Shares of Equitas Holdings and Ujjivan Financial Services — holding companies of two south-based small finance banks (SFBs) —on Friday slumped to their lifetime lows after the Reserve Bank of India (RBI) directed both firms to list their SFB units.
Shares of Equitas Holdings and Ujjivan Financial Services — holding companies of two south-based small finance banks (SFBs) —on Friday slumped to their lifetime lows after the Reserve Bank of India (RBI) directed both firms to list their SFB units. While Equitas fell nearly 40% intraday to Rs 78, Ujjivan’s stock dropped as much as 24% to Rs 166.80. The stock reaction suggests that the markets adjusted the value of the two companies to account for their new status as holding companies, which typically have a discount associated with them.
The two companies informed the stock exchanges after the close of trading on Thursday about the new direction from the central bank, which they had received on Wednesday. They have been asked to list their bank units within three years of the launch of operations. This means that the deadline for Equitas is September 4, 2019 and that for Ujjivan is January 31, 2020.
In addition, promoters of the two SFBs will be required to hold a minimum share of 40% for a period of five years from the date of launch of operations. Equitas said it would, at its board meetings on November 1 and 2, consider the question of listing its SFB unit within the prescribed timeline and obtaining the RBI’s approval for merging the holding company with the SFB at the end of the prescribed lock-in period.
In its communication to the exchanges, Ujjivan said, “We wish to inform that the bank and the company are committed to consider all appropriate measures to ensure the timely compliance of the above directives of the RBI, while ensuring the long-term interests of the shareholders of the company are maintained.”
Analysts say the companies are now likely to opt for a listing involving a small fund-raise as they are adequately capitalised. This would result in a temporary structure of dual listing. In a note circulated on Friday, Kotak Institutional Equities (KIE) said, “We await to see the steps taken as the dual listing of the holding company as well as the bank on the same underlying business necessarily creates a holding company discount as investors can directly access the bank and the dividends to the holding company shareholders would be subject to dividend distribution tax, which is a permanent loss of value.”
The loss to the shareholder can be minimised if the companies declare negligible dividends over the next two years, KIE said. In recent months, the RBI has been particular about promoters of private banks complying with shareholding guidelines. Earlier this year, Kotak Mahindra Bank and Bandhan Bank have come under regulatory fire for not reducing promoter stake in line with RBI guidelines.