The promoters of Fincare SFB, namely Fincare Business Services Limited, will bring ₹700 crore of capital as part of the deal to merge with AU Small Finance Bank. The merger was officially announced on Sunday night marking the first deal in small finance banks space, nine years after SFB licences were granted.

Confirming businessline’s newsbreak on September 13, AU SFB said that “this strategic merger expands reach and diversifies offerings, reinforcing our commitment to financial inclusion”.

The scheme of merger is subject to approval of the respective shareholders of the AU SFB and Fincare SFB, the Reserve Bank of India and the Competition Commission of India. According to AU SFB’s exchange filing, the merged entity should take effect from February 1, 2024, suggesting that the deal should conclude in FY24 subject to regulatory approvals. Interestingly, the merger is announced about a month after SEBI okayed Fincare SFB’s IPO filing. 

As part of merger terms, promoters of Fincare SFB, namely, Fincare Business Services Limited, will bring in ₹700 crore of capital into the bank.

The share exchange ratio for the amalgamation shall be 579 equity shares of face value of ₹10 each of AU SFB for every 2,000 equity shares of face value of Rs 10 each of Fincare SFB. Post merger, existing shareholders of Fincare SFB shall hold ~9.9 per cent in AU SFB.

Accordingly, at these exchange ratios, Fincare SFB is valued at around 3x price to book based on Q2 FY24 financials and AU SFB at approximately 4x price to book. AU SFB stock fell by 3.4 per cent reacting to the merger.

Leadership structure

Rajeev Yadav, MD & CEO of Fincare SFB, will be appointed Deputy CEO of AU SFB post-merger and will continue to lead the Fincare unit of AU SFB. Yadav will an invitee to board meetings of AU SFB. He will jointly lead the IT and digital unit of AU SFB as part of merger integration.

Divya Sehgal, currently a nominee director on Fincare SFB’s Board will join the board of AU SFB post-merger. Sehgal is a partner at True North, private equity firm which is the major investor in Fincare SFB’s promoter entity.

Uttam Tibrewal will remain an executive director of the merged entity and will also be a deputy CEO of the bank post merger.

Deal synergy

While AU SFB is already the largest small finance bank, with a combined balance sheet of Rs 1.6 lakh crore, it would be the largest SFB with no immediate competition.

As a predominantly microfinance-oriented book and 49 per cent of its business coming from the South India market, merger with Fincare SFB will give AU SFB the access to MFI loans and better penetration into the southern States, making it a more pan-India bank. It will also bring relief to AU SFB on certain priority sector lending requirement.