Ahmedabad-based microfinance firm Arman Financial Services Ltd is raising Rs 15 crore ($3 million) in private equity funding from Belgian investment firm Incofin Investment Management's Rural Impulse Fund II.

Incofin will invest Rs 7.74 crore through equity shares, which will give it a 24.99 per cent stake in the company, just short of the trigger point for making a compulsory open offer. Incofin will invest the rest through compulsorily convertible debentures (CCDs) which will converted in the next 18 months.

Accounting for all current issued shares and outstanding convertibles (including warrants issued to promoters), Incofin will own over 36 per cent of Arman post conversion of CCDs, as per VCCircle estimates. But it may well be that the lending company may go for further stake dilution so that Incofin does not cross the trigger mark for making an open offer. However, that would require massive equity dilution within 18 months in which time the CCDs come for conversion into equity.

The transaction will be unique two ways. Firstly, Arman is listed on BSE, making it one of the first pure private investments in public equity (PIPE) in a listed MFI. While an investment was announced in Delhi-based Capital Trust Ltd last year, it was called off due to regulatory changes hitting the microfinance sector.

Secondly, the deal is one of first known private equity transaction taking advantage of the new Sebi takeover code where it increased the mandatory open offer threshold from 15 per cent to 25 per cent. The move was aimed at increasing PE participation in the listed space, especially small and mid cap firms.

The deal has been approved by the board of Arman and is awaiting approval from its shareholders. Incofin has subscribed the shares and CCDs at Rs 56.95 per share, which is at nearly a 100 per cent premium. Unitus Capital is the financial advisor to Arman on this transaction.

Arman scrip was down over 2 per cent in mid-day trade and was quoting at Rs 29.5 on BSE in a weak Mumbai market on Thursday. The firm has a market capitalisation of Rs 12.10 crore. Arman hit its 52-week high earlier this week at Rs 34.45 per share more than doubling from Rs 16 in March 2011. 

The company that is registered as an NBFC, was listed in August 1995 and forayed into the microfinance business three years ago. It provides secured lending for two-wheeler, three-wheeler purchases besides the microfinance activities. The company currently operates mainly in Gujarat and has been making marginal profits for in the recent past. 

For H1FY12, PBT increased 128 per cent to Rs 3.48 crore with revenues up 87 per cent to Rs 8.34 crore as compared to the same period last year.

“We strongly feel that the partnership with Incofin is the logical next step for Arman to continue with our growth. Apart from equity, Incofin will also bring in the diverse geographical experience it has working with various microfinance institutions across the globe, which will enable us to implement global best practices and help Arman to better its existing processes, human capital, and corporate governance," said Jayendra Patel, vice-chairman & managing director of Arman.

Smaller MFIs, Underserved Areas

For Incofin, which has €300 million or $400 million under management, this will be the fifth investment in the country. Its total investment portfolio includes over 100 MFIs in more than 40 countries, with the firm having executed more than 400 transactions since 2003.

The investment firm has been focusing on smaller MFIs, typically series-A rounds in low-penetration regions, said Aditya Bhandari, Regional Director for Incofin South Asia. "Gujarat is an underserved region as the overall microfinance market there is only Rs 250 crore as compared to Rs 12,000-15,000 crore in Tamil Nadu and Rs 10,000 crore in Andhra Pradesh," he told VCCircle. 

Incofin's last investment was Rs 10 crore in Kerala-based Hope Microcredit Finance Ltd, which was the first deal after Andhra Pradesh crisis in the sector. It has also invested Rs 4.5 crore in Fusion Microfinance, a start-up with operations in Uttrakhand, Delhi, Madhya Pradesh and Uttar Pradesh. Other investments include Rs 10 crore in Karnataka-based Grameen Koota and 34 per cent stake in North-East based Asomi Finance.

"The crisis of the microfinance sector has caused some delays, but this new investment in Arman is proof of our continued support for the industry. Moreover, this investment in Gujarat is very complementary to our existing holdings of in four MFIs spread across the country. We are confident that our proposed investment will provide a very positive signal," says Geert Peetermans, chief investment officer of Incofin.


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