The board of directors of Bandhan Bank and GRUH Finance on Monday approved the merger of Gruh into Bandhan Bank in a share swap deal. Shareholders of Gruh Finance will receive 568 shares of Bandhan Bank for every 1,000 shares.

Gruh Finance is the affordable home loan subsidiary of Housing Development Finance where it owns 57.86 per cent stake in it.

According to the contours of the deal, HDFC would own 14.96 per cent stake in Bandhan Bank. Deepak Parekh, chairman of HDFC said that HDFC will seek approval from the RBI to retain upto 15 per cent in the merged entity. As per the RBI’s rules, HDFC can hold upto 10 per cent. It needs approval for holding anything more than 5 per cent stake in a bank.

“If the RBI doesn’t give us approval, we will bring down our holding to 9.9 per cent since this is a financial investment for HDFC,” Parekh added.

The move is aimed at paring down Bandhan Bank’s founder and CEO Chandra Shekhar Ghosh’s holding to 60.27 per cent in line with the regulator’s banking licence rules and expanding its housing finance portfolio. The rules require Bandhan Financial Holdings to halve its stake to 40 per cent from 82. RBI licensing norms require Bandhan to bring down promoter holding to 40 per cent within three years of starting operations.

After that, it has to reduce holding to 20 per cent within 10 years and 15 per cent within 12 years. For Bandhan Bank, the deadline of three years ended on August 23, 2018. Since the bank was not able to bring down the promoter’s holding to 40 per cent, it attracted the regulator’s ire for non-compliance.

In September 2018, the RBI had placed restrictions on the bank for failing to meet these rules by freezing branch expansion and Ghosh’s remuneration. Ghosh said that he is working on a roadmap to further reduce his shareholding but refused to divulge details.  The merger is a “win-win” deal for both Gruh and Bandhan Bank, said Parekh. 

The Share Exchange Ratio implies a 2.05 per cent premium to the shareholders of Gruh based on the volume weighted average prices of Bandhan and Gruh over the 26-week period ended January 4.

Announcing the merger, Keki Mistry, vice-chairman and CEO at HDFC said, “Given Gruh’s successful business model, investors have accorded a significant premium to its valuation compared to its peers…On a 5-year CAGR basis, Gruh’s loan book growth is 23 per cent and profit after tax growth is 20 per cent.”

The companies are contemplating a merger under the scheme of amalgamation under the Companies Act and hence there will be no open offer. The effective date of the merger shall be January 1, subject to regulatory and shareholder approvals. 

The amalgamation will enhance shareholders’ value, accruing from synergy of operations, new products development, integration of technology and information, Mistry said. 

The deal will pool resources and help create better synergies, optimal utilisation of resources and economies of scale, the filings said.