Things are finally falling in place for Equitas Holdings and its subsidiary Equitas Small Finance Bank, with the Reserve Bank of India okaying the reverse merger plan proposed by its subsidiary on Friday. This has been one of the long-standing demands of Equitas Holding’s shareholders given the value leakage in the stock.
At one point the holding company discount was as high as 70 per cent, though it got gradually bridged to 25 per cent ever since the RBI indicated in 2020 that it would permit banks to do away with the holding company requirement, which was a licensing mandate for banks such as Equitas, Ujjivan, Bandhan and IDFC First among listed entities.
In our stock recommendation for Equitas Small Finance Bank dated March 26, we had suggested that based on the swap prices for the reverse merger investors could consider buying shares of Equitas Holding. The assumptions hold good even now and with the holding company discount yet to vanish entirely, investors can explore this option.
Given that fund houses such as Franklin and DSP among others are heavily invested in the holding company and have shares of the SFB, how they would rebalance their positions in the combined entity would be interesting to watch. Under the automatic route, any investor can hold up to 4.99 per cent stake in a bank. If the threshold touches five per cent or above, the investor should seek RBI approval for which passing the fit and proper criteria of the regulator would become important.
While RBI approval for the reverse merger holds immense significance for shareholders of Equitas Holdings, those holding owning share of Equitas SFB, the announcement doesn’t change the needle much.