My guess is that some kind of scheme of arrangement may be worked out which has happened with IDFC as well. Different level of fall in equitas and ujjivan may be because equitas has only 1 year time frame while ujjivan has 2 years left to comply with this regulation. Shareholders may get share in proportionate basic in newly listed sfb. Being financial service companies reputation in financial market is vital so current holders likely to get fair deal. Market reaction seem to be exaggerated on this count.
In an interview with Bloomberg MD & CEO of Ujjivan Financial Services (UFSL) Mr. Ittira Davis said they are working on possible scenarios - One being giving 60% of shares of SFB to existing shareholders of UFSL.
He said they are working with legal and TAX consultants. I do not know if there will be some tax implications of this transaction. This needs exploration. If tax implications are high management make take shield behind it.
Disclosure - Invested, views biased.
Well i am of strong view that all these will be worked out with SEBI and RBI, and promoters of these SFBs are professionally qualified.
Financial Fundamentals are strong and Equitas is available at 16-17 PE of FY 19 earnings with high growth of over 35-40% and NII margin of 7-8%. Its a bargain buy.
What others say on thisā¦pls commentā¦I am expecting Rs.200 in a year time.
I beleive Ujjivan management is strong with high integrity.This is just a impulsive reaction to RBI directive.No probs with the business model and fundamentals of Ujjivan
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I read up a little more about this and would like to understand how this is neutral to shareholders. Assuming these companies list the SFB separately by allotting 60% shares to existing shareholders (instead of doing an IPO) and the other 40% is held in holdco, then applying 40% discount to holdco, the value will fall to 60 + 60% of 40 = 60 + 24 = 86 rupees. Or a loss of 14% value.
The oher worst case is that they allot nothing to existing shareholders and instead go for an IPO. In this case, holdco will get cash for 60% stake sale which will be valued again at discount besides the 40% stake holding at discount as well.
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Both the managements of Ujjivan & Equitas say that they can either list or restructure. They do not intend to have any business under the holding company so after the lock in period in 2022 they will go back to RBI for merger. Currently, the request was not entertained because it was a deviation from the current rules. In 2022, the request will be in normal course of business.
So, for a long term investor the situation is still neutral. May suffer from a holding co. discount for 2 years but things will be back to normal post the merger.
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I am not 100% sure, but I suppose,
for 5 year holding must not dip below 40%,
for 10 years holding must not dip below 30%ā¦
After end 12y period, there is mandatory dilution of promoter holding i.e. it must be taken below 10% (if individual promoter) after some time. (Eg Kotak Mahindra Bank)
The news articles are old and the guidelines are changing for ever, so I am not 100% sure but looks like a bigger problem than 2 years.
Some interesting data on Ujjivan SFB in their āREGULATORY DISCLOSURE SECTIONā
https://www.ujjivansfb.in/Regulatory-Disclosure-section.html
In case of ujjivan for top level management significant portion of their wealth is also tied with listed entity. Recently they have given ESOP to employees at price of RS 145 per share. So they try their best to find best possible solution to this. My guess is current shareholders shall get proportionate holding in new listed entity.
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Yes nirajiitkgp thats what i am saying regulatory issues will be taken care of even Equitas have 1 years time and after 15 days everyone will forget the issue and start talking fundamental and valuation of these banks, which is very attractive at current price.
The report is quite long, will take lot of time to parse. Any thing particular you wish to draw attention to.
Thanx
I could not find anyone breaking this down to explain the implications this will have on the shareholders. I have tried to put together my thoughts below, would love to know what others think.
When Ujjivan/Equitas got the license to operate a SFB they floated a special purpose vehicle/holding company which was considered as the promoter entity and issued its IPO. One of the RBI mandate at the time of this IPO was that the SFB should be listed seperately within 3 years of the holding company IPO.
Current state: Ujjivan Financials (Holding Company/Promoter) owns 100% of Ujjivan SFB (Subsidiary)
What RBI expects (by Jan 2020): Ujjivan Financials (Holding Company/Promoter) owns at least 40% of Ujjivan SFB (Subsidiary)
This would mean the following consequences for us shareholders:
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60% of SFB ownership will be transferred to new investors, while 40% will remain with Holding company
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For every 100 shares in holding company, we will get 60 shares in SFB
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The shares we own in holding company will correct in value to reflect 40% ownership of SFB as against 100% ownership that we previously had
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The holding company shares will further trade at a discount to the SFB. This is called holding company discount
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The holding company discount generally can vary between 20% to 80%
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This means the shares that we continue to hold in the holding company and that carries 40% ownership in the SFB can further correct by another 20% to 80%
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good summary-as per your analysis this should therefore not be an issue at all - still price fell today - i think we must also consider impact of esop shares given to employees ? i am talking of esops that are still not vested but exercised-because if already esop shares received means no issue because he will receive sfb shares also-but where not received i think will be issue ?
If Ujjivan and Equitas are holding companies at 100% stakes and deserve to trade at discount then almost every listed company is a holding company and market should immediately discount this fact and fall by 20-30%!!!
Holding company discount occurs only when the company is a minority stake holder, which means it canāt control governance, it canāt control dividend policy and nor it can consolidate financials.
So, ideally it should be applied only when the stake fall to 40% or less. Even then the ultimate shareholders/beneficiaries will be almost same for both entities so there is no reason for discount since interest are aligned of both parties. RBI will anyway ensure holding company stake further fall to 15% overtime which means there is no reason to worry.
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It is an issue. Suppose 1 share of holdco is worth one share of SFB because holdco is doing nothing else. So today you have say 100 shares. After listing of SFB, you will have 60 shares directly of SFB and your holdco shares will be equal to 40 SFB shares BUT with a discount. So new valuation would be 60 SFB shares + 40 SFB share with 20%-80% discount.
Another case is if they have to IPO the SFB and decide not to give any shares to holdco investors. Then holdco guys will get only cash from sale of 60% which again will be valued at less than cash value.
EDIT: A lot of people are comparing it with IDFC and IDFC Bank. In that case, IDFC had many other businesses. Ujjivan/Equitas holdco are doing nothing else and wonāt do anything else as management has clarified. So there really is no need for them to exist separately. Why would you run a company to hold shares of another company and do all the paperwork and expense? So if holdco and SFB merge at a later date, in that case there will be no impact on shareholders of today.
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With the fall yesterday, the market seem to gave already given the holding discount to a currently non-existent holding co.
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If market is completely rational and efficient then it should not have fallen just based on holding company discount basis as ownership structure remain the same. As listed entity donāt have any other business than it is actually better still and ownership is mirror image only. Suppose in place of ipo they decide to go for scheme of arrangement than this kind of fall should have happen on ex-date and not one year before. Also because there is no promoters shareholding it means ultimately shareholders need to approve the decision about rout of listing and management can not impose their will as is the case in many promoters driven companies. Some analyst wrongly propagating as if only ipo is the rout to list sbfs however in case of IDFC it is shown that scheme of arrangement can easily be done so no need for ipos to list unless management intention is not right. In time of bear market any info is seen in bad light and stocks fall without any basis sometimes which give opportunity to long term investors.
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market reacted because surprisingly , it was under impression that separate listing of SFB may not be required
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Current state: Ujjivan Financials (Holding Company/Promoter) owns 100% of Ujjivan SFB (Subsidiary)
What RBI expects (by FEB 2020): SFB be separately listed before Feb 2020 and after listing of SFB holding company which we are invested in shall held atleast 40% of SFB shares.
Note that there is no upper cap here and i believe it is 75% cap of promoter as per sebi listing guidelines.
what are the options available in front of ujjivan holding company board of directors.
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Bring IPO of SFB with offer for sale at attractive premium for offer for sale for say 50% of current unlisted SFB shares (it can be any fig between 60 to 25%) . and give away premium collected as special dividend , which at that time approximately matches to possible holding company discount treated by market viz a viz SFB valuation.
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or bring book building IPO with new equity of SFB offered and totally ignore current share holders. wherein SFB get new share holders and we became promoters as holding company share holders.
so we as an investor in holding company need to wait till board decides. Note response to IPO depends on how they have or will treat current share holdersā¦
also important to note that current two phased fall was due to following two reasons
firstā¦ NBFC issue in general and wrongly treating ujjivan and equitas as NBFC and in general _ve environment for financial stocks
secondā¦ recent Friday fall due to news that RBI needs SFB to be listed within 3 years of starting its operation, whereas this was known since day one but market and may be promoters were thinking of getting away with relaxation in this rule , which was not given by RBI.
It is important to note that underlying business has not been affected in any ways so far and it is expected to grow at 25% CAGR by management and even by analysts closely observing the sector.
concerns are followingā¦
samit ghosh retiring in Nov 2019 and in absence of sudha suresh and hiren shah MD and CFO who left company in last one year has created vacuum and full new team is at driverās seat ā¦ next few quarters will be important in terms of observing underlying business going towards projected trajectory or notā¦
and than decide thereon and be ready for that final announcement of IPO for SFB
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Which IDFC arrangement are you referring to?