Could someone please help with some queries if they’ve previously tracked the reverse mergers of ICICI and ICICI Bank in 2001-02? Were the rules different back then? How was the bank allowed to retain the non banking financial activities in parallel to conducting banking activities? An interesting point being KV Kamath having overseen ICICI during that period who also happens to be VV’s mentor and Godfather in a way.
Thanks a lot in advance 
Regards,
Gaurav.
IDFC outstanding shares is approx 160 cr shares. IDFC owns 40% of IDFCB, i.e. approx 227 cr shares. So each IDFC share has 1.42 (227/160) shares of IDFCB plus 100% stake in the AMC.
Thanks a lot for clearing this. one question I would like to ask - what will be the average price for those shares? same as market value or something else? e.g. say I have 10 shares of IDFC at 50 and for that, I have been allotted 14 shares of IDFCFirst and say the current market price is 60 for IDFCFirst, what change will these shares cause to my avg price of IFDCFrst shares I already have? will it be added at 60 as the average buy price? or there will be some other calculation? coz I bought 10 shares at 50 so total 500 for buy, but now I got 14 shares at 60 total 840. I hope my question is making sense.
If I understand your question correctly, for the 500 you spend on buying 10 idfc shares, post reverse merger, you’d get 14 shares at buy price of approx 35 (500/14). However, as I’ve mentioned previously, the swap ratio is likely to be a bit lower than 1.4 depending on final negotiations between Idfcb and idfc on terms of reverse merger assuming RBI approves reverse merger for non operating financial holding companies holding only bank. Idfc would need to sell the AMC prior to any reverse merger. This is all based on my understanding from idfc concalls.
Your understanding is a bit incorrect. The 1.4 shares of the bank are not in question, IDFC Ltd shareholders will definately recieve those, what is in question and needs to be negotiated is how many additional shares will be issued for the cash recieved from selling the AMC.
So idfc management themselves have said that ratio needs to be negotiated as Idfcb will need to assume idfc’s contingent liabilities post RM. So 1.4 is not a given.
I guess the cash will be distributed as a dividend.
IDFC limited has two primary investments - i) AMC ii) IDFC First Bank
Let us evaluate each of them separately to arrive at valuation.
A. AMC Business
B. IDFC First Bank
Summary
Risk Factors:
Value unlocking for AMC business and IDFC First may be longer than investment horizon. Such time horizon would lead to unrealized value in IDFC limited, which is the case for past 5 years.
Only recently monetization of non core assets started (IDFC securities - DAM Capital, IDFC Infra debt fund - NIIF etc.)
Awaiting feedback from other senior members @r13rk @Gaurav_Sheregar
Disc. Evaluating, no positions presently
Taxes needs to be considered since IDFC is holding IDFC Bank and IDFC MF via NOFHC.
Nature of transaction will decide ultimate payout.
Distribution of shares IDFC First bank shares to IDFC shareholders is an possibility but that is possible only after RBI allows merging IDFC with its NOFHC subsidiary and Govt allows this transaction to take place without paying taxes.
Reverse merger could be an alternative but it will require buy in from IDFC First board as well. To get approval from IDFC First board, IDFC will need to offer some discount for 40% of the share.
IDFC AMC spinoff will also get double taxation unless regulatory changes being discussed are approved.
So flexibility from RBI mandated structure and Govt approval for tax efficient restructuring will lead to value unlocking. Considering current valuation of holdings even after paying taxes IDFC shareholder can benefit but it will depend on the nature of the transactions and price paid.
There is a project going on within IDFC & it’s bank to “Declutter the structure”
Pl refer to concall of IDFC https://youtu.be/xtbZr0fPeDY
Reverse merger or alternate move is expected within this FY.
Benefits to the shareholders shall be Hair cut + MoS in above calculations.
IDFC has carry forward losses on books, gains from sale of AMC shall set off. So Tax liability shall be low.
As per Q3FY21 Con-call, Indexed cost of AMC business is about 2500 Crs, additionally there are carry forward losses also.
In summary, tax impact would be less than 25% (standard rate), please see hypothetical example below:
Sell Price - 4000 Crs
Indexed Cost - 2500 Crs
Gain - 1500 Crs
carry forward losses - say 500 Crs(assumed)
Net Taxable gain - 1000 Crs
Tax Rate - 25%
Tax to be paid - 250 Crs
If you are indexing cost its capital gains. Which means tax rate is capital gains tax rate. And not at 25 percent.
Effective tax rate will be lower.
The bigger thing to think is if these proceeds are paid out as dividends.
Your marginal tax rate may be much higher in that case once dividend proceeds are received
Giving such huge dividend is never tax friendly.
Logical path for IDFC after the RBI guidelines is to merge with IDFC First bank.
IDFC First is cash hungry & needs equity raise again next year to keep up with their growth.
IDFC will have better odds at merger ratio if they retain the cash within IDFC & propose a merger with IDFC First bank.
Ratio can be 1:1.5 at lower end & 1:1.7 at higher end considered some discount.
Agreed. btw how did you came across ratio of 1:1.5 to 1:1.7 ?
1.IDFC Ltd holding in IDFC First bank is in the ratio 1.4313.
Now: add to it contingent liabilities( 300cr), Bonus & other expenses (50cr). Final net value can be 2900cr.
Final cash value can be 3100cr i.e cash value per share of 19.4
During the merger, if IDFC First is trading at 2× book (rs.66) then IDFC shareholders will get 0.3/share of IDFC First bank for the Rs.19.4 cash swap.
Total = 1.4313+0.3 = 1.7313
Consider 5% discount - 1.64
Consider 10% discount- 1.55
Even 10% discount is too high, considering IDFC First will need some 5000cr cash infusion during 2022-2023 for maintaining 25% growth rates.
It is a classic win win for both companies shareholders.
Update:
I didn’t factor in less voting rights(26%) of IDFC Ltd in IDFC FIRST bank.
Updated calculations:
IDFC holds 36.6% of IDFC First bank of which voting rights are limited to 26% so, 10.6% non voting shares.
Considering there is no further dilution till the reverse merger & 40% discount on the non voting rights holding (10.6%), IDFC Bank pro rata swap ratio will be impacted by around 11.5%. so, instead of 1.4313 it’ll become 1.265.
So, 1 share of IDFC = 1.265 + 0.3 = 1.5565 IDFC First bank.
5% discount = 1.478
10% discount= 1.4
Incase there is additional dilution in IDFC First bank before this reverse merger, swap ratio will become more favourable to IDFC holders.
Moreover the merger will not increase the equity base of IDFC First Bank…
IDFC MF Revenue numbers seem to be predictable way ahead of their results disclosure.
In the above link, one can find Half-yearly disclosures. Sum of Management fee and trustee fee combined together should give approximate topline number.
Accordingly, Revenue for this quarter (March-21) should be - 87.72cr.
Hi,
Equitas and Ujjivan got RBI approval for RM, IDFC next? We should ask the IDFC management as what is their status with RBI approval and AMC sale accordingly?
I believe if they find a buyer for AMC, they are closer to the reverse merger but remember IDFC and IDFC first bank have different management, hence management approval will be an another hurdle if they seek any premium for merger and it will be value accretive if the AMC money pass onto bank books.
