Ujjivan Financial Services Ltd, the microlender that has won a provisional licence to convert itself to a small finance bank, is in talks with potential investors to raise Rs.400-450 crore, three people aware of the development said.
The effort precedes a planned initial public offering (IPO) by Ujjivan, which gives small loans to the poor and self-employed who have no access to the formal banking system. The lender plans to raise around Rs.1,500 crore through the IPO, Mint had reported in October.
“The firm has begun investor road shows recently. The pre-IPO fund-raising will be limited only to domestic investors, given the need to bring down foreign shareholding in the firm,” said one of the three persons cited above. He didn’t want to be named.
Ujjivan, in which foreigners owned a stake of 88.69% as of 31 March, has to ensure that overseas shareholding in the company drops to 49%, one of the conditions it has to meet to become a small finance bank.
The share sale is aimed at raising funds and giving overseas investors an opportunity to sell their stakes in the microfinance firm founded by former banker Samit Ghosh.
“We are talking to people and we will let you know about it later,” said Ghosh, declining to comment on the details of the firm’s fund-raising plans at the sidelines of the 9th Mint Annual Banking Conclave in Mumbai on Thursday.
Ujjivan is the second of 10 small finance bank licensees to initiate work on selling shares to the public.
Chennai-based microfinance lender Equitas Holdings Ltd filed its share sale documents with the capital market regulator in October and received approval on 11 January. It is planning to raise about Rs.2,000 crore through its IPO.
Ujjivan filed its IPO papers on 31 December and is awaiting approval.
Ahead of the IPO, Ujjivan is reaching out to mutual funds, insurers and family offices that offer wealth management advisory services to firms, as well as high networth individuals (HNIs) for its pre-IPO equity placement, said the first person cited above.
“Given that the domestic investor pool is a comparably limited pool, they are trying to target a wide range of investors including family offices and HNIs and not just the routine domestic institutional investors,” he added.
The pre-IPO fund-raising entails a fresh issue of shares, which will help bring in capital to help meet capital needs for the firm’s transformation from a microfinance institution to a small finance bank, said the second person cited above, also requesting anonymity.
Small finance banks will offer basic banking services, accept deposits and lend to unserved, underserved sections including small business units, small and marginal farmers, micro and small industries, and entities in the unorganized sector.
The second person added that a key reason for the pre-IPO placement is also to get an early commitment from investors and reduce risk for the eventual public share sale.
“Given the volatility in the markets, the fund-raising will reduce the overall size of the IPO, thus significantly reducing the price and size risks. Pushing a deal of around Rs.1,500 crore in volatile markets can be a challenging task,” he said, adding that the pre-IPO fund-raising could be completed by early next month.
Industry experts believe that domestic fund-raising might be a challenge for small finance bank licensees, owing to an untested business model and high valuations in past rounds of private funding.
“While the risk factors around the microfinance sector have been substantially mitigated and the industry is being viewed much more positively, the small finance bank is a completely new type of entity,” said Alok Prasad, an independent industry expert and former chief executive of the Microfinance Institutions Network, the industry body of microlenders.
“The emerging competitive landscape and the market challenges are large. Building a retail liabilities portfolio as also a good quality asset base will be an uphill task. All in all, it will be a difficult game to play,” said Prasad.
Given the current state of the capital markets and the global headwinds, pricing and timing of the prospective IPOs will also be an issue, he added.
According to Ujjivan’s draft papers, the company intends to raise Rs.650 crore through the sale of new shares, while several private equity investors in the company including World Bank arm International Finance Corporation and the Netherlands’ development finance institution FMO will sell part of their shareholding through an offer for sale.
For the year ended 31 March, Ujjivan’s revenue rose 72% to Rs.599.3 crore from a year earlier. Net profit increased 38% to Rs.75.8 crore from Rs.55 crore. The company disbursed loans worth Rs.4,328 crore in fiscal year 2015 and had a network of 423 branches across the country.
This story was first published on Livemint.com