India: Five Small Finance Banks Gear Up For IPOs Worth $571.4m

At least five small finance banks (SFB) are preparing for initial public offerings (IPOs) totalling more than ₹4,000 crore as a Reserve Bank of India (RBI) deadline for public listing draws closer.

Small finance banks with a net worth of more than ₹500 crore were mandated by the central bank to list within three years of launching operations.

That deadline is now approaching for many of the 10 small finance banks who won in-principle approvals in September 2015.

Small finance banks that have started work on their IPOs include Fincare Small Finance Bank, which has appointed investment banks to start working on its proposed IPO of more than ₹1,000 crore and Kerala-based ESAF Small Finance Bank, VCCircle reported on 22 August.

Utkarsh Small Finance Bank is looking to hire investment banks to advise on its ₹500 crore initial share sale, Mint reported on 18 September.

As they queue up to go public, small finance banks could face several challenges, given their ownership structure.

Many small finance banks are held by private investors through a holding company structure, which was created to comply with RBI norms of having a designated promoter for such bank.

Ujjivan’s small finance bank subsidiary has already filed its draft IPO papers for a ₹1,200 crore share sale, while Equitas notified the stock exchanges on 13 September that its small finance bank subsidiary will go public by March 2020.

For these entities and others with a similar structure, the challenge is that if they list the small finance bank (while the holding company is also listed) separately, then the holding company investors will see a loss of value in the shares, as it will be valued with a holding company discount.

“One potential solution to it is that at a subsidiary level, one does a small float to keep shareholding in the parent company more liquid and, hence, relevant, even after the SFB unit gets listed,” the person added.

Other industry experts say that banks who have shorter deadlines to list are also exposed to potential valuation headwinds.

However, he said that unlike previous instances, there is enough headroom for foreign investor participation in these IPOs and that could help support valuations.

Jacob added investor appetite will also depend on whether it is the bank or the holding company that is seeking to go public.

“Another important aspect for the investor would be whether it is the SFB or the holding company that is going public. Holding companies would find it tough to get investors as it will be a case of once bitten, twice shy,” he added.

This article was first published on livemint.com.