BL Research Bureau

Equitas Holdings---the holding company of Equitas Small Finance Bank—has fallen by a sharp 13-odd per cent today. The stock has come under pressure after SEBI returned the company’s draft scheme of arrangement wherein shareholders of Equitas Holdings are issued shares in Equitas Small Finance Bank by capitalising the free reserves of the bank. SEBI’s communique follows the RBI’s refusal to grant the company extension of the listing deadline (on or before September 5, 2019) for its subsidiary-- Equitas Small Finance Bank.

Equitas Holdings has stated that it would now take necessary steps to list Equitas Small Finance Bank through IPO and get the shares listed. Since listing through the IPO route would hurt investors of Equitas Holdings—creating a pricing discount for the holding company and possible dilution for existing shareholders—the stock has taken a knock.

Much like its peer Ujjivan Financial Services that came under pressure after it announced the IPO of its banking subsidiary, Equitas too could see some pain in the coming months, despite its strong operational performance.

What’s spooking investors?

In a bid to ease the pain for existing shareholders of Equitas Holdings--- on account of listing of the banking subsidiary through the IPO route--- the board had approved a scheme of arrangement in Jan-Feb this year wherein shareholders of Equitas Holdings are issued shares in Equitas Small Finance Bank in proportion to their holding in Equitas Holdings by capitalising the free reserves of the bank. The company has been awaiting SEBI's approval on this arrangement, and had also sought an extension from the RBI on the listing deadline.

The RBI recently refused to grant the extension and barred the company from opening new branches and put a freeze on the remuneration of its MD & CEO.

With SEBI returning the draft scheme, Equitas Holdings has said that it would take necessary steps to list shares of the Equitas Small Finance Bank through IPO which is expected to be completed by March 2020.

Equitas Holdings -- that got listed in April 2016-- is the holding company of Equitas Small Finance Bank. The RBI’s norm requires the company to list its banking subsidiary within three years and maintain minimum promoter shareholding in the bank (at least 40 per cent) for five years from the date of commencement of their business.

Listing of the banking subsidiary though the IPO would have an unfavourable impact on the existing shareholders of the already listed holding company---Equitas Holdings. This is mainly on two counts.

One, the double listing of the holding company and the small finance bank, could add pricing pressure at the holding company level---Equitas Holdings. This is because a pricing discount gets created for the holding company.

The second issue from the listing of banking subsidiary stems from the possible dilution for existing shareholders.

In case of Ujjivan Financial Services, that filed a draft red herring prospectus for its proposed IPO of its banking subsidiary---Ujjivan Small Finance Bank, the new shareholders in the small finance bank, post the IPO, may hold about 15 per cent. Ujjivan Financial currently holds 100 per cent in Ujjivan Small Finance Bank. The actual dilution for existing shareholders would ultimately depend on the IPO price.