In the Indian banking scene, regulation can often trip up intermediaries. Axis Bank’s acquisition of Enam’s investment banking business appeared to be stuck in a regulatory quagmire, first announced in November 2010.
Banking is covered by a fairly comprehensive set of regulations, but often interpretation and case-by-case approvals lead to some subjectivity in the matter. Often, the reputation of the bank’s chief executive and his or her rapport with the central bank play a big role in resolving such matters. Shikha Sharma had joined Axis Bank in June 2009 as its MD and CEO, and the acquisition of Enam’s investment banking business was her first big strategic move.
News reports had earlier said that the RBI was uncomfortable with the earlier structure of the deal. Under it, the investment banking business would have been acquired by Axis Bank, which in turn would issue equity worth Rs 2,067 crore to four of Enam’s owners –Vallabh Bhansali, Manish Chokhani, Jagdish Master and Nemish Shah.
Mr Bhansali would also join Enam’s board as an independent director. The investment banking business was to be housed under a separate subsidiary. The RBI was apparently not keen on any of Enam’s employees joining the bank’s board. And, it had also asked for changes in the accounting structure proposed for the acquisition.
The final structure announced is not very different from what was proposed earlier. Enam will demerge the financial services business to Axis Bank under a scheme of arrangement, in return for an all-stock consideration paid to Enam’s owners, of 1.38 crore Axis Bank shares worth about Rs 1,560 crore at today’s prices.
The difference is that it will be housed momentarily in Axis Bank and not directly under a subsidiary. Axis Bank will subsequently transfer the acquired financial services business to its wholly-owned subsidiary ASSL for Rs 274 crore, or the book value of the business. This apparently is in line with RBI’s conditons for an accounting structure it was more comfortable with.
Though Axis Bank has had to modify the scheme structure, the end result is the same: it has acquired the investment banking business of Enam in return for an all-stock consideration. The number of shares to be issued are the same, though Axis Bank’s share has fallen considerably since the time the acquisition was announced. The share sale was valued at Rs 2,067 crore when the deal was first announced. There is no word on Mr. Bhansali’s position in the bank, however.
Next, the schemes of arrangement will be readied and approval of the courts, shareholders, creditors and other regulators will be sought. Once done, the Enam financial services business will become part of Axis. This may take till the end of 2011-2012 to complete.
The Axis Bank stock was up by about 1.6% on Friday.