Equitas and Equitas SFB to announce long awaited merger

For the stocks of Equitas Holdings and Equitas Small Finance Bank (SFB), the big trigger was always going to be the reverse merger of Equitas Holdings into Equitas SFB. Accordingly, there was a sense of excitement in the markets on Tuesday 22nd March, when the merger was actually announced.

As per exchange filings, the boards of Equitas Holdings Ltd and its subsidiary, Equitas Small Finance Bank, had already approved their merger plan.

This will be an interesting amalgamation as per the new amalgamation norms permitted by the RBI regarding beneficial ownership in the case of small finance banks.

As per the scheme of amalgamation, Equitas Holdings Ltd will be the transferor company, while Equitas Small Finance Bank will be the transferee company.

The amalgamation will be structured in such a way that the transferor company, despite merging, does not have to be wound up.

In short, this is a reverse merger where the holding company merges into the subsidiary. Accordingly, as per the scheme of amalgamation, Equitas Holdings will merge into and with Equitas Small Finance Bank.

Thus, as a result, there will be dissolution of Equity Holdings Ltd without winding-up of the transferor company. This deal is still subject to the approval of RBI, the stock exchanges, SEBI and the National Company Law Tribunal (NCLT).
 

One of the main reasons for this scheme of amalgamation of the holding company into the subsidiary small finance bank (SFB), is more for a legal purpose.

It is aimed to meet RBI's licensing conditions to bring down the shareholding of the holding company of a bank to 40% within a period of 5 years from the date of commencement of business of the bank. This 5-year window was completed on 04th September 2021.

RBI guidelines also stipulate that the shares of the small finance bank (SFB) have to be listed on the stock exchanges within a time frame of 3 years from the date on which the net worth of the SFB reaches Rs.500 crore.

Since Equitas had started operations with a net worth of over Rs.500 core, it had already complied with the listing guidelines laid out by SEBI and the stock exchanges by way of its initial public offer (IPO) in November 2020.

This deal will also save Equitas Holdings from the traditional holding company discount which is the bane of most banking and other holding companies in India.

Normally, since banks don’t have any running business in their books, except the investments in group companies, they tend to get valued at lower valuations as investment companies rather than as core manufacturing or service companies. That discount can now be avoided.

Regarding modalities of the scheme of amalgamation, equity shareholders of the transferor (Equitas Holdings) will be allotted 231 equity shares for every 100 shares of the transferee company (Equitas SFB).

Post this deal, there will be no identifiable promoter group for Equitas SFB and as a result its public shareholdings as per stock exchange records will go up from the current 25.41% to 100%. Both stocks have rallied sharply of late.