According to analyst present in the meeting the management said that the parent company’s holds stake in IDFC Mutual Fund and two ventures one with the Delhi government and one with Karnataka Government would need to be exited and there are challenges in exiting these two firms. Shares of IDFC was down 3%, while shares of IDFC First Bank rose 2% following the analyst meet. Although neither had announced merger plans in the past, the same has often been speculated by analyts. There expectation of the holding company merging into the bank got a boost after the Reserve Bank of India in July clarified that IDFC can exit as the promoter of IDFC First Bank.
The central bank had also allowed small finances banks, which came under a holding company structure to reverse merge with their parent. Following this a couple of SFBs merged with the parent.
For IDFC shareholders the merger with the bank is beneficial considering that there have been reports that the company is selling its mutual fund arm. If post-sale the proceeds are distributed to shareholders it would be very tax inefficient as IDFC would be paying capital gains as well as dividend distribution tax. In the event of a merger the sale proceeds need not be distributed but can be infused into the bank as capital. As the bank’s equity is trading at higher multiples compared to the parent there is an upside for IDFC shareholders if there is a merger. However, IDFC First Bank already has enough capital and may not be able to deploy the fund immediately.
During the call IDFC’s non-executive chairman Vinod Rai said that there were challenges in unwinding the complex corporate structure of IDFC. He also said that the corporation had initiated the process of divesting stake in non-core subsidiaries.
