How do you see the synergies of merging Equitas Holdings and Equitas Small Finance Bank?

The long awaited news is finally out and it pertains to the much awaited reverse of Equitas Holdings and Equitas Small Finance Bank (SFB). It is a reverse merger as the holding company will merge into the SFB subsidiary in this case. As per exchange filings, the board of Equitas Holdings Ltd and the board of its subsidiary, Equitas Small Finance Bank, had already approved their merger plan. So the merger is all set to happen.

This merger plan is under the new amalgamation norms permitted by RBI for beneficial ownership in case of SFBs. This is how the scheme of amalgamation will work. Equitas Holdings Ltd will be the transferor company and Equitas Small Finance Bank will be the transferee company. Post the merger, the transferor company will be dissolved but it will not be wound up under this arrangement. In other words this is a kind of reverse merger.

One of the main reasons for this type of amalgamation into the subsidiary SFB, is for a legal purpose. The RBI's licensing conditions lays down that there is the need to bring down the shareholding of the holding company of a bank to 40% within 5 years. This 5-year window was completed on 04th September 2021. This reverse amalgamation was offered as a way out by RBI in case they wanted to avoid diluting this stake to 40%.

There is a larger advantage for Equitas Holdings as it saves them from holding company discount which is the problem with most holding companies in India. Normally, since holding companies don’t have running business, other than investments in group companies, they are assigned lower valuations. This holding company discount can now be circumvented by this revere merger of Equitas Holdings into Equitas SFB.

This is how the scheme of amalgamation ratio will look like. Shareholders of Equitas Holdings will be allotted 231 equity shares for every 100 shares of Equitas SFB. Post this deal, there will be no promoter group for Equitas SFB and public shareholdings goes up from the current 25.41% to 100%. The deal is still subject to the approval of the RBI, SEBI, stock exchanges and also the National Company Law Tribunal (NCLT).