Vault Matters: The question of ownership
The regulator is very clear when it comes to banks – no non-promoter can own more than 10 percent of the company’s shares. But what about other forms of financial institutions, in particular non-bank finance companies or non-bank financial companies. Watch out for this space if you are interested in deals and mergers and acquisitions in the financial services sector.
Much work is expected. In the past week, the second largest microfinance company denied reports of deal talks with a bank. Interestingly, this company was on hiatus even a couple of years ago, and given its shareholding structure, it’s very difficult to dismiss these news reports as mere rumours. At one point, 70 percent of the NBFC was supported by promoters – individuals or large conglomerates; Today, meadows ownership in the NBFC space is only about 40 percent. The number is much lower if one looks at individual promoters like Piramal India Bulls and, to an extent, IIFL and Edelweiss.
The rest of the segment is populated with big names like Black Rock, Everstone, Warburg, TPG, True North General, Atlantic Apollo Global, and so on. Bringing in institutional names like this has its own advantage. It lends credibility to the system, ensures that the business is not run as a one-man show, and adds layers of processes and checks and balances, which generally satisfy investors. But with its own continuity challenges. Each box has a lifespan of 7 to 8 years. By the time the fund has been in the company for five years, it’s time to start thinking about how the money will be paid back; Investors often contact LPs Limited Partners and this is how the exit journey begins. Once an exit is in sight, it can do funny things for a business. Some start chasing growth, which they wouldn’t normally be comfortable with — picking businesses that might not fit their core operations, or even worse if a particular sector or business unit isn’t doing well for the company, substitute all hands in it. From a long-term perspective, none of the measures may work positively for the company in the long run.
Even worse are the internal imbalances among employees that it can cause. Companies may deny news of a deal or deal, but it’s a well-known secret that a fund doesn’t last more than eight years, or at best 10. The question about the next step can be annoying. But in the end, if something goes wrong, NBFC’s cascading impact on the banking system cannot be ignored. With banks not turning out to be an easy option, it remains to be seen how the system can be protected.