Approval for Merger of IDFC First Bank and IDFC Ltd

The 3 way merger of IDFC First Bank, IDFC Ltd and IDFC Financial Holdings has been set in motion with the respective board of directors approving the proposal, in principle. However, any such merger decision will need the approval of the shareholders, creditors of these institutions and the regulators; including NCLT, RBI and SEBI.

As of now there has been no time defined for the merger since such processes typically take time to get the approval of the shareholders, the NCLT and the regulators. In addition, creditor approval also takes time due to the nuances involved in the merger. The approval process may take up to a year and as of now, only the board has given in-principle approval.

The 3 way merger has been necessitated due to the cross holdings of connected entities. For example, IDFC Financial Holdings owns a 36.52% stake in the bank as of September 2021. While IDFC does not have a direct stake in IDFC First Bank, it indirectly owns a stake in IDFC Bank due to IDFC Financial Holdings being a 100% subsidiary of IDFC Ltd.

To begin the process of the merger, the board has appointed a special Capital Raise and Corporate Restructuring Committee (CRCRC). This committee will work on the terms of the merger. Its scope of work will include areas like finalising the scheme of merger, arriving at valuation for the deal and hiring advisors to navigate the entire merger process.

IDFC, as the promoter of IDFC Bank, was required to hold 40% stake in the bank for a period of 5 year from the date of the bank’s commencement of operations. However, this 5-year period was completed in September 2020. In July 2021, the RBI also gave its approval that IDFC could now exit as the promoter of IDFC First Bank.

There is a reason for the urgency shown by IDFC and IDFC First Bank. In the IDFC board meeting held in September 2021, the shareholders of IFDC Ltd voted against giving a third term to Vinod Rai as the non-executive director of IDFC Ltd. The shareholders were upset that he had not done much to either push the merger with IDFC Bank or to hive off the non-core asset management business of IDFC.

While the details are awaited, it looks like it would be a reverse merger IDFC Ltd with IDFC First Bank. This will save IDFC Ltd from the persistent holding company discount and also improve the stock price performance of IDFC First Bank.

RBI, in July 2021, had allowed the amalgamation between holding companies and subsidiary banks. For the IDFC group, such a reverse merger looks like a win-win all through.