Asia’s richest banker wants more

Asia’s richest banker wants more
Uday Kotak, MD of Kotak Mahindra Bank was asked to meet a year-end deadline to reduce his personal stake in Kotak Mahindra Bank Ltd. below 20 percent. Kotak Mahindra Bank is an Indian private sector bank headquartered in Mumbai, Maharashtra, India. In February 2003, Reserve Bank of India (RBI)...

Uday Kotak, MD of Kotak Mahindra Bank was asked to meet a year-end deadline to reduce his personal stake in Kotak Mahindra Bank Ltd. below 20 percent.

Background

Kotak Mahindra Bank is an Indian private sector bank headquartered in Mumbai, Maharashtra, India. In February 2003, Reserve Bank of India (RBI) gave the licence to Kotak Mahindra Finance Ltd., the group's flagship company, to carry on banking business.

It offers a wide range of banking products and financial services for corporate and retail customers through a variety of delivery channels and specialized subsidiaries in the areas of personal finance, investment banking, general insurance, life insurance, and wealth management.

Kotak Mahindra Bank has a network of 1,369 branches across 689 locations and 2,163 ATMs in the country (as of 31 March 2017). In 2018, it is the second largest private bank in India by market capitalization after HDFC Bank

Kotak Mahindra Bank completed a similar acquisition of a rival bank, ING Vyasa, in 2014 by offering share swaps, instead of diluting its shareholding.

Analysis

A refusal from India’s banking regulator has derailed Asia’s richest banker Uday Kotak on a $17 billion acquisition trail.

Last year, the Reserve Bank of India ordered Kotak to cut his ownership of the bank in phases, to below 20 percent by 2018 and to 15 percent by March 31, 2020.

This was suggested as part of a plan to reduce the influence of founding shareholders. Kotak currently owns about 567 million of the bank’s 1.9 billion shares, or just under 30 percent.

The bank has said it still hopes to persuade the RBI to approve its original plan to reduce Kotak’s stake. That involves a proposed sale of 5 billion rupees of so-called non-convertible perpetual non-cumulative preference shares to domestic institutional investors.

But if the bank fails to sway the regulator, it would require the issuance of about 970 million new Kotak Mahindra ordinary shares to get the holding below 20 percent.

Another option is for Uday Kotak to reduce his stake either wholly or in part via a share sale to institutional investors.

To get down to the 20 percent solely via a share sale would require Kotak to dispose of about $3.4 billion of the bank’s ordinary shares.

Uday Kotak may dilute his stake with a new $17 billion share offering unrelated to an acquisition.

However, this is considered unlikely because Kotak Mahindra’s capital adequacy ratio is a more than comfortable 17.7 percent, so any further buffering via a share issue would lead to an unnecessary dilution of earnings.

The bank last issued fresh shares in May 2017 when it raised $901 million to boost lending and raise money for acquisitions.

However, Kotak Mahindra Bank has acquired rival banks in the past. In 2014, the bank purchased ING Vysya Bank Ltd. in a deal valued at $2.4 billion via a share swap.

Kotak Mahindra Bank enjoyed a very strong first quarter this year. The bank reported an over 15% jump in March quarter net profit, boosted by higher net interest income and other income.

Net profit for the quarter stood at Rs1,124.05 crore against Rs976.48 crore a year ago.

Non-performing Assets (NPAs) which plague a majority of India’s large banks, stood at 2.22% for Kotak Mahindra Bank, down from 2.33% from the year before.

Counterpoint

Kotak Mahindra bank had earlier reduced the promoter stake under 20% by selling non-convertible preference shares worth over Rs. 500 crores.

The bank’s paid-up capital expanded and the share of the promoters fell from 30.3% to 19.7%, under the 20% target set by the RBI.

Critics of the move say that the bank and its promoters have followed the letter of the law and not the spirit behind it.

Uday Kotak’s commented in the onset of this move: “By and large, most leading corporates in India follow rules and regulations, and if their governance practices are put to test, they will likely stand the scrutiny of the law. However, if one delves deeper, one could find that while the letter of the law may have been complied with, the spirit of regulations has not necessarily been embraced wholeheartedly.”

Assessment

Our assessment is that Kotak Mahindra Bank will further dilute its promoter’s shareholding in order to complete the acquisition under RBI’s set guidelines. The acquisition of ING Vyasa in 2014 can be seen as an example of Kotak Mahindra Bank using share swaps and issuing new preference shares to dilute shareholdings.

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