The Reserve Bank of India (RBI) has allowed IDFC Ltd to exit as the promoter of IDFC First Bank Ltd after the 5-year lock-in period, the bank said in a statement to exchanges on Wednesday. The stage is now set for a potential reverse merger between IDFC Ltd and IDFC First Bank Ltd.

The RBI communicated its approval to the bank in a letter dated 20 July 2021. The five-year lock-in period had ended on 30 September 2020.

IDFC Ltd wholly owns IDFC Financial Holding Company, which in turn holds 100% in IDFC Asset Management and 36.6% in IDFC First Bank. Analysts said, besides the reverse merger, IDFC will have to sell its mutual fund business, IDFC AMC.

IDFC will have to apply to the RBI for its nod for a reverse merger between the two entities. “The move will unlock shareholder value, removing the holding company discount for IDFC shareholders,” an analyst said.

Two small finance banks (SFBs) are going through a similar process. Earlier this month, the RBI allowed the promoter entities of SFBs like Equitas and Ujjivan to reverse merge with the bank.

In April 2014, IDFC obtained a banking licence from the RBI as per the February 2013 universal bank licensing guidelines. Under these norms, IDFC had to create a non-operative financial holding company (NOFHC) structure to house the bank and other financial services units of the parent company to ensure the banking business was completely ring-fenced from other activities of the firm.

The parent company IDFC was also mandated to hold a minimum of 40% stake in the bank, locked in for the first five years, and thereafter reduce it to 15% over ten years. The RBI’s latest internal working group recommendations propose that the cap on promoters’ stake, in the long run, may be raised from 15% to 26% of the paid-up voting equity share capital of private banks.