Neha DaveMoneycontrol Research
Promoters of Indiabulls Real Estate (IBRE) sold 12 percent out of 38.72 percent stake held by them in the company, as per media sources.
This piece of news comes days after the group company Indiabulls Housing Finance (IBHF), the fourth-largest housing finance company, announced its intent to merge with Lakshmi Vilas Bank (LVB), a Tamil Nadu-based old private bank.
While the news of IBHF’s potential merger with LVB was a surprise, today’s development wasn't completely unexpected. In the current times of tight liquidity, real estate business doesn’t seem to be an attractive proposition. But the actual reason for the promoters moving away from real estate is Indiabulls Group’s big plans in the financial services space.
Prolonged slump in real estate sector
The highly capital-intensive real estate industry is going through a very challenging period. The trouble in the real estate sector is clearly visible in high level of unsold inventory, fewer new launches, an all-time high stalled realty projects, falling sales and decline in real estate prices.
Till mid-sept last year, buoyant liquidity and ample funding from NBFCs helped oil the wheels of the real estate sector. Frequent refinancing of the loans was rampant and to a large extent helped camouflage the underlying stress in the real estate sector.
But things have turned ugly after the liquidity crisis engulfed the NBFC sector in September last year. While we haven’t seen wide-spread spillover effect on the real estate sector so far, prolonged withdrawal of liquidity could be disruptive for the sector. To avoid liquidity crunch translating into a solvency crisis, many real estate players are attempting to reduce debt levels and improve the gearing ratios.
But in the case of IBRE, the promoters’ decisions seems to be driven not by slowdown in the real estate sector, but more by group’s banking ambitions.
Banking ambitions - Proposed merger of IBHF with LVB
There have been instances of merger between a bank and non-banking lenders (NBFCs) in the past, the latest one being the ongoing merger process of Gruh Finance with Bandhan Bank. Earlier instances include merger of IDFC Bank and Capital First and acquisition of Bharat Financial Inclusion by IndusInd Bank.
But the announced deal between LVB and IBHF, however, is unique, in the sense that it is not just a proposed merger announcement, but IBHF essentially is making a bid for a banking licence and requires the Reserve Bank of India’s approval.
RBI’s guidelines for ‘on tap’ licensing of universal banks in the private sector issued in August 2016 clearly lays down the requirements for a banking licence.
IBHF is largely in compliance with the requirements like minimum 10 years of track record and foreign shareholding in the company below 74 percent.
RBI’s guidelines also require that non-financial businesses of the group seeking a banking licence should not account for more than 40 percent of total assets or gross income. The Indiabulls Group more than satisfies this as its real estate and other ventures do not account for more than 15-20 percent of the group’s revenues.
That said, there is an element of subjectivity in handing out banking licences by the RBI, which adds a great deal of uncertainty to the deal.
Historically, the RBI has been cautious about giving bank licences to groups connected to real estate and there have been no licences that have been issued to any such entity. As a matter of fact, the RBI discourages banks from increasing exposure to real estate sector disproportionately.
Indiabulls Group’s real estate business is smaller than its financial services business. But IBHF and IBRE, being group companies, have the same promoters. Hence, the promoters of IBHF during an analyst call after the merger announcement said they were open to giving up executive position in the merged entity and disassociate completely from the day-to-day operations of financials services entity in case the RBI required so.
But with today’s announcement, it seems the promoters of IBHF are willing to give up the interests in real estate business for a banking licence.
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
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