Will Kotak’s Route To Bring Down Promoter Holding Pass Muster With RBI?
The promoters of Kotak Mahindra Bank have reduced their shareholding in the bank to below 20 percent, in line with the RBI’s directions, the lender informed stock exchanges in a notification late on Thursday evening.
The route taken to do so, however, is an unusual one, leading to questions over whether the move is in keeping with the letter and the spirit of banking regulations.
What Has Kotak Done?
What Kotak has done is use non-convertible preference shares to dilute promoter shareholding. Following the issuance, the bank’s paid-up capital will increase 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 remains at 30.3 percent since preference shares do not count towards the equity share capital.
“This meets the RBI's communications in this behalf for December 31, 2018,” said the lender in its notification to stock exchanges. The RBI had asked the bank to reduce promoter shareholding to below 20 percent by December 2018 and 15 percent by March 2020.
The precise instrument used by Kotak to bring down shareholding is ‘Non-Convertible Perpetual Non-Cumulative Preference Shares.’ According to a Macquarie report, the instrument is permitted under the Banking Regulation Act and is treated as paid-up share capital under the Companies Act.
“As per the Companies Act, however, these shares do not carry any voting rights, unless it concerns decisions relating to their rights or winding up of the company,” said Macquarie.
Therein lies the problem.
In Keeping With Spirit Of The Regulation?
The intent of the Reserve Bank of India’s regulations on promoter shareholding of banks is to ensure that these deposit taking institutions are widely held. By asking promoters to bring down their shareholding over a period of time, the regulator wants to ensure that power over these institutions is not excessively concentrated in the hands of one person or group.
Which raises the question of whether Kotak’s move will pass muster with the RBI.
Jaimin Bhatt, president and chief financial officer of Kotak Mahindra Bank told BloombergQuint that the lender had informed the RBI on Thursday after the closure of the transaction. He added that concentration of power is not a concern since voting rights are anyway restricted under the Banking Regulation Act.
Voting rights are curtailed at 15 percent by the Banking Regulation Act so we believe control is adequately diversified in any case.Jaimin Bhatt, CFO, Kotak Mahindra Bank
An industry veteran, who spoke to BloombergQuint on condition of anonymity, pointed out that the rights of holders of these instruments are more akin to creditor rights rather than shareholder rights. For instance, key business decisions like acquiring or selling businesses would not need the approval of those holding these instruments.
The move is in keeping with the letter of the regulation but the RBI will certainly examine it closely, said this person.
The Analyst View
Analysts believe the transaction, if approved, will reduce the overhang of high promoter shareholding for the bank. Research houses, however, also remained uncertain on the regulatory view of the deal.
We need to see if the RBI is comfortable with the above move, said Morgan. “Historically, the Bank has reduced promoter holding via equity dilution. If the RBI is fine, this reduces an overhang of big equity supply for the stock,” Morgan said.
Morgan Stanley in its note said that the licencing round of 2000, as part of which Kotak Mahindra Bank was licensed, defines promoter contribution based on paid-up capital. However, the new licences given under the 2013 round defined promoter ownership based on paid-up equity share capital.
Bhatt of Kotak Mahindra Bank confirmed that their licencing conditions defined promoter contribution based on paid-up capital.
Kotak Mahindra Bank’s decision will reduce the overhang of equity dilution and put to rest speculation of inorganic expansion, said Edelweiss in their note.
We perceive this as an innovative structure of shareholding dilution sans financial implications. However, RBI’s stance on the same is critical, specially given that various banks (small finance banks, Bandhan etc...) are scheduled to cut promoter holdings.Edelweiss Equity Research
The industry veteran quoted above, however, said that banks like Bandhan, licensed in the 2013 round, may not be able to use such an instrument due to the difference in definitions of promoter holdings.