IDFC Bank acquiring Capital First Ltd.

Group 4 :

Akash Sahu – A020

Akash Bahal – A025
Vaira Muthu Raja – A030
Sapan Shah – A036
Raghav Todi – A039

IDFC Bank and Capital first merged effective 18th December 2018. For both the firms, the
merger is a win-win. IDFC Bank will get a strong retail loan book, while Capital First will be
able to pursue its banking ambitions. The merger resulted in a combined valuation of Rs
33,000 crore in market capitalization. The share swap ratio for the merger was adjusted as
139 shares of IDFC bank for every 10 shares of Capital First. The combined entity is now
strong and well capitalized and with relationships that run deep both in the retail as well as
the corporate sector. It brings together the banking platform of IDFC Bank and retail
capabilities of Capital First.
SWOT Analysis of the merger

STRENGHTS:

 Strong loan assets of more than Rs 1,04,660 crore

 Diversified asset profile
 A large retail customer base of more than 7 million live customers including 3 million
rural customers
 Retail loan portfolio of 40,812 crore
 Approval of the merger by shareholders with overwhelming votes in favor of the
merger (99.98%) IDFC Bank and (99.90%) Capital First
 Post-Merger the combined entity will have an AUM of Rs 88,000 crore and a profit of
Rs 1,268 crore

WEAKNESSES:

 HR related challenges will remain a key issue to realign culture at both the entities.
High profile exit at the corporate banking level in the merged entity would be
negative.
 Execution will remain a key challenge. Post conversion from NBFC to IDFCB has
seen rapid changes. From a pure infra lender to across spectrum corporate lending.
 IDFC bank has one of the weakest retail liability franchises and one of the lowest
share of retail loans among its peers.
 At the time of the merger it was a possible situation that the merged entity would be
required to raise as much as Rs 4,000 crores to meet regulatory obligations on
liquidity
 Weak CASA ratio (12%) compared to its competitors having CASA ratio of about 30-
40%
 IDFC Bank had entered into an agreement with Piramal Group-backed financial
services major Shriram Group for merger however the deal was called off as they
could not reach a mutual agreement, so there could be a challenge in the smooth
transition and execution of the merger between IDFC Bank and Capital First in the
long run.

OPPORTUNITIES:

 The merger created an extensive banking franchise as IDFC FIRST BANK which
combines erstwhile IDFC Bank’s retail liability franchisee, branch network and
digital banking with Capital First’s innovative approach to retail lending, distinctive
credit underwriting and a robust financing model for the under-penetrated high
potential market segments.
 Develop a diversified product portfolio backed by analytics and technology-enabled
platforms.
 Opportunity to improve its CASA ratio and expansion of business by opening new
branches and banking centers from the current count of 242 branches.
  The merger presented an opportunity to diversify and venture into new financial
products and services. The merged entity launched a 3 in 1 integrated trading, demat
and savings account facility in partnership with Zerodha.
 GDP growth increased to 8% from the previous 6%

THREATS:

 A weak earnings profile lead to ICRA downgrading Rs 38,670 crores of non-

convertible debentures to AA from AA+.
 Lower CASA ratio of the merged entity compared to other public sector banks poses
some serious challenges and risks to its expansion plans.
 Global economic slowdown and macro-economic scenarios such US-China trade war,
Brexit , increase in crude oil prices, depreciation of the INR are some major
challenges which create instability in operations
 To increase its retail loan book and achieve the target CASA ratio of 40% in the next
5-6 years the bank may expose itself to credit risks and increasing NPA’s from
accounts of SME’s
 Competing in the rural market place and capturing market share.

Time line of IDFC Bank

Sequence of Events: 

 13th January 2018 : Announcement of Merger

 16th February 2018: Receipt of Approval from National Housing Bank (NHB)
 7th March 2018 : Receipt of Approval from Competition Council of India (CCI)
 14th March 2018 : Receipt of Approval from Bombay Stock Exchange (BSE) –
Currency Derivative Segment 
 26th March 2018: Receipt of Approval from National Stock Exchange (NSE) –
Currency Derivative Segment
 25th May 2018 : Receipt of Approval from Bombay Stock Exchange (BSE)
 25th May 2018 : Receipt of Approval from National Stock Exchange (NSE)
 4th June 2018 : No Objection Certificate (NOC) from the Reserve Bank of India (RBI)
 3rd September 2018: Receipt of Approval from the shareholders of IDFC Bank.
47.25% of shareholders (as per holding) participated in the valid voting process and
99.98% of them voted in favor of the merger.
 3rd September 2018: Receipt of Approval from the creditors of IDFC Bank. 100% of
Secured Creditors voted in favor of the merger.
 4th October 2018: Receipt of Approval from the shareholders of IDFC FIRST Bank
Limited. 74.67% of shareholders (as per holding) participated in the valid voting
process and 99.90% of them voted in favor of the merger.
  4th October 2018: Receipt of Approval from the creditors of IDFC FIRST Bank
Limited. 99.96% of Secured Creditors voted in favor of the merger.
 5th December 2018: National Company Law Tribunal (NCLT) – Chennai Bench
completed the hearing of the merger from IDFC Bank perspective.
 6th December 2018: National Company Law Tribunal (NCLT) – Mumbai Bench
completed the hearing of the merger from IDFC FIRST Bank Limited perspective.
 12th December 2018: National Company Law Tribunal (NCLT) – Chennai Bench
passes the written order for the merger.
 13th December 2018: National Company Law Tribunal (NCLT) – Mumbai Bench
passes the written order for the merger.
 14th December 2018: Intimation to the RBI on NCLT orders.
 18th December 2018: Filing of Application with Registrar of Companies (ROC)
 18th December 2018: Board Meeting of IDFC Bank
 31st December 2018: Record Date for conversion of IDFC FIRST Bank shares to
IDFC Bank shares (as declared on 18th December 2018)

Timeline of Capital first for the Merger

• The Board of Directors at their Meeting held on March 29, 2017 had inter-alia
approved re-appointment of Mr. Naresh Chand Singhal, Mr. Swaminathan
Sundararajan Mittur and Mr. Hemang Harish Raja as Non-Executive Independent
Directors for a term of five consecutive years with effect from April 01, 2017 to hold
office up to March 31, 2022.
• April 27,2017- Slonkit raised an undisclosed amount / Funding Round from Capital
First.

• Jun 18, 2017- SV Credit line raised ₹200,000,000 / Debt Financing from Capital

First.

• The Company has obtained the approval of members at Annual General Meeting of
the Company held on July 05, 2017 under Section 180 (1) (c) of the Companies Act,
2013 for an amount not exceeding ` 30000 crore over and above the aggregate, for the
time being, of the paid up capital and free reserves of the Company.
• During the financial year 2017-18, seven Meetings of the Board of Directors were
held on following days: May 10, 2017, July 05, 2017, August 02, 2017, October 31,
2017, December 18, 2017, January 13, 2018 and January 24, 2018 with the time gap
between any two consecutive Meetings being not more than one hundred and twenty
days at any point in time.
• Board of meeting held on October 31,2017, they re-appointed Mr. Dinesh Kanabar as
non-executive independent director for a term of five year.
• Meeting of independent directors held on 9th may 2017, to review the performance of
Non-Independent Directors and the Board as whole.
• Corporate social responsibility committee (Mrs. Brinda Jagindar, Mr. Hemang Raja,
Mr. V. Vaidya Nath) meet once in year 17-18. i.e. on 9th may 2017.
• Twelfth annual general meeting held on July 5 2017 for Re-appointment of Mr. N.C.
Singhal, Mr. M.S. Sundara Rajan, Mr. Hemang Raja as Non-Executive Independent
director of the company and Approval for CFL Employee Stock option scheme 2017,
Approval for raising of funds through issue of securities.
• During the financial year 2017-18, the term of Dr. (Mrs.) Brinda Jagirdar, Non-
Executive Independent Director of the Company who was appointed for a term of
three years with effect from September 24, 2014, expired on September 23, 2017. The
Board of Directors at its Meeting held on August 02, 2017 on recommendation of
Nomination & Remuneration Committee had re-appointed Dr. (Mrs.) Brinda Jagirdar
as Non-executive Independent Director of the Company for a term of five years with
effect from September 24, 2017 to hold office up to September 23, 2022 and she shall
not be liable to retire by rotation. The aforesaid re-appointment of Dr. (Mrs.) Brinda
Jagirdar as Non-Executive Independent.
• Nomination and remuneration committee met five times during year. i.e. May 09,
2017, August 02, 2017, September 13, 2017, October 31, 2017 and December 18,
2017.
• Stakeholders relationship committee (Mrs. Brinda Jagindar, Mr Hemang Raja, Mr V.
Vaidya Nath) meet four times during year 17-18. i.e. on May 09, 2017, August 02,
2017, October 31, 2017 and January 24, 2018.
• Audit committee (Mr. Dinesh Kanabar, Mr N.C Singhal, Mr Vishal Mahadevi, Mr
M.S. Sundara Rajan) meeting held 6 times in year 2017-18. i.e. May 10, 2017, July
05, 2017, August 02, 2017, October 31, 2017, January 13, 2018 and January 24, 2018.
• Warburg Pincus owns 36% in Capital First. In the three months to December 2017,
the company reported profit after tax of Rs 87 crore, which is an increase of 42%
from Rs 61.4 crore in the same period the previous year. In fact, this is the highest
ever quarterly profit in the history of the company. The gross non-performing asset
(NPA) of the company reduced sequentially from 1.63% as of September 2017 to
1.59% as of December last year.

• During the financial year 2017-18, Mr. Dinesh Kanabar Non-Executive Independent
Director of the Company who was appointed for a term of three years with effect
from January 06, 2015, expired on January 05, 2018. The Board of Directors at its
Meeting held on October 31, 2017 on recommendation of Nomination &
Remuneration Committee had re-appointed Mr. Dinesh Kanabar as Non-Executive
Independent Director of the Company for a term of five years with effect from
January 06, 2018.
• Dec 14, 2017- Capital First: VC Circle — Zone Start-ups backs three firms run by
women entrepreneurs.
• During the Audit Period, the Board of Directors of the Company at their meeting held
on January 13, 2018 approved the composite scheme of amalgamation of Capital First
Limited with IDFC Bank Limited.
• The market capitalization of the company increased from ₹ 7.81 billion as on 31
March 2012, to ₹ 60.96 billion as on 31 March 2018. The company has been able to
maintain a high asset quality. As of 31 March 2018, the gross and net NPA of the
company stood at 1.62% and 1.00% respectively. Capital First Ltd. has posted a net
profit of ₹ 3.28 billion (USD 37 million) for the financial year ended on 31 March
2018.
• The Board of Directors at their Meeting held on April 03, 2018 on recommendation of
Nomination & Remuneration Committee had re-appointed Mr. Apul Nayyar and Mr.
Nihal Desai as Executive Directors who shall act as Whole Time Directors and Key
Managerial Personnel of the Company for a term of one year with effect from April
04.
• The Board of Directors at their Meeting held on May 04, 2018 had also approved
increase in remuneration of Mr. V. Vaidyanathan, Chairman & Managing Director by
10%, consisting of Salary of ` 5.50 Crore per annum from April 01, 2018 and bonus
of ` 2.80 Crore per annum being effective for the financial year 2017-18 and payable
in financial year 2018-19 and thereafter for the remaining period of his tenure.
• During FY 2018-19, seven Board meetings were held. i.e. April 24, 2018, July 30,
2018, October 24, 2018, December 18, 2018, two Board meetings held on December
18, 2018.
• Scheme of amalgamation was approved by RBI, Competition Commission of India,
the Securities and Exchange Board of India, Stock Exchanges, the respective
Shareholders and Creditors of each entities and the National Company Law Tribunal
(NCLT) with appointed date as October 1, 2018 and effective date as December 18,
2018.
• Member’s approval has been obtained at the 4th Annual General Meeting held on July
31, 2018 for borrowing/raising funds, from time to time, in Indian currency/ Foreign
currency, by issue of debt securities including but not limited to Non-Convertible
Debentures and Bonds on private placement.
• Capital first stop offering their share by December 17,2018.
RATIONAL BEHIND THE MERGER

The new business model: We plan to implant the erstwhile capital first’s tried and tested
model of financing small entrepreneurs and consumers( a retail franchise, growing at 29% per
annum and profits 5-year CAGR of 55%,(FY18 PAT grew by 37%)), on a bank platform ,
(IDFC bank’s strong branch network of 242 and growing, excellent technology stacks,
quality internet and mobile banking, and strong rural presence). We will also find cutting
edge solution for large entrepreneurs and corporates and customize technology solutions to
meet there for trade, forex, credit, deposits and payment.
Hence, the erstwhile IDFC bank looked for a retail lending partner who already had scale,
profitability and specialized skills to merge with so that it could jumpstart this process which
could otherwise take many years to build, with its attendant probabilities.
• Strong loan assets of more than Rs.1,04,660 crore, as of December 31, 2018 right after
the merger, out of which 35% of loans were in retail segment.
• Quarterly annualized gross spread increased from 1.7% (before the merger) to 2.9% post-
merger (Q3 FY19).
• Diversified asset profile
• Strong platform to grow retail deposit and CASA
• A large retail customer base of more than 70lakh live customer including 30 lakh rural
customer.
• Capital first will get access to cheap funds being a bank, so deposit received by IDFC in
form of deposit can be further used by capital first to maintain growth.
• IDFC bank’s retail portfolio will increase from 25% to 40% after acquisition of capital
first is an growing co with a good pace around 30% so, growth possibility of IDFC bank
is also high.
 Details Of The Merger

Overview:

The merged entity will serve 7.2 million customers through its 203 bank branches, 129
ATMs, 454 rural business correspondent centers across the country’s urban and rural
geographies. IDFC First Bank will now offer retail and wholesale banking products to a
greater number of customer segments. V. Vaidyanathan, Founder and chairman of Capital
First will head the bank as managing director and Chief Executive Officer. Rajiv Lall,
Founder MD & CEO of IDFC Bank has been appointed as part-time non-executive chairman
of IDFC First Bank.

Valuation:

The merger created a financial company with a market value of Rs 29,080.57 crore that
included all the business segments. Post-Merger the combined entity will have an AUM of Rs
88,000 crore and a profit of Rs 1,268 crore. The market capitalisation of the combined entity
works out to be about Rs 313 billion (Rs 230.3 billion of IDFC Bank and Rs 82.7 billion of
Capital First), based on the closing price of January 12 2018.
Share Swap Ratio: In January 2018, IDFC Bank and Capital First announced that they had
reached an understanding to merger with each other and shareholders of Capital First were to
be issued 139 shares of the merged entity for every 10 shares of Capital First.

Merger Gains

For both the firms, the merger is a win-win. IDFC Bank will get a strong retail loan book,
while Capital First will be able to pursue its banking ambitions. IDFC Bank, which started
operations in October 2015 after getting a banking license, largely had a loan book that
comprised of infrastructure loans. Capital First, on the other hand, was present in the retail
segment where IDFC was trying to build a retail franchise.

For Capital First, the timing of the merger couldn’t have been better as the firm already had
built a sizeable presence in retail loans, however, post the merger it would be able to access
low-cost deposits and thus reduce its borrowing costs.

For IDFC Bank will get access to a large retail book of Rs 22,974 crore and a customer base
of 3 million. Post-merger, the combined entity will have an AUM of over Rs 88,000 crore
and a profit of Rs 1268 crore.

Merger Gains:

Estimated Merger Gains:

PV(A) – IDFC BANK LTD. = Rs 22,968.1 cr
PV(B) – CAPITAL FIRST LTD. = Rs 8,282 cr
PV(AB) – IDFC FIRST LTD. = Rs 36,400 cr

Gain = PVAB – (PVA+PVB) = 𝚫PVAB

Gain= 36,400 – (22,968.1+ 8,282)
= Rs 5,149.9 cr

Reference: Edelweiss Research Report on the merger

Share Prices:
IDFC BANK LTD. = Rs 68
CAPITAL FIRST LTD. = Rs 838

Share Price as on 31st December 2019 = Rs 45.15

Actual Merger Gains:

PV(A) – IDFC BANK LTD. = Rs 21,793.33 cr (64.05 x 340,261,244,6)

PV(B) – CAPITAL FIRST LTD. = Rs 8,282 cr
PV(AB) – IDFC FIRST LTD. = Rs 26,723.93 cr (50.15 x 532,880,000,0)

Gain = PVAB – (PVA+PVB) = 𝚫PVAB

Gain= 26,723.93 – (21,793.33+ 8,282)
= (Rs 3,361.4 cr)

Share Price as on 31st December 2019 = Rs 45.15

No. of shares = 476,167,640

Market cap = 21,589.30 cr