IDFC Ltd, IDFC Financial Holding to merge with IDFC FIRST Bank

By Consultants Review Team Tuesday, 04 July 2023

ItIt seems to be a merger season in the Indian banking sector. The Board of Directors of listed IDFC FIRST Bank Ltd approved the composite scheme of amalgamation amongst IDFC Financial Holding Company Ltd, IDFC Ltd and the bank. IDFC FIRST Bank and IDFC Ltd are listed on the bourses, while IDFC Financial Holding is not. The new amalgamation comes soon after HDFC merged with HDFC Bank Ltd. The IDFC group rejig scheme is a two-step process. As per the amalgamation scheme, IDFC Financial Holding will be amalgamated with IDFC Ltd and then IDFC Ltd, which will amalgamate with IDFC FIRST Bank. Part of the rejig scheme is the reduction of the securities premium account of the bank.

The share swap ratio for the amalgamation of IDFC Ltd with IDFC FIRST Bank shall be 155 equity shares of the face value of Rs 10 each fully paid-up of IDFC FIRST Bank for every 100 equity shares of face value of Rs 10 each fully paid-up of IDFC Ltd. As regards the rationale for the merger, IDFC FIRST Bank said it would lead to simplification of the corporate structure of IDFC Financial Holding, IDFC Ltd and IDFC FIRST Bank by consolidating them into a single entity and will help streamline the regulatory compliances of the aforesaid entities. The merger will help create an institution with diversified public and institutional shareholders, like other large private sector banks, with no promoter holding.

As per conditions of RBI’s Guidelines for Licensing of New Banks in the Private Sector on February 22, 2013, the equity shares of IDFC FIRST Bank must be listed on a recognized stock exchange in India within a time period of three years of commencing banking business. The promoter(s), namely IDFC Ltd must not be conducting any financially regulated business directly under it. Further, it was mandated to hold the equity investment in IDFC FIRST Bank and other regulated financial entities only through IDFC Financial Holding. Hence, IDFC Ltd (the bank promoter) invested in IDFC FIRST Bank only through a Non-Operating Financial Holding Company, IDFC Financial Holding, due to other regulated financial services entities of the group.

As a result, the 39.93 percent equity stake in IDFC FIRST Bank is held by IDFC Ltd through IDFC Financial Holding. As on the date of the Board of IDFC Financial Holding approving the amalgamation scheme, the company has closed/sold/exited all other regulated financial services business, the IDFC FIRST Bank said in a regulatory filing. Further, the RBI has clarified that after the expiry of the lock-in period of five years, that is, after September 30, 2020, IDFC Ltd, the amalgamating company, can exit as the promoter of IDFC FIRST Bank, the amalgamated company. As regards the proposed utilization of the securities premium account to set off the accumulated losses as per the amalgamation scheme, the book value of shares, IDFC FIRST Bank’s net worth, equity capital structure and the shareholding pattern will all remain unchanged. “Thus, this is a balance sheet neutral action and will not result in a reduction in the paid-up share capital of IDFC FIRST Bank. This shall also enable IDFC FIRST Bank to explore opportunities which benefit the shareholders (including dividend payout),” the bank said.

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