ValuePickr Forum

Ujjivan Financial - Small Finance Bank

Jatin, I missed that part of 26% cap. My bad.

No problem.
I am just fetching information from wherever i can and am trying to make sense out of it. I actually wish that any valuepickr member with some knowledge of voting rights on merger of holding company with banks clarify and help answer multiple questions i posted above. We need clarity on “chances of reverse merger of UFSL hold co with USFBL after 5 years when UFSL will have about 40% holding in USFB”.

Drhp of USFB are here:

Page number 34 in it says that no entity can have more than 26% voting rights in a bank. Screenshot of page 34.

Now if a 40% holding co will have only 27% voting rights then how would voting rights reach to a full 100%?

Also, why would the USFB shareholders presumably holding 60% of bank at the end of 5 years would allow reverse merger when they would know that allowing it would result in voting rights of holding co would increase from 26% to a larger number, may be full 40%???

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Such a wondeful business, but no straightforward way to own it due to some irrational RBI rule. :disappointed:

The draft guidelines are expected to be out by sept end.
Below article uses ‘may’ word and gave a view on possible guidelines :

Ok at end of september.

Even if RBI may allow reverse merger, would the new shareholders of SFB allow it is the primary concer right now


I am not sure whether the regulations allow complete collapse of promoter holding after 5 years as that is what a reverse merger would do. As per my knowledge, Regulations only say maintain minimum 40% promoter holding for 5 years and only says reduce thereafter. Haven’t looked into the minimum requirements for promoter holding after 5/7/12 years.

The new RBI guidelines for the reverse merger are not out yet as per my search. I am following that every day. There was a rumour last week, for the same being finalized, in the market and that lead to some jump in the stock.

I am assuming here that by the time the 5 years of operations are completed in Jan 2022, the bank would have probably gone for one more capital raise or maybe not depending on the growth. Since the UFSL’s current 100% holding, next year’s 85-90% holding will have limited voting rights of 26% as uncovered by you, I am thinking whether in 2.5 years time we will see more than 26% dilution or not.

Most probably the dilution will be less than that and the new shareholder’s voting rights will be less than 26% in quantity, than UFSL’s. At which point of time if RBI permits, the reverse merger can be applied for. However, following the Equitas saga, the SEBI has not responded in 6 months time with approval because as their MD said this Scheme of Arrangement is not a normal course of business. It would be safe to assume that SEBI may be a hurdle to cross even at that time.

All the above information is as per my limited understanding, we need a corporate law, accounting law expert to help with this. As per AR FY19, the shareholder’s reserves in USFB are only 179 cr while Equitas SFB has 1250 cr odd. In the 3 FYs before the reverse merger date, depending on growth, credit risk manifestation, we may see reserves of USFB build up by 200-250 cr each year.

So basically, I am assuming that the reverse merger will be done to facilitate brining the promoter holding below 40% rather than doing it after. This is all speculation on my side, only the management can answer on the specifics.

RBI said that ujjivan can approach them at end of 5 years for reverse merger. No merger talk enetertained before that. Now, rules for SFB states that they MUST bring down promoter shareholding to 40% in 5 years. Hence, they can not rely on reverse merger to bring down stake below 40%.

The only option i can think of is that They will have to Raise large capital to bring promoters down to 40%. But there can be other ways, which we may not know.

If they raise capital, then we are back to the problem that USFB shareholding will be 60% and then they will have higher voting share and merger may be difficult… anybody has any other inputs/corrections on this?


On this, Equitas MD said on a con call that Rbi in its 2015 SFB gudelines said that whether promoters can completely exit SFB business at the end of 5 years will be dependent on RBIs regulatory and supervisory comfort/discomfort as well on SEBI regulations at that time. That means that there are no rules that says that “Promoters must not exit” and so this route is open. RBI would consider it based on its comfort on ujjivan’s business/behaviour/etc.

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At the end of 5 years when U-FSL will be holding 40% of bank. The chances of SFB merging in financial services will be rare instead SFB shareholders may think of buying out their shareholding from financial services.

At that point what price SFB shareholder will pay for financial services is the question? I believe this is more or less settled now.

@Gaurav_Agarwal unless they have hope of a merger, why would they buy out holding company shares?

Yes, you are right. All I am saying is

  1. U-SFB board will be all powerful. At present also U-FSL board is just a show piece.
  2. U-SFB may decided (just to look good) to buy shares of U-FSL, how it will done - merger or something else does not matter.
  3. U-SFB may in-fact in future decide not to waste it’s money in buying shares of U-FSL and let the company rot just like that.

So far i always bought shares in companies where management had skin in game, at least about 50% shareholding.

What do u guys think would be incentive to the MD, CEO, management in running UFSL or USFB when they do not hold any significant shares in either of the two? Can u share your views? I want to understand about it.

They took all this effort of getting SFB license and bringing it up from scratch, opening branches, scaling up, etc. wouldn’t they wish they held some stack to benefit in this growing SFB sector??? They surely have more money than i do :joy:

The reason i ask this is, if they have some interest in UFSL, then they would take all the care in future to help it merge with USFB. :grinning:

Jatin, sure, banking sector does not see huge promoter holdings in majority of cases. But they have ESOPs schemes to align employee interests.

All the ESOPs granted by Ujjivan to its employees and even Ittira Davis, are in UFSL and not USFB. I am guessing even Nitin Chugh will get ESOPs in UFSL as well only.

@hack2abi, @Gaurav_Agarwal, @gpoliset
Guys, i believe i have got an answer to this voting right thing after a lot of confusion (on my side).

At the end of 5 years lock in period of promoter holding at 40% level, if RBI agrees to dissolve holding company, i.e. that RBI allows promoters stack to go down to zero, then it should be pretty easy for holding company shareholders to dissolve the USFL hold co. There must not be any role of new USFB shareholders in the holding company dissolution decision at that time. The reason being, it would be an internal matter of the holding company shareholders as the holding company will directly hold shares of USFB in its books and its just a matter of distributing those USFB shares to individual shareholders of holding company in proportion of their shareholding in the holding company. isn’t it? What do you think?

If this is true, then i am hopeful that RBI should be okay with promoter holding going down to zero after 5 years, since there is no rule that says that promoter holding in a bank must be such and such after 5 years (current rules only decide upper limit). So there could be a considerable upside at the end of 5 years (less than 3 years from now to say). And that could also mean that holding company trading discount should not be significant in case of UFSL share.


Then why dont they do the same for current listing? Give everyone a 1/10th of their holding in USFB and list. Why go to SEBI for capitalising reserves? Why can’t this also be done to bring down the promoter shareholding to >=40% now or even before end of 5 years?

Also as per sebi ipo rules, promoter shares (minimum contribution 20%) are locked in for a period of 3 years. Over and above that, contribution are locked in for 1 year. So the 85-90% promoter holding in USFB cannot be fully collapsed until after Jan 2023.

I think its best to take the queries directly to the management. Too much confusion here.

This can’t be done. Then there is no one holding more than 40% and no identifiable promoter remains.

This is to raise new shares of SFB, which can be distributed to holding co shareholders, without breaking hold co. This route is being looked at by equitas because they have more reseves. Ujjivan does not have significant reseves.

I agree with this that hold co breakup may take an additional year due to sebi rules. This can be taken to management for clarifocation definitely.

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@hack2abi What should a regular investor do ?

  1. Take a bargain by buying Holding co shares in bulk now before listing and wait for 3 yrs
  2. Keep SIPing Holding co shares and SFB shares 50:50 allocation , for 3 yrs
  3. Just Buy Bulk SFB shares on IPO even at 8000cr mcap or 12000 cr mcap and stay calm & peaceful for 3 yrs.
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Man, Gautham that is a tough question to answer, Ujjivan will probably list before Equitas now, and there are no comparables to cite.

  1. Bandhan is a Universal bank with majority MF book but has no limiting regulations of SFBs. It has traded between 7.5x to 4.5x in terms of P/B. Valuations have reduced after non-compliance with regulations.

  2. AU SFB is similar in regulatory stead but its book is entirely different, it has traded between 4x to 9.7x and is at 6x now in terms of P/B.

  3. Equitas SFB is the closest comparable in term of holding structure and loan book but not in geographic spread. It has traded between 2x to 4x in terms of P/B. Their IPO came out at a P/B on 2.29x (based on 9MFY16 BV).

  4. Ujjivan came out with an IPO valuation of 2.2x P/B (based on 9MFY16 BV), while Bharat Finance and Satin Credit Care were both trading at 5x odd P/B at the time.

Perhaps the managements and merchant bankers of both Equitas & Ujjivan applied the holding company discount to the IPO in recognition of the holding structure.

It is difficult to imagine that all market participants did not know about the holding company structure, I have not looked into the shareholding data but it could be the case that the retail participants bid the holding company shares to 4x P/B without the knowledge of holding structure or in hope of favourable exemptions from RBI.

Assuming the above history in trading values, it may be that when the SFB IPO comes out, it will come at, at least 4x P/B and markets may bid them higher due to low float that will be available. Building a position in SFB will not be easy and cheap, given the interest that was seen in the IPO of the holding companies.

Ujjivan’s bid to show better C/I ratio and loan book growth in Q1FY20 and in the coming quarters before the IPO is also not of any help. The management had guided again and again in interviews and CCs that it will have 3 years to bring down C/I ratio to ~50%. Another factor to consider is that Ujjivan SFB will see a big leadership change from December and we need to be in a wait & watch mode to see how the leadership direction, values, culture and efficiency change.

If one truly believes in the long term story, then high valuations should not necessarily be a deterrent, we have ample examples of long term wealth being compounded at respectable rates even when purchase price were at expensive valuations. Whether Ujjivan and other SFBs are in that basket is a call the investor will have to take after their own due diligence.

I am sorry that I do not have an answer in the format of, do 1,2 or 3. You are a knowledgable investor yourself, and you know when to buy in bulk and when to SIP. The allocation decision between UFSL and USFB will need to be taken on the basis of relative valuations, and the regulatory environment of the time.

@shreyas1705 I missed your query from before. As you have seen that the conditions for Equitas have changed since the time you asked your question. Valuation comparison between Equitas and Ujjivan is a subject of long detail research. But is majorly dependent on NPA levels, loan book segmentation based on geographic and product, provision coverage, collection efficiency, management quality in assessing, mitigating risks.

Equitas did better in terms of NPA during the DEMON after-effects, but they received their SFB license before DEMON, though not all branches had been converted at the time to accept old currency notes, it is difficult to determine whether they did better due to SFB license advantage or better risk-adjusted loan book.

Currently, if my memory serves me right, Equitas has higher NPAs and lower PCR than both Bandhan and Ujjivan even though Equitas has a lower proportion of MF loans and a higher proportion in Vehicle and house finance. Equitas has moved to daily recognition of NPAs if I remember correctly, I am not sure what they mean by that, as per my understanding that is just the PAR>0 figure that everyone follows. Or maybe they are recognising NPAs on a day to day basis and providing for it daily instead of doing it at month-end or at quarter end.

On your other question, Ujjivan management has still not started work on bringing down the promoter holding to 40%, but given their preference for following regulations, they will have a plan ready and executed before the deadline, this is another area we need clarification on from the management in their next CC.

I am in a learning phase myself, and the situation in the microfinance industry, SFB industry, regulations, political interference, weather-related disruptions are so dynamic that currently, it is not possible for me to decide which business is superior between Equitas and Ujjivan and even Bandhan and AU for that matter.

It is difficult to even decide whether MFIs are worse off than SFBs currently because the good ones are showing similar Cost of Funds, NIMs and better ROAs and ROEs due to lower regulatory burden and operating costs. It doesn’t help that SFBs (which were the biggest MFIs) have vacated the field for old MFIs in terms of 2 lenders and 1 lac borrowing per client policy.

There have been recommendations to incorporate client wise lending data from all sources like SHGs, SFBs, Banks and non-MFI NBFCs.

We have an excellent gauge of DEMON to check how the loan books and business of different participants performed during and after the crisis. I am working on a comparative data sheet for the same, but it is a work in progress currently.

Take the case of Janalakshmi Financial Services (now Jana SFB), if you read the industry reports before the DEMON they grew their loan book at a crazy pace, 194%, post-DEMON their NPAs reached 30+% levels. Now the management has been changed and Mr. Kanwal ex-CITI was brought in with PE investments to save the company. Does one give the business a clean chit because the top management has changed or does one penalize them for past mistakes knowing that it is difficult to change company culture? Jana still hasn’t posted their FY18 AR & results on their website, while before they were, regularly.

Spandana, a recently listed MFI, went into CDR after the 2010 AP-crisis, they were one of the few who came out of CDR, others went bankrupt and BASIX pivoted to becoming an organized BC. Spandana before their IPO showed a loan book growth of 144%.

In good times, investors forget the bad past and see only the rosy future. There is no doubt that PE-backed investments want top dollar exits and managements are coerced to deliver.

I am leaving below some links to resources that one can study to understand the industry and its participant’s past if one goes through them and other company filings, you will be able to get some idea on management quality. With upcoming SFB and MFI IPOs, these are a must-read.

  1. MFIN - Their MicroScape, MicroMeter and Annual Reports offer good data points.(

  2. Sa-Dhan - Their Bharat MicroFinance Reports have been sighted in a few research papers. I haven’t yet got around to reading them.

  3. India Inclusive Finance - Their annual reports are a must-read to get industry insights, 2015 to current are a must-read to understand the latest developments. One can even read the ones around AP-crisis to learn more.

  4. Dvara Research Blog _ Microfinance through a Data Lens.pdf (953.0 KB)

  5. Ambit- Microfinance errclub Will the dream run continue.pdf (421.5 KB)

  6. The Microfinance Bill - Need for a Fresh Outlook.pdf (508.3 KB)




  10. ice360survey2014-datacodebook.pdf (828.6 KB)

This is just the tip of the iceberg, I surely haven’t got them all, but one can go through the research from RBI and other institutions like IIBF, PRICE, CRIF Highmark, EQUIFAX etc. to understand the macro and micro of the industry and its need. Also, as the AMBIT report reveals, we can also follow the industry developments in Brazil, Mexico, Bangladesh, and Africa to understand what happened to institutions which converted to banks from MFIs.


Sebi refuses SoA of Equitas on some non-compliance grounds. If anyone understands this please do share. I will try to wrap my brain around this over the weekend.

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New draft guidelines from rbi for on tap SFB license. Clears the route to universal bank and collapse of promoter holding but dependent on decision by rbi and sebi.

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