A consortium led by Kolkata-based Bandhan Group and joined by Singapore's GIC and private equity firm ChrysCapital is likely to have emerged as frontrunner in the ongoing mega sale process of IDFC Mutual Fund (MF), multiple industry sources with knowledge of the matter told Moneycontrol.

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On March 24, Moneycontrol was the first to report that consortiums of the Bandhan Group and Invesco MF had been picked for the final leg of the divestment exercise which is being run by investment bank Citi.

"A board meet by IDFC Ltd is scheduled on April 6 to consider interim dividend. The deal is also likely to come up for discussions and as of now the Bandhan combine is being seen as the preferred bidder, though the consortium led by Invesco MF is also in the fray," said one of the persons cited above.

Private equity firms Warburg Pincus and Kedaara Capital have joined hands with Invesco MF for the bid.

A second person also told Moneycontrol that the Bandhan consortium had an edge over Invesco MF but was quick to add that the board of IDFC would take a final call. A formal announcement on the outcome of the sale process is likely this week, this person said.

Elaborating on some of the factors which work in favour of the Bandhan bid, a third person told Moneycontrol: "A bank is in the mix which provides heft via distribution and network. They don't have an existing management team so integration will be easier with the existing team at IDFC MF. Also a shorter time frame is expected for approvals in this case as compared to the other party."

In December 2021, IDFC First Bank set the ball rolling for the process of merging IDFC and IDFC Financial Holding Company with itself, an event keenly awaited by market observers. Both entities are part of the bank’s promoter group. The sale of IDFC MF is seen as a precursor to the merger.

Additionally, the cash pumped in earlier by investor GIC into the Bandhan Group needs to be deployed as the group looks to move beyond its core business, leverage its customer base and offer a value addition platform.

GIC holds around 7.7 percent in Bandhan Bank while Temasek holds 1.68 percent. HDFC holds 9.89 percent of the lender.

But a fourth person pointed out that Bandhan could not afford to offer an exorbitant valuation: "The markets and the analyst community had reacted negatively earlier as they believed the Gruh Finance buyout was over-priced. Since then Bandhan has adopted a cautious approach. They have been eyeing IDFC MF for a long time as its the only target of material size in the market"

It was not immediately clear which of the two parties (Bandhan or Invesco MF) had submitted a higher bid in terms of valuation, but after the binding bid stage, Moneycontrol had learnt that the quantum of the shortlisted bids was likely to be in excess of Rs 4,400 crore.

This is expected to be the biggest mutual fund transaction in recent times and follows the recent sale of L&T MF to HSBC MF in December for around Rs 3,188 crore.

All the four persons above spoke to Moneycontrol on the condition of anonymity.

Email queries sent to IDFC MF, Bandhan Group, Invesco MF and the private equity partners remained unanswered till the time of going to press.

To be sure, unlike the Bandhan combine, Invesco MF has a strong management team and being an existing player has a mutual fund licence.

The Moneycontrol report of March 24 had indicated that Invesco is a well-performing equity MF and since the target IDFC MF is largely debt-oriented, the deal made strategic sense for the former. Additionally, PE partner Warburg Pincus has an indirect understanding of the MF industry since it backs CAMS (Computer Age Management Services) which made its market debut in October 2020, the report added.

Incidentally, according to a recent media report by Business Standard, a whistleblower has filed a complaint with regulators against Invesco MF India alleging irregularities in the management of its fixed income schemes. The whistleblower who was sacked has also moved the Bombay High Court, this report added.

“Invesco seeks to maintain excellent relations with all our regulators. We cooperate with any regulatory inquiries (including any examinations or investigations) in a manner that is transparent and consistent with global best practices,” the fund house said in the report.

On September 17, 2021, the boards of IDFC and IDFC Financial Holding Company gave the nod to kickstart the divestment process for the mutual fund business subject to requisite regulatory approvals. Interestingly, investors had earlier expressed concerns over a delay in the value unlocking exercise.

To be sure, market regulator Securities and Exchange Board of India isn’t comfortable with a pure-play private equity fund acquiring a majority stake in a domestic mutual fund. That was one of the key reasons why the Blackstone-L&T MF transaction fell through earlier. The regulator’s past stance explains the tie-ups between strategic players and private equity funds for IDFC MF.

The size and scale of IDFC MF and its strong management team are seen as two key reasons why the deal has generated strong interest.

IDFC MF has around Rs 1.2 lakh crore of assets under management (AUM), is profitable (profit after tax of around Rs 80 crore in the first half of 2022) with 64 percent of its AUM in fixed income and 26 percent in equity. For FY21, the firm had reported a net profit of Rs 144 crore, a sharp rise of 81 percent over Rs 79.4 crore registered in FY20, reports said.

Over the past few years, the domestic mutual fund segment has seen a lot of M&A activity. Other than the HSBC-L&T MF and the Sundaram MF-Principal MF transactions, the sector has also seen deals like Zerodha-backed Groww–Indiabulls MF, White Oak-Yes Mutual Fund and Navi–Essel MF.