Uday Kotak, chairman of Kotak Mahindra Bank Ltd., attends the TiE Global Entrepreneurs Summit in New Delhi, India. (Photographer: Udit Kulshrestha/Bloomberg)

The Two Options For Kotak Mahindra Bank To Meet RBI’s Ownership Norms

Kotak Mahindra Bank Ltd. may be forced to go back to the drawing board after the Reserve Bank of India rejected its proposal to reduce promoter shareholding via a preference share issue.

On Tuesday, the bank informed stock exchanges that the regulator has said that Kotak Mahindra’s proposed non-convertible perpetual non-cumulative preference share (PNCPS) issuance does not meet the RBI’s promoter holding dilution requirement. “We continue to believe that we have met the requirement and will engage with the RBI in this behalf,” the bank said.

Should the RBI hold on to that view, the Uday Kotak-led bank will be left with two options, said Dhananjay Sinha, head of research for institutional equities at Emkay Global.

Raising Funds

One of the options to dilute Uday Kotak’s stake in the bank is to invite investments from other parties. This is not a probable option for Kotak, Sinha said. “There is no requirement for the bank to raise money at this juncture because they have a relatively high capital adequacy ratio.”

If the fundraise happens, it can depress the return on equity and will be negative for the stock, he said. “I don’t think the bank will go for that option.”

Also read: Kotak Mahindra Bank Fracas Revives Bank Ownership Debate

Stake Sale Plus Acquisition

The second option is a lot more probable, according to Sinha.

To bring the promoter shareholding down from 30.3 percent to the permissible 20 percent, the company will have to sell stake. The bank can then use the additional capital from the sale for acquisitions within the industry, he said. “There can be many contenders within the banking sector and also outside of the core banking sector, like PNB Housing.”

There is a high probability of Kotak Mahindra Bank taking the acquisition route as it aligns with their growth strategy, Sinha said. “They are clearly looking at banks they would like to acquire,” he said. “There are talks and rumors that are going around but there are definitely options within the private sector.”

Developments So Far

Earlier this month, Kotak Mahindra Bank had informed stock exchanges that it has used the non-convertible perpetual non-cumulative preference share route to dilute promoter shareholding.

According to a Macquarie report, the instrument is permitted under the Banking Regulation Act and is treated as a paid-up share capital under the Companies Act.

Following the issuance of these shares, the bank’s paid-up capital increased to Rs 1,453 crore from Rs 953 crore, thereby bringing down the promoter’s interest in paid-up capital to 19.7 percent from 30.3 percent. However, as a percentage of post-issue equity share capital, the promoter group shareholding remained at 30.3 percent since preference shares do not count towards the equity share capital.

The central bank on Tuesday rejected this plan.

Kotak Mahindra Bank now has to reduce promoter shareholding to below 20 percent by December 2018 and 15 percent by March 2020, according to the RBI’s direction.

Also read: RBI Rejects Kotak Mahindra Bank’s Plan For Dilution Of Promoter Stake