NASDAQ listed Customers Bancorp Inc. is investing $51million or Rs 310 crore in the Malvinder Singh and Shivinder Singh promoted financial services company Religare Enterprises. The stake purchase comes at a time when a bunch of companies are applying for a banking license to be one of the new batch of private sector banks to enter the Indian market.
The transaction benefits Religare Enterprises as it will bring down the promoter stake to help the firm comply with shareholding requirements to be able to promote a bank. Customers Bancorp will get a toehold in the Indian banking sector, and also plans to use Religare’s local expertise to cater to its own clients from South East Asia. But there is one uncertain factor. If Religare fails in its bid to get a banking license, it is not clear how Customers Bancorp will benefit from this transaction.
The investment will happen in multiple legs. Customers Bancorp will invest $22million or Rs 133 crore to buy shares directly from the Indian promoters of Religare. If we assume a price of Rs 336, the closing price on June 28—the day it announced the transaction—that amounts to 39.6 lakh shares, or 2.7% of Religare’s existing share capital. Subsequently, Religare will allot equity shares and convertible warrants to Customers Bancorp, resulting in dilution in its equity capital and also an infusion of funds.
According to a notice issued to shareholders, for its forthcoming extraordinary general meeting, Religare said it plans to allot up to 207,568 shares at a price of Rs 313.5 and also issue up to 58.1 lakh warrants that are convertible at the same price within 18 months of allotment. This issue is expected to cost Cusomers Bancorp about $29million, taking the total investment to $51million.
Subsequent to the preferential allotment of shares and warrants, the promoter’s share is expected to go down from 71.5% to 68.97%, and the stake sale by the promoters will in addition result in their stake going down to 66.4%. Customers Bancorp is likely to end up with a stake of 6.4% in the company. The final figure will vary depending on the actual price at which the promoters are selling their own shares to Customers Bancorp.
The promoters of Religare Enterprises still need to reduce their stake to 49%, with another 17.4 percentage points left before they reach that level. That will make them eligible to be given a banking license, in accordance with the Reserve Bank of India guidelines. The deadline for the application is July 1. If Religare gets an in-principle approval, then it will have 18 months in which to ensure that it meets the rules so that it can start functioning.
So why did Religare do the transaction now, if it could have just given a roadmap to diluting the promoter stake? For one, this will boost its net worth to some extent. Second, diluting its stake before applying also may show its seriousness and perhaps bolster its chances in the selection process. And, having an investor from the banking industry may even give it some brownie points.
Customers Bancorp is the holding company for Customers Bank, a full service bank based in Pennsylvania with assets of about $3.2billion and focused on customers in Pennsylvania, New Jersey, Connecticut and New York.
Jay Sidhu, Chairman and Chief Executive Officer of Customers Bancorp Inc., said there are “mutually beneficial opportunities for both organizations to explore” and that the company has negotiated “what we believe are very attractive terms and covenants in connection with this investment.” James D. Hogan, Customer Bancorp’s Chief Financial Officer, added the investment is expected to provide well over the current ROE on the capital being deployed while enhancing long term earnings.
But if Religare fails to get a banking license, will Customers Bancorp’s investment still be worth it? Religare is still a large non-banking finance company spread across various sectors such as mutual funds, insurance and lending. Customers Bancorp may find some cross-selling opportunities to some of its clients. But that may not hold as much attraction for Customers Bancorp, compared to holding shares in a bank. It may then decide to exit its investment, either to the promoters or on the open market.
On the other hand, if Religare does get a license, then its share is bound to zoom, giving Customers Bancorp not only an investment in an Indian bank, but also capital appreciation on its investment. After the announcement, Religare’s shares rose from Rs 336 on June 26 to a high of Rs 354 but then closed lower on June 28 at Rs 317.
Here is the BSE announcement of the proposed investment and the notice of the extraordinary general meeting. You can also read Customers Bancorp’s announcement here.