With brokerage firms helping in the transactions of financial securities, reliability is often taken into deep consideration by clients and investors. Every year the National Stock Exchange witnesses an increment in the participation from its investors, thereby ensuring a healthy brokerage industry for our country.
However, the start of 2019 faced skeptical reactions due to the merging of the shares of Bandhan Bank and Gruh Finance. The latter being involved in the funding of reasonable housing sections is assisted by HDFC, which holds the position of being the largest mortgage firm in India and comprises 57.86 percent of Gruh Finance shares.
Bandhan Bank, on the other hand being a microfinance entity, allures its investors with a high spread and return on asset (ROA) rate of 4.25%. In comparison to the ROA rate, Gruh Finance is lagging behind Bandhan Bank with a rate of 2.6%. Phillip Capital, one of the leading group of companies rendering financial services, perceives that the amalgamation of the two companies will cause the ROA to fall. Every shareholder of Gruh Finance with a holding of 1000 shares will now receive 568 shares of Bandhan Bank. As for a 4.5 times payment for Bandhan, the shareholders shall be required to pay 13 times for Gruh.
Many experts and analysts have expressed their concern for such a synthesis through the share swap deal. Bandhan Bank faces a higher risk as the deal can turn out to be expensive. It might not even provide an apt solution for the promoter stake dilution concern which the bank is facing due to the set guidelines by Reserve Bank of India on ownership limits for the shareholders. Previously, in September 2018 the bank even underwent a cease to its expansion of branches and the remuneration of its founder and chief executive Chandra Shekhar Ghosh was also stopped, due to RBI’s curtailments.
For Gruh Finance, the swap can prove to be unpropitious by lowering its capitalization value. Nonetheless, HDFC will secure the most benefits with its 14.96 stakeholding. Motilal Oswal, a pre-eminent online share trading company regarded the situation as an advantageous win for HDFC bank.
On January 8th, 2019, the stock market saw the 6% decline in shares of Bandhan Bank whereas for Gruh Finance it was 14% after they came together. To usher in some hope, Phillip Capital has observed that since Gruh Finance is known for its profitable business and its exceptional growth for a considerable time span, hence the acquisition of it by Bandhan Bank can be “pricey in short term” yet if the “scale up for this business continues to remain profitable” then long term benefits can be reaped.
According to JPMorgan, a known investment bank, the merger received a “neutral” rating and for the global investment bank, the deal happens to serve the purpose of a “combined entity” where it can act as a leader in areas of microfinance and rural housing thereby seeking a high valuation. The union in other terms is also a promising union of the east and the west as Gruh has an influencing hold in western parts of India while eastern India lies under the grip of Bandhan.
By Debashrita Dey