According to an exchange filing on Wednesday, the Reserve Bank of India allowed IDFC Limited to exit as the promoter of IDFC First Bank Limited, and this is what the bank said in a statement to exchanges. Two businesspeople familiar with the situation believe that this merger could pave the way for a potential reverse merger between IDFC Limited and IDFC First Bank Limited.
On July 20, 2021, the Reserve Bank of India (RBI) wrote to IDFC Limited (“IDFC First Bank”) confirming that after the five-year lock-in period had expired, IDFC Limited could exit as the promoter of IDFC FIRST Bank Limited. This lock-in period, which was supposed to last five years, will conclude on September 30th, 2020.
In effect, the RBI has issued a clarification which is in line with the previous ruling allowing SFBs such as Equitas and Ujjivan to amalgamate the entity promoter with the SFB. Accordingly, this also is to be expected of IDFC. Several variables are now in place for the board to seriously consider a reverse merger of IDFC Bank and the bank, resulting in the holding company structure collapsing, one of the people involved in the situation told us on the condition of anonymity.
This person has pointed out that, in order for the merger to be permitted, an official application would have to be submitted to the RBI for their approval. Furthermore, it is possible that IDFC might also have to sell its mutual fund business, IDFC AMC.
A holdco is required when there are other non-banking financial businesses in a company along with a bank. In spite of the findings of the internal working group (IWG), current banks that are under the control of the NOFHC structure can exit if they are not associated with other entities. This official also believed that it was necessary to sell the AMC business to collapse the entity holding company structure. Both earlier interviewees stated that the process may take some time.
Following the universal banking licencing guidelines established in February 2013, the Reserve Bank of India (RBI) granted IDFC a banking licence in April of 2014. To ensure the banking business was completely separated from other activities of the firm, IDFC had to establish a non-operative financial holding company (NOFHC) structure for the bank and other financial services units of the parent company. Not only was the parent company IDFC required to hold a minimum of 40% stake in the ban for the first five years, but also they were required to maintain a minimum of 40% for the first five years with the intention of eventually lowering it to 15% over ten years. The latest recommendations from the RBI’s Innovation Works Group propose that the cap on promoters’ equity, which would eventually be raised from 15 percent to 26 percent of the paid-up voting equity share capital of private banks, may eventually be raised to 26 percent.
According to a source, the IWG recommendations, if and when they are finalised, will have a huge impact on IDFC Bank’s intention to exit the holding company structure, and on whether other banks that have multiple financial services divisions will have to create one.
It will take time for this merger to bear fruit, but shareholders of IDFC Limited could gain if it does. Analysts say a merger could help IDFC Limited shareholders unlock value in the company, reduce the holding company discount.
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