Indiabulls Housing Finance’s
bid for Lakshmi Vilas Bank has set the cat among the pigeons. A deal like this could open the floodgates for more such acquisitions by non-banking financial companies (NBFCs) to turn into banks —which by itself need not necessarily be a bad thing. The acquisition is a dream deal for Indiabulls shareholders, including the promoters, because there is no cash outgo and a 19.5 percent stake in Indiabulls Bank will likely be more valuable than 21 percent in a housing finance company.
But let’s get to the regulatory challenges. First off, Indiabulls will need the blessings of Reserve Bank of India (RBI) in-principle to proceed with the merger, which will require the central bank to take a big call of permitting the entry of housing finance companies and non-banking finance companies with exposure to “high risk” segments like realty developers into banking. If this passes muster, there may be further questions around the present structure of the deal.
Also Read: Indiabulls bids for a banking licence via Lakshmi Vilas: What may RBI do
Here, it is important to note that a sister concern, Indiabulls Ventures has a financing arm that offers personal loans and credit to small businesses. These are also businesses that Lakshmi Vilas Bank is also engaged in. And while the Indiabulls management seemed to suggest that the norms pertaining to ownership of banks via non-operative financial holding companies (NOFHC) won’t apply to the deal, it helps to factor in what the regulations say.
The “on tap” licensing policy of RBI says: “In case the individual promoters/promoting entities/converting entities have other group entities, the bank shall be set up only through an NOFHC.” Here the important words to note are “having other group entities”. While the shareholding of Indiabulls Housing and Indiabulls Ventures is not common — Sameer Gehlaut is the only common shareholder (see table below) — the Indiabulls website does list several entities, including Indiabulls Ventures, as part of the group.
If RBI takes a call that both Indiabulls Ventures’ financing business and the bank can’t co-exist, either another merger or divestment of the financing business to the banking entity may be required. Here, the RBI norm on such co-existence is relevant. Here are two extracts:
"The general principle for reorganisation of the activities in the group is that all activities permitted to a bank under Section 6 (a) to (o) of Banking Regulation Act, 1949 shall be carried out from the bank.” "However, if the Promoters desire to continue existing specialised activities from a separate entity proposed to be held under the NOFHC, prior approval from RBI would be required and it should be ensured that similar activities are not conducted through the bank.”
Here, though not strictly a similar comparison, a case in point is HDFC and HDFC Bank, where the bank does not offer home loans. Hence, this could become a sticky point.
The other issue is with regards to Indiabulls having a real estate arm. It is not clear if the central bank will be comfortable with this sector exposure within the group or if it would recommend measures to ring-fence any such exposure.
These are some of the key issues why most industry watchers are skeptical of the Indiabulls Housing-Lakshmi Vilas Bank marriage getting the central bank’s nod. Some even see it as a convenient distraction from the core issues troubling the group.
But if the deal does get the nod, there will likely be more gains than just the synergies and access to deposits and so on that a narrow perspective on Indiabulls Housing Finance and Lakshmi Vilas Bank will provide.
Do note that a group entity Indiabulls Integrated’s two arms have acquired life and general insurance licenses. Having a bank will greatly benefit the growth of these businesses. Even the mutual fund arm, which today has assets of under Rs 5,000 crore (HDFC AMC has assets of almost Rs 3.5 lakh crore) is a fledgling, and together with the broking business can gain from a wealth management offering by the bank, which has 2.2 million depositors.In sum, this could be a dream deal for Indiabulls Housing Finance, but there will likely be speed-breaks, if not a complete roadblock ahead.