Needs to spend Rs 1,500 cr to buy remaining stake

IDBI Bank’s amalgamation of custodial services provider Stock Holding Corporation of India with itself is widely perceived as expensive.

SHCIL was last valued at about Rs1,725 crore when IFCI (Industrial Finance Corporation of India) bought out ICICI Bank’s stake at Rs 818 a share in 2011. IDBI holds close to 19 per cent in SHCIL. This apart, LIC holds about 14 per cent and SUUTI (Specified Undertaking of the Unit Trust of India) 17 per cent.

Assuming there is no change in the valuation of SHCIL (price-to-book of 9.54 times), IDBI Bank will have to issue over 10 of its shares for every share of SHCIL, not held by it.

This will require IDBI Bank to issue over 17 crore fresh shares to buy out SHCIL shareholders. The fresh issue will also lead to a dilution of over 14 per cent from its existing paid up capital of over 127.83 crore shares.

In effect, IDBI Bank needs to shell out close to Rs 1,500 crore for SHCIL’s remaining stake at Rs 875 a share. “Merger with SHCIL at this valuation through a share swap deal is book value dilutive for IDBI Bank.

“This is expected to be negative for shareholders of IDBI Bank,” said Nirakar Pradhan, CIO, Future Generali Life Insurance.

The official stand of IDBI Bank, while announcing the deal in November 2012 was that there is synergy in taking over the financial services firm.

Marketmen said SHCIL’s e-stamping business would be affected by the deal. The e-stamping business earned over Rs 47 crore in FY12. “It remains to be seen if all the 12 State Governments retain IDBI Bank,” said a SHCIL employee.

‘Hugely negative’

“There may be exodus of other banks who are now SHCIL clients and hence this merger could be hugely negative for IDBI on plain reading,” says Kishor Ostwal, CMD, CNI Research.

R.K. Bansal, Executive Director, IDBI Bank, said, “We will get licences for all the SHCIL branches and the people we require for our back office work. We will change locations of those branches which cannot be converted into a bank branch.”

Bansal also pointed out that the biggest custodians in the world were banks such as Citi, Deutsche and BNP Paribas. “Further, all asset managers reveal their equity book on a periodic basis. So, is it a big secret?” he asked.

Senior officials of SHCIL declined to comment on the issue. Atul Gupta, Managing Director, Orbis Financials, who is also SHCIL’s competitor, said a SHCIL branch would not add any value towards establishing a banking branch.

BETTER FIT

“Moreover, I doubt if there could be any city where SHCIL is present and IDBI Bank is not. They may not be on the same street but would surely be in the same city,” he said.

“Acquiring an old generation private sector bank would perhaps be a better fit and much more cost-effective,” said Pradhan.

“For instance the price-to-book value of Karnataka Bank at 1.17, South Indian Bank — 1.33, Karur Vysya Bank — 1.99, Federal Bank — 1.53, and Dhanlaxmi Bank — 0.68, seem more attractive than converting SHCIL’s offices to bank branches and incurring additional cost,” he added.

However, the amalgamation is firmly on track. “The process of seeking regulator approval (RBI and SEBI) is also on,” Bansal said.

raghavendrarao.k@thehindu.co.in

shanker.s@thehindu.co.in

(This article was published on April 3, 2013)
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