Ujjivan, Equitas promoter shareholdings to fall to zero

The reverse merger of the Ujjivan Small Finance Bank (SFB) and Equitas SFB with their respective holding companies has brought down promoter shareholding to zero. The move has helped the entities to comply with the Reserve Bank of India (RBI) norms and shareholders of the holding entities in reaping rich rewards.

The share prices of Ujjivan Financial Services and Equitas Holdings jumped 20 per cent each after the two entities received the nod to reverse merge with their small finance bank entities.

When the central bank issued guidelines on SFBS, it had said the holding company structure could be allowed to merge back with the bank after five years, subject to regulatory approvals. In the interim, the holding company discounts on both the firms had reached over 55 per cent in the market, as the shareholders were not sure if the RBI would eventually allow a reverse merger. Getting a regulatory approval cleared all doubts.

“The reverse merger is greatly beneficial for shareholders of the holding company because they will now get shares of the bank on a particular share swap ratio, which is yet to be decided,” said Samit Ghosh, chairman, Ujjivan Financial Services, and founder MD & CEO of Ujjivan SFB.

The holding company structure, in theory, is a necessity for universal banks that offer full services to their clients. The non-operative financial holding company (NOFHC) structure basically says if a promoter entity has financial businesses other than the bank — for example, if the promoters also run an insurance company or a mutual fund company — then all the businesses must operate under a common umbrella but as separate silos. This was to protect the bank. Industrial groups are not yet allowed banking licence to start with.

However, for a firm that only has a bank to run, the NOFHC structure was not required. “The guidelines do not require setting up of a holding company to set up the SFB. If there is an intermediate company, it should be an NOFHC and conform to all requirements relating to NOFHC stipulated in our guidelines on licensing of new banks in the private sector dated February 22, 2013,” the RBI had clarified in a FAQ section on its website on January 1, 2015. The NOFHC, it was clarified in the FAQ, has to be the promoter, and non-promoters were not allowed in it. In case of Ujjivan SFB, promoter shareholding, or the shareholding by the NOFHC, was 83.32 per cent in June 2021. For Equitas, the NOFHC held 81.98 per cent of the bank in March this year.

RBI rules stipulated that SFB promoters must bring down their shareholding to a minimum of 40 per cent in five years. The reverse mergers, in this case, bring down the promoter shareholding to zero as post-merger and the holding companies would cease to exist.

“The holding company was trading in the market at a discount of 4050 per cent, as people were not certain if the holding company could reverse merge with the bank after five years. Now it has been approved, and so the shareholders of the holding company will now be direct shareholders of the bank,” Ghosh said.

Since the holding company will not exist any more, the entire board of the holding firm will have to be disbanded. However, few members of the holding board can join the bank board. Ghosh, the chairman of the holding company, will have to snap his association with the microfinance institution-turned bank he floated. “I will be free of all my burden after the merger,” said Ghosh. However, if the shareholders want, Ghosh can still get his foothold in the bank.

Ghosh turned 70 in November 2019, and became ineligible to continue as the MD & CEO according to the rules. However, he can be elected back in the bank as a director, as the age limit is 75 for such positions.