Mumbai: A slew of initial public offerings (IPOs) by small lenders and finance companies is in the offing as strong investor appetite and regulatory requirements are prompting these firms to sell their shares to the public.
The IPO pipeline of small finance, microfinance and non-banking finance companies worth over ₹6,500 crore is bigger than the amounts raised by them annually in the past five years. At least eight such lenders have filed their draft documents for an IPO with the Securities and Exchange Board of India. Small finance banks which intend to go public include Jana, Capital, ESAF and Fincare. Muthoot Microfinance and Fedbank Financial Services are among the other finance companies that have applied with the regulator for the initial share sales. Bankers expect most of these IPOs to happen in 2024
“We expect a lot of capital raising across diversified NBFCs, SFBs, affordable housing finance companies and NBFC MFIs in the current and the next fiscal year,” said Nipun Goel, head of investment banking, IIFL Securities.
While some of these lenders have been pushed to list by early-stage investors, small finance banks are also rushing to the primary market because of the Reserve Bank of India’s requirement that mandates this category of lenders to list within three years of reaching 500 crore networth.
A senior official at Jana Small Finance told ET that it is going for an IPO mainly to fulfil the central bank’s guidelines.
“While RBI regulations for SFBs and MFIs (micro finance) is pushing them to go public, private equity investors, which have supported these entities for the past 7-8 years, are also wanting to exit their investments,” said Abhijit Tare, MD, Motilal Oswal Investment Advisors.
The recent appetite on Dalal Street for listed small-sized lenders is driving pre-IPO investors to seek exits on their early-stage investments. In the past year, Equitas Small Finance shares have jumped 110% and AU Small Finance is up 22%. Full-fledged commercial banks such as RBL, South Indian Bank, CSB and J&K Bank, among others, are up 50-100% in this period.
“Banks like AU Small Finance have become the poster company for expectations of these companies and they expect a premiumisation in their valuations as the price to book ratios of listed banking companies go up,” said Tare.
Many of these lenders are building a cash chest when the stock market conditions are still good as a projected strong economic growth is expected to boost loan demand.
“The need for capital in all companies in the BFSI sector is growing,” said Sanjiv Saraff, Joint Managing Director, BOB Capital Markets. “This can be attributed to the growth of the economy, which has encouraged SFBs, NBFCs and MFIs to raise capital for funding those companies which do not have access to the capital markets.”
So far in 2023, two such lenders including Utkarsh Small Finance and SBFC Finance have launched IPOs and made their stock market debuts.
Their stock performance post listing has been mixed so far. Utkarsh Small Finance Bank, which did an IPO in July and listed later in the month, has returned almost 12% since debut. SBFC Finance is down 8.4% since its listing in mid-August.
“Institutional investors have looked at the lending sector very positively which can be substantiated with recent re-rating of the already listed peers, since this sector is expected to ride the growth wave in sync with the India story,” said Mahavir Lunawat, managing director at Pantomath Capital Advisors.
