When a holding company receives dividend from its subsidiary company (both being domestic companies), then when the holding company distributes dividend, amount of dividend liable for DDT will be equal to:
Dividend declared/distributed/paid during the year
(Less): Dividend received by holding company during the year
If I am not mistaken, the holdco will have to bring down its ownership stake in SFB to 40% by Jan 2022. As far as the current proposal goes, the stake dilution is only to the tune of up to 15%. How do they plan on to reduce it further?
And regarding the double taxation applicable on dividend distribution, I believe the holdco discount will have factored it in.
Now coming to valuation, I find Equitas to be more attractive at current levels given the current shareholders will have c.43% of listed shares in SFB with no dilution. Either the market believes that the scheme of arrangement proposed by Equitas will not go through or that the business model of Ujjivan is significantly superior to that of Equitas, which I donât believe. Else, Equitas is a pure arbitrage buy!
Keen to know your thoughts on this.
Equitas did not receive the extension from RBI. Further, non-compliance with license agreement has come with similar restrictions that Bandhan is facing. If the IPO process takes 6 months, they will be limited from opening new branches and promoter salary is frozen for that timeframe. I have not followed their branch opening plans for this financial year but if they are similar to Ujjivanâs of 50 conversions and 50 new branches, it would set back the plan.
Management of Ujjivan is right to stay within the regulatorâs conditions and list in the given timeframe. They knew that capitalising reserves would require lengthy approvals, that wouldnât be met on time. Plus as they have said in various interviews they want to show themselves as good boys and remain fully compliant so as to have the best chances of approval when they apply for universal bank license.
It is also confirmed that present shareholder will get holding company discount so even if bank lists at 400 equivalent price, present share price should be around 200
Though I am hopeful of premium listing considering growth rate & scope of scale, it seems prudent to wait & watchâŚ
Hi,
@Akash_Padhiyar, that is not how holding company discount is calculated. You would be correct only in special situations where the number of shares outstanding of similar face value, would be equal for both the holding company and the underlying business.
In case of Ujjivan as per FY19 AR, on a consolidated basis, the number of outstanding shares in UFSL as on 31st March 2019 was 121,166,697 shares, PAT was Rs. 150 cr odd and Book Value was 1877 cr odd which gives us a BVPS of 155 odd.
On a standalone basis for UFSL, the shares outstanding are same, PAT was 21.5 cr which is mainly from dividend and interest on FD received from USFB, Book Value was 1787 cr odd which gives us a BVPS of 147 odd.
While USFB as per the same document has 1,640,036,800 shares outstanding inclusive of preference shares, PAT was 204 cr odd and Book Value was 1819 cr odd which gives us a BVPS of 11 odd.
Now, based on Mar -19 Book value, UFSL currently trades at P/B of 2 odd. Now given the IPO, there will be around a 10-15% dilution based on listing valuations. I have shared the table in my previous post.
In the same table, you will see the corresponding Market Cap of USFB at different PB multiples, UFSLâs corresponding holding % at different dilution levels and corresponding market cap values for the holding company at the 50-60% holding company discount.
Your assigned value of 400 to the share price of USFB would give it a P/B of 36, and P/E of 321 which even you will agree is absurd and the discrepancy is due to the different number of shares outstanding in both entities.
@vaedermacher , @gpoliset guys, RHP states that according to some banking act, no entity can have more than 10% voting rights in a bank. So even if UFSL holding co will hold 40% at the end of 5 year lock in, would UFSL have only 10% voting right when merger devision will be taken up? If yes, then what if the new shareholders of the USFB vote againts merger?
Does anybody know what is the holding of ittira davis and sumit gosh in ujjivan financial services and ujjivan sfb?
Mr. Ittira said that there are certain rules in such situations where non-promoter shareholders have to pass the resolution by majority. I have mentioned this before in my Q1FY20 concall highlights post above. Basically it is the same voting mechanism that companies have to follow in case of approving related party transactions.
As for your second question, Mr. Ittira holds 50k shares of UFSL and Mr. Samit Ghosh holds 1 share.
Thanks !! So i just went though conf call transcript. Mr Ittira said that 3x should vote in favour as well as 51% of USFB shareholders (excluding holding company shareholders) should vote in favour.
Now given than holding company would only hold 40% of USFB by end of 5 year (due to dillution requirement), this does not seem like it can go in favour of merger if common shareholders (out of 60% of USFB) are lesser than 51%. Do you agree?
I m concerned that we may be left with holding company forever. Can you share you view on this?
Also, management said that new august guidelines from RBI will clarify on the collapse of holding co after 5 years. Are those RBI guidelines out as yet?
This may not be true because banking act says that no entity can have voting right of more than 26%. Even though UFSL will hold 40% or more shareholding of USFB, their voting rights will be limited to 26%. Ujjivanâs DRHP also mentions this in it.
Do you have a source from where u got to know that holding company will have voting rights in proportion of their holding in USFB?
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 âchances of reverse merger of UFSL hold co with USFBL after 5 years when UFSL will have about 40% holding in USFBâ.
Drhp of USFB are here: http://www.investmentbank.kotak.com/downloads/ujjivan-small-finance-bank-limited-DRHP.pdf
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%???
Such a wondeful business, but no straightforward way to own it due to some irrational RBI rule. 
The draft guidelines are expected to be out by sept end.
Below article uses âmayâ 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
Jatin,
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. Havenât 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 UFSLâs current 100% holding, next yearâs 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 shareholderâs voting rights will be less than 26% in quantity, than UFSLâs. 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 shareholderâs 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 âPromoters must not exitâ and so this route is open. RBI would consider it based on its comfort on ujjivanâs business/behaviour/etc.
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.
