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Axis Bank scrip gets banged in the market

The flipside to the much talked of perfect fit deal between Axis Bank and Enam Securities is exposed as markets open today

On Wednesday, the country’s third largest private sector bank announced the acquisition of Enam Securities in a deal that cost the former Rs 2,067 crore. As per the deal, Enam Securities will de-merge its investment banking, institutional equities, retail equities and related businesses such as distribution of financial products, and NBFC to a wholly owned subsidiary of Axis Bank. Axis Bank will also de-merge its investment banking business into the wholly owned subsidiary.

On signing the deal, Shikha Sharma, managing director and CEO of Axis Bank said, “This merger is in line with Axis Bank’s strategy of continuously expanding its product and service offerings to its customers in order to deepen its relationships and value differentiators. We are delighted at the prospect of combining forces with Enam Securities, a pre-eminent name in Investment Banking and Advisory field, to create an Indian financial services powerhouse at a time when India has occupied the world’s centre-stage and is poised for years of rapid growth.”

However, when markets opened on Thursday, the share price of Axis Bank fell 5 per cent in the early trading session on back of the acquisition news. On the National Stock Exchange (NSE), the stock opened trading at Rs 1,499 and by 10.30 in the morning it was trading at Rs 1,396, Rs 73 below its previous close of Rs 1,469 on Tuesday. A total of 20.5 lakh shares had exchanged hand during the period on the NSE. On the Bombay Stock Exchange (BSE), the stock opened at Rs 1,508 and by 10.30 am it was trading at 1,398, a drop of 4.6 per cent from its previous close of Rs 1,466.

The deal has its share of limitations, especially for Axis bank. Enam’s institutional broking business has not been doing well for the some time, with a large number of institutional clients moving to the direct market access route that has resulted in a fall in its revenues. It is the same when it comes to revenues from corporate finance business and advisory. The merchant banking business has a stiff challenge in the wafer-thin margins that it works in making the future of Enam some what less glorious. For Axis Bank, the deal does offer access into the missing link in its business, however, the cost of acquisition is high, which is reflected in the way the markets are treating the bank stock.

In the deal, Enam shareholders will receive shares of Axis Bank in the ratio of 5.7 shares of Axis Bank for every one share held in Enam, resulting into about 3.3 per cent equity stake of Axis Bank. The Board of Axis Bank proposes to induct Vallabh Bhansali, the co-founder and chairman of Enam, as an independent director, subject to approval from Axis Bank’s shareholders and the RBI. Manish Chokhani would be the MD and CEO of the newly to be formed entity, while Jagdish Master will continue to provide guidance as a board member of the wholly owned subsidiary.

Vallabh Bhansali, Chairman of Enam Securities, said, “In Axis Bank, we found the perfect fit and have chosen this path in order to provide greater value to our clients and greater opportunity of growth for our employees. Enam’s shareholders have demonstrated their confidence in the combination by their acceptance of Axis Bank shares in exchange of their ownership of the painstakingly built investment bank.”