Bandhan Bank agrees on all-stock deal with Gruh Finance

Under regulatory glare for higher promoter holding, private sector lender Bandhan Bank Monday agreed to take over mortgage lender Gruh Finance, an arm of industry leader HDFC in an all-stock deal, thus bringing down its promoters stake to around 61 per cent. The boards of both the lenders fixed a share exchange ratio at 568 equity shares of Bandhan Bank with the face value of Rs 10 for 1,000 shares of Gruh Finance which has a face value of Rs 2 each.

Post-merger, the shareholding of Bandhan Financial Holdings, the holding company of Bandhan Bank will come down to 61 percent from 82.3 percent now, while HDFC will own 15 per cent in the merged entity that will have a balance sheet of a little over Rs 50,036 crore and a market capitalisation of Rs 82,206 crore as of Monday.

Bandhan Bank founder managing director and chief executive Chandra Shekhar Ghosh, however, did not give any timeline for reducing his stake to 40 per cent, as mandated by the Reserve Bank. In the run-up to the merger announcement in the evening, Bandhan stock shed over 5.2 per cent at Rs 501.10 on the BSE with a mcap of Rs 59,771.21 crore, Gruh closed 3.9 per cent down at Rs 306.20 on the BSE with a market value of Rs 22,435.27 crore. Against this, the benchmark Sensex gained 155.06 points or 0.43 per cent and the BSE Bankex closed 0.37 per cent up or 113.24 points Monday.

Gruh operates in the affordable home loan segment and as for December 2018, HDFC owned 57.83 percent in the subsidiary. It can be noted that last September, the Reserve Bank had barred Bandhan Bank from opening new branches and also froze its managing director and chief executive Ghosh's remuneration after the lender failed to scale to bring down the promoter shareholding to 40 per cent as required under the licensing condition. The RBI has come down heavily on the fourth largest private sector lender Kotak Mahindra Bank on the same issue, forcing the bank to drag the regulator to the Bombay High Court, where the case is pending.

The RBI had given a December 31, 2018 deadline to promoter Uday Kotak to bring down his stake to under 20 percent. The companies said HDFC will have to get RBI permission to hold a 15 percent stake in the merged entity. While Gruh Finance has a strong presence in the Western region, Bandhan Bank primarily operates in the Eastern states. HDFC chairman Deepak Parekh termed the merger like a marriage, with Gruh Finance as a bride to the Bandhan family. "One could say it is a semi-arranged match. (Chandra Shekhar) Ghosh did approach me initially with this idea, but, of course, one has to leave it to the bride and the groom to figure it out about the compatibility," Parekh said.

Bandhan Bank founder and managing director Ghosh said the merger will give help the bank diversify into larger geographies and enhance the secured loan portfolio. HDFC vice-chairman and chief executive Keki Mistry said since the merger is done through a scheme of amalgamation under the Companies Act, there will be no open offer. Parekh said HDFC will have to seek approval from RBI to retain a 15 percent stake in the combined entity.

"As you know, a non-bank can hold up to 9.9 percent shares and by this merger swap ratio, we will end up with a little under 15 percent. So, we will request RBI for a special dispensation, otherwise we will have to sell the balance to reduce our stake to 9.9 percent," Parekh said. Even for 9.9 per cent, HDFC would need RBI's permission because only up to 5 percent holding is permitted through the automatic route, he said. Loan book of the merged entity would consist of micro-loans (58 percent), retail home loans (28 percent) and other loans (14 percent), Ghosh said.

The combined distribution network of the merged entity would comprise 4,182 banking outlets and 476 ATMs across 34 states and Union territories. Mistry further said no other alternatives would have given Gruh Finance the ability to scale up its operations better than the platform that Bandhan is offering. "The synergies that come with a merger of Gruh with Bandhan would not have come with a merger of Gruh with HDFC," he added.

(With inputs from agencies.)