Indiabulls group has announced its intent to merge with Lakshmi Vilas Bank, a Tamil Nadu based private bank which is the fourth largest housing finance company in India.

Indiabulls was incorporated in 2006 with the primary aim to focus on construction and development of residential, commercial and special economic zones in various metros.

Why it plans to exit?

Over the last 1 year, the company was streamlining its real estate by exiting residential projects in Chennai. It was experiencing a prolonged slump in the real estate sector. Over the years, its real estate business has dropped to less than 20% which used to be 50% earlier. Out of the 5000 crore profit, its real estate’s contribution was less than 10%.

Focus shifted to financial services

• Indiabulls chairman, Sameer Gehlaut stated that Indiabulls real estate has significantly shrunk. The actual reason behind Indiabulls leaving the market is that it plans to make it big in the financial services.
• It plans to focus strongly on SME financing and housing. The proposed merger announcement is unique as Indiabulls is making a bid for a banking license and for which it requires the approval of the Reserve Bank of India.

Requirements for Banking License

• Indiabulls has complied with the requirements of a minimum track record of 10 years and foreign shareholding in the company should be below 74%.
• As per RBI’s guidelines, its non-banking businesses should not account for more than 40% of total assets in order to get a banking license. Indiabulls’s real estate and other ventures fulfill it as it does not account for more than 15-20% of the group’s total revenue.

However, in the past RBI has been cautious in giving banking licenses to the real estate groups. Although in the case of Indiabulls, its real estate is comparatively smaller than its financial services business.

Therefore, for the above reasons Indiabulls Group is planning to exit real estate to expand its base in financial services and get a banking license.