Shares of Lakshmi Vilas Bank (LVB) hit the upper circuit on the BSE while those of Indiabulls Housing Finance (IBHF) slid 5% after the entities announced a merger that will give the former capital and the latter an entry into banking space.

For LVB’s shareholders, for 100 shares, they would get 14 IBHF shares, implying a 36% premium to the closing price of LVB as of April 5, viz. the day on which the deal was announced, and 63% premium to the last six months’ average price.

Shares of IBHF — an NBFC — ended 4.9% lower to ₹858.90 while LVB shares ended 4.96% higher to close at ₹97.35. “The merger is a win-win deal for both IBHF and LVB. IBHF gets access to banking platform, essentially the liability franchisee and provides longevity to its lending business on a consistent basis,” broking firm Motilal Oswal said in a report.

“This deal will have some adverse transition impact on the near-term return ratios,” it added.

Gagan Banga, vice-chairman and MD, IBHF, told The Hindu in an interaction that IBHF had the capacity to ‘digest’ LVB and the ‘ratios can go down a little bit but not collapse.’ Another key issue to watch out for is the regulatory approval since IBHF was unable to secure a licence when universal bank licences were given in the last round.

“The critical question is whether the deal measures up to regulatory rigour that the RBI is known for. While the deal makes the compliance cut-off and is within the purview of the policy framework, similar transactions in the past indicate an element of subjectivity in handing out banking licences by the RBI,” Edelweiss Securities said.

Indiabulls group has significantly reduced its revenues from real estate which is now in its ‘teens’ according to Mr. Banga. The latest RBI norms mandates that a group looking to apply for a bank licence should not have more than 40% of their revenues from non-financial sources.