Bandhan Bank Ltd. is set to merge with Gruh Finance Ltd. Bandhan bank was incorporated in the year 2001 as a micro finance company. They received the banking license in the year 2014. Further, they started the operations as a bank in the year 2015. The licensing guideline of the Reserve Bank of India (RBI) in February 2013, states that recently licensed banks have to bring down their promoter shareholding to 40% within 3 years of their licensing. Following that, Banks are required to reduce their shareholding to 20% thereafter, down to 15% within a span of 10 years and 12 years respectively.

Bandhan Financial Holdings Ltd. has a promoter stake of 82.28% stake in Bandhan bank which needs to be reduced to 40% in 3 years. So, the deadline for them to reduce their promoter shareholding to 40% within 3 years ended on August 23, 2018. They were unable to bring down the shareholding of Non-Operative Financial Holding Company (NOFHC) to the required per cent. Hence, in September’18 RBI imposed a restriction on Bandhan Bank on the expansion of their branches. RBI also froze the remuneration of the MD & CEO Mr Chandra Shekhar Gosh.

Bandhan bank had 3 options to reduce the NOFC shareholding.

1. Offer for Sale.
2. Merger and Acquisition.
3. Primary or secondary fundraising.

On 7th January 2019, Board of Directors of both Bandhan Bank and Gruh Finance Ltd.agreed on the merger of the entities. The merger will be conducted in a share swap deal. The deal is yet subject to shareholders and regulatory approval.

Further, this deal will help to bring down the stake of Kolkata-based Bandhan bank’s promoter shareholding. Along with this, HDFC will own 14.96% stake in the merging entity via its holdings of 57.83% in Gruh Finance Ltd.

The terms of the deal discussed are:

Post-merger the promoter shareholding of Bandhan Bank will come down to 61% from 82.28%

HDFC will seek approval from the RBI on retaining 14.96% stake in the merging entity. According to the RBI norms, HDFC can only hold up to 10%. They will require approval for holding more than 5% in the Bank. If the approval of 15% is denied by the RBI HDFC bank will reduce the stake to 9.9% in the merging entity.

Merging will reduce the concentration risk in Bandhan bank.
Post-merger the unsecured loan book of the combined entity will account to 50% as compared to 86% unsecured loans held by Bandhan Bank in FY18.

At present, Bandhan bank’s unsecured loan book is in the form of Microcredit accounting to Rs. 33,373 crores it is 85% of the loan Book as per FY18. They will add Rs. 16,663 crores in the housing loans which will bring down their microloan book from 85% TO 58%.

This merger will help both the entities expand their presence in the banking sector. Bandhan Bank has geographic penetration in the east and the northeast in India. Whereas Gruh Finance has geographic penetration in the western part of India.

The Swap ratio decided by both the entities:

The swap ratio decided is based on the basis of closing prices of both the entities.

Shareholders of Gruh Finance Ltd. will receive 568 shares of Bandhan Bank for every 1000 shares of the housing finance company.

The deal has valued Gruh finance 8% down by its closing price i.e. Rs. 306.2 per share. Bandhan bank was valued around 4% below its closing price i.e. Rs. 501.1 per share on 4th January 2018.

Gruh Finance Ltd has an average home loan to the economically weaker sections (EWS) at a ticket size of Rs.10.1 lakh and Lower Income Groups (LIG) stood at a ticket size of Rs.17.1 lakh. The average ticket size of Gruh is Rs. 9.4lakh.

As both the entities have similarity in their credit portfolio both the entities agreed on merging and making it one of the largest lending platforms for rural and semi-urban areas with their products and services.

This merger is a win-win situation for both the merging entities as Bandhan bank will have an opportunity to Reduce promoter holding and diversify asset and geography base. Gruh will be part of the eminent bank again with a diversified asset mix.

Watch out for positive momentum in Gruh and little in HDFC stocks as the deal finalizes.
Come back to this space for more live updates…..

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