The regulator is very clear when it comes to banks — no non-promoter can own more than 10 per cent stake in the company. But what about other forms of financial institutions, particularly non-banking finance companies or NBFCs. Watch out for this space if you’re interested in deals, mergers and acquisitions in the financial services sector.
A lot of action is to be expected. The week gone by saw the second-largest microfinance company denying reports of deal talks with a bank. Interestingly, this company was on the block even two years ago, and given its shareholding structure, it’s very difficult to disregard these news reports as just rumours. At one point, 70 per cent of the NBFC’s were backed by promoters — individuals or large conglomerates; today, the promoter ownership in the NBFC space is just about 40 per cent. The number is far lower if one were to look at individual promoters such as Piramal India Bulls and, to some extent, IIFL and Edelweiss.
The rest of the segment is largely packed by big names such as Black Rock, Everstone, Warburg, TPG, True North General, Atlantic Apollo Global and so on. Bringing in institutional names such as these has its own advantage. It lends credibility to the system, ensures the business isn’t run like a one-man-show, and adds layers of processes and checks and balances, which are satisfying aspects for investors at large. But along with it has its own challenges of continuity. Every fund has a life of 7 to 8 years. By the time the fund does five years in a company, it’s time to start thinking about how to pay back the funds; investors often call LPs limited partners and with that starts the exit journey. Once exit is at sight, it can do funny things to a business. Some start chasing growth, which they would normally not be comfortable with — picking up businesses which may not fit with their core operations or, even worse if there’s one particular segment or business unit which is not doing so well for the company, replace all hands in it. From a long-term perspective, none of the measures may work favorably for the company in the long term.
What’s worse is the internal imbalances among employees that it can cause. Companies may deny the news of a deal or transaction, but it’s a well-known secret the a fund doesn’t stay longer than eight years or at best 10. The question of what’s next could be an unsettling one. But ultimately if something goes wrong the NBFC’s ripple effect to the banking system cannot be ignored . With banks not becoming an easy option, how else could the system be protected remains to be seen.