group corporate structure currently includes the IDFC Foundation and two underlying Joint Ventures with the Delhi Govt and Karnataka Govt respectively. Actions for the suitable disposition of these entities are in process, the letter reads.

According to market experts, the intention of making this dialogue public could be investor pressure in IDFC to quickly unlock the value of its investment.  To exit the promoter position after the lock-in period, the promoter needs to either sell the stake in the bank or consider a reverse merger.