RBI's nod to SFBs and holding companies merger can unlock value for Ujjivan

Ujjivan Small Finance Bank said it would initiate steps for the amalgamation of the holding company Ujjivan Financial Services Ltd with the bank after RBI's nod. Samit Ghosh, Founder, Ujjivan Financial Services, helps us understand how it may be a good news for shareholders.

Now that, RBI has given nod to SFBs and respective holding companies to apply for a merger, help us understand how really does this help in unlocking share value for you?
This is an extremely good news which we were expecting for quite some time and first in the line of course is Equitas. Equitas and us, we worked earlier on this and we are very glad, it has come through. Basically, there is a holding company structure in which is the Ujjivan Financial Services Ltd. which owns the bank Ujjivan Small Finance Bank and we own 83% of the bank-- so, what the RBI has committed is that the holding companies can reverse merge into the bank and there will be one entity. Before that, there was uncertainty of this and consequently we are the holding company stock-- UFSL stock was anywhere between 40% to 50% discount. Now, this discount will gradually narrow, so, there is a tremendous upside on the Ujjivan Financial services stock.
The bank stock depends on how the bank actually performs in terms of business, but this is extremely good news for the Ujjivan Financial Services stock- the holding company stock, and that was the original shareholders. We have about 80,000 retail shareholders out of which there are at least 10,000-15,000 employee shareholders, who originally invested in the bank and this is extremely good news for them.

Our fifth year is in February 2022, and we can apply three months before that -for the reverse merger---with the RBI as per its new direction. RBI will evaluate the proposal and see whether we can go ahead, chances are that things are normal, we will be allowed to reverse merge. There is one issue which was there, by the fifth year the shareholding of the holding company was required to come down to 40% but we are quite confident that since RBI is allowing us to totally reverse, much of it- at the end of five years, going to be waved, so we do not think that is an issue at all. It is a good news for the holding company shareholders.
When will this merger process be completed?
We will apply late October-early November and then RBI will give us the approval, I think the process cannot start before our fifth anniversary, which is early February 2022 and the whole legal and all that clauses NCLT etc. can take anywhere between eight to 12 months, so, that is the kind of time frame we are looking at.

Post the merger which entity will remain listed?
The bank will remain, the holding company will completely disappear so all the shareholders of the holding company will then become shareholders of the bank.

What has been the impact of the second wave on your business, are you now seeing faster recovery as compared to what we have witnessed last year and in light of that what would be the outlook on your growth disbursements for FY22?
I am not part of the bank, I think this question you should raise with Nitin Chugh, who is the managing director of the bank but what I can tell you overall in the industry-the second wave has receded to a certain extent, things are much better now, but this kind of crisis, which we are facing is an unprecedented crisis. We had faced earlier crisis, the demonetisation crisis which were like one shock kind of crisis and we overcame, but here, because of the multiple waves of the COVID crisis--it hits our customer and business in waves and the ultimate solution getting the population of India 70% or 80% vaccinated. Unfortunately today, the vaccine availability is still an issue, hopefully, in couple of months--rom the production of the vaccine to the scheduling of the production in India, there will be abundance supply. There was hesitancy even among our customer base before the second wave, but post second wave that hesistancy has also gone. As as soon as the vaccines are available and we are able to vaccinate all our customer base or the entire population in India, then there is going to be a solution to this problem.

So, the most important thing to do is proactively help our customer base to get vaccinated, meanwhile RBI has given a lot of restructuring, opportunities for good customers and also to provide them additional cash, which is very important because people have either exhausted their savings or their working capital, and not only the restructuring but providing them the extra cash would help them but this has to be carefully done only for our good customers and that process is sort of a lengthy process. So, I think there is time till September, the bank is undertaking that and most micro finance institutions are undertaking that, it has to be done very carefully and I think that will help us to get out of the crisis.