In a candid interview with businessline, Anil Singhvi, Chairman, IDFC Limited, discusses the ongoing merger of IDFC Limited with IDFC First Bank. Once the merged entity is effective, the bank is free to use or not use the name ‘IDFC’, he says. Edited excerpts:
From the famous investor call of September 2021, where investors took the board to task over the poor performing IDFC Ltd stock and you stepping in to course-correct and conclude the merger with IDFC Bank, how would you summarise this experience?
The September 2021 investor call was a bit counterproductive. Instead of working as a balm, it ruffled the investors even more. I think the board was not well prepared and did not read the investors’ concerns and their ire. On one side we had a very skeletal management team and on the other the board was unable to read the urgency and expectations of the investors. IDFC was then run by a CEO who had, in his mind, retired and checked out and the skeletal management team was looking tired and defeated. We as a board then rose to the occasion and got more involved in realising the expectations of the investors.
The first test was the sale of IDFC Asset Management Company…
IDFC’s market cap was about Rs 8,000 crore in December 2021. We were looking at selling the asset management business and were evaluating many proposals. The process was very transparent. Vishal Kapoor, the CEO, did an outstanding job, though markets often felt it was more of debt and less of equity fund. Also, we were mindful that whoever we chose should be a very reputed name, and pay us good valuation. It’s like marrying the daughter. We were very fortunate to have got the successful bidder — Bandhan Consortium. It took us about nine months to get the approvals. At the finishing line, we faced two headwinds — January 25, 2023, the financial market was shaken by the Adani situation; and February 1, the tax arbitrage for debt schemes ended. To the credit of both sides, we completed the deal to the satisfaction of everyone. We gave a dividend of Rs 11 once we got the money and the total dividend paid last year was Rs 12. We also recapitalised the bank and took our stake back to 40 per cent.
You were working with a very strong bank, backed by equally strong investors… was there any resistance while arriving at valuations?
It took us quite some time to clean up the whole thing and three months back, after recapitalising the bank, we went into discussions. They never expected us to come so fast (to talks about the merger). It took them some time to understand whether we were right and ready. After the IDFC results were announced in May, our balance sheet was available to them and, in less than two months, we were ready to ink the deal. It was just a 60-day process.
On that note, the market wasn’t expecting the valuations that IDFC got. You’ve landed a good deal…
IDFC had some cash and 40 per cent equity shareholder of IDFC Bank. If the bank does well, we do well. There couldn’t have been a better merger where the fate and future are aligned like this. There aren’t many parallels also. IDFC has 264 crore shares of the bank and, on the basis of IDFC capital, it’s 1.65 bank share for every share of IDFC. But it’s a theoretical calculation, as we have to factor in the market prices of shares, as widely traded shares.
You gave up the extra valuation owing to holding company discount?
This is what the market practice is and it’s very shareholder unfriendly in India... that there are such huge holding company discounts. And what for? Many promoters are to be blamed because they put those kinds of structures where it has never given the underlying assets full value to the owners. You can’t have a structure which is bad for the investors on the street but good for the promoter. We must move towards eliminating holding company discount.
The government’s stake in the bank would now be around 11 per cent?
Yes, the government will be the largest single shareholder.
Will the government want a nominee on the board?
I think it’s best answered by the bank.
Will the government look at this stake like the SUUTI-Axis Bank structure?
Government of India has reaped good value out of its IDFC investment. This investment has returned significantly since its inception and we have already paid Rs 12 a share this year as dividend; and considering the value of the bank shares, I think it will be a multi-bagger. Whether it will be treated at par with Axis Bank-SUUTI, I cannot comment on it. But the outcome is fairly good for the government as the largest shareholder in IDFC First Bank.
Who will have the rights to the IDFC name post the merger?
The IDFC name has a huge value in terms of brand and customer trust. For a bank that is very important. So, when the merger is completed the right of use of the IDFC name will transfer to the bank.
There will be a transfer of IP?
Yes. But I cannot comment on what will happen thereafter. Until the merger, it will be IDFC First Bank. Post merger, IDFC will cease to exist and the name will be struck off from the registrar of companies. The bank is free to choose whether it wants to retain IDFC or not.
It would be four initials without the government backing?
Yes, that’s true.