IDFC Demerges Financial Unit Into IDFC Bank

Infrastructure Development Finance Company Ltd (IDFC) on 30 October 2014, informed stock exchanges that it received the board’s approval to demerge its financial undertaking into a wholly owned step-down subsidiary IDFC Bank Ltd pursuant to the scheme of arrangement under sections 391-394 of Companies Act, 1956.

IDFC Bank is a recently incorporated company by IDFC with a paid up capital of Rs 5 lakh.  Post demerger, the shares of IDFC Bank will be listed on the BSE and the NSE which is compliant with RBI requirement of listing within 3 years of commencement of business.

IDFC Ltd. has raised Rs 1,000 crores from sale of shares to institutional buyers, seeking to lower the holding of Foreign Institutional Investors (FII) to less than 50% to comply with rules set by RBI before it establishes a bank.

SCHEME OF DEMERGER:-

IDFC Bank will issue 1 equity share of Rs. 10 each, fully paid up of IDFC Bank for every 1 equity share of Rs. 10 each held in IDFC as a consideration for the demerger of financing undertaking of IDFC into IDFC Bank, to the shareholders holding shares of IDFC as on the record date.

On completion of the demerger, equity share capital of IDFC Bank will be held approximately 53% by IDFC Financial Holding Company Ltd. (lDFC FHCL) (being incorporated), a 100% subsidiary of IDFC and approximately 47% by the shareholders of IDFC (as on the record date).The structure is in a compliance with RBI guidelines wherein IDFC Financial Holding Co. Ltd. (IFHCL) is required to hold at least 40% in IDFC Bank. However, it will be difficult to raise large funds by dilution  as its present holding is just 53%  ,though right issue option is open for Any amount .As on date Government  holding is about 16.5%  only in IDFC so effectively and beneficial interest in the bank will be only marginally above  8% .The scheme would be effective upon receipt of all requisite approvals including approval from Shareholders, Creditors, SEBI, Stock Exchange(s), Madras High Court and filing the certified copies of the order of Madras High Court with Registrar of Companies, Tamil Nadu and RBI granting final banking license.

Set up as an infrastructure finance company, IDFC has diversified over the years and has a presence across various financial services segments, including the mutual fund, private equity advisory, and broking.

Infrastructure Development Finance Company Ltd (IDFC) demerges its financial undertaking into a wholly-owned step-down subsidiary IDFC Bank Ltd

WHY DEMERGER?

The move is to comply with the Reserve Bank of India (RBI)’s norms for new private sector banks which call for separation of banks from the non-lending business. As per the rule, banks need to be controlled by a financial holding company, which can separately promote other regulated financial services activities.Earlier this year in August, The RBI had issued two fresh banking licences one to IDFC and another to Bandhan Financial Services Pvt. Ltd.

The financial undertaking will include transferring related businesses of financing, project finance (fund and non-fund based), fixed income and treasury comprising all assets, liabilities, movable and immovable properties, employees, consents, approvals, benefits, licenses, contracts, deeds and tax balances to IDFC Bank.

CONCLUSION:-

1. RBI granted banking licenses only to IDFC and Bandhan Financial Services among 25 players in the fray including big companies like Anil Ambani’s Reliance Capital, Bajaj Finserve, L&T Finance, LIC Housing.
2. The demerger will help the company to transfer its finance undertaking into separate wholly-owned subsidiary IDFC Bank.
3. The demerger will leave IDFC with other businesses such as windmill operations, shares in IDFC FHCL and other entities including IDFC Alternatives and IDFC Securities.
4. In coming years IDFC Bank will face tough competition from other Private banking companies like ICICI Bank, HDFC Bank, Axis Bank etc.
5. Only time will tell whether IDFC gets success in creating its footprint in the banking sector.