After nearly five months, the government has given nod to Axis Bank to increase its foreign investment limit to 62 percent from the composite cap of 49 percent. The government expects Rs 7,250 crore by way of foreign investment as a result of this relaxation. The government has further re-iterated that FII investments are capped at 49 percent.
The foreign investment inflow of Rs 7,250 crore into the country is not a simple math as indicated by Government in the press release. The government has assumed the entire 13 percent at current market price to calculate the possible inflows.
Currently, the headroom available to Axis Bank is just 4.54 percent, i.e. the GDR holding held with custodians as per the September-end shareholding. That would mean FIIs headroom that opens up is only to the tune of Rs 4.54 percent...and that would bring only Rs 2800 crore at current market price.
So how will the remaining money come in? There are a few options on the table.
First, the FIIs currently invested in domestic shares convert them into GDRs. The company has a GDR cap of 11 percent and hence only up to 6.5 percent of the domestic shares held by FIIs can be converted into GDRs. That would add an additional headroom of up to 6.5 percent or nearly Rs 4000 crore. But for the FIIs to convert, the GDR needs to trade at a significant premium. The GDRs are currently tracking the domestic share prices.
Second, if foreign investors like private equity players, sovereign wealth funds acquire stake in the bank via preferential issue. And thirdly, if Axis Bank happens to raise funds via a follow-on GDR issue on the LSE. The last two option means Axis Bank would be hitting the street to raise further fund. The bank as of today has no plans.
These options clearly leave very little room for the government to divest stake held by SUUTI in Axis Bank to FIIs. Government holds 20.72 percent stake in Axis Bank via SUUTI. And if the government goes ahead with the stake sale, the participation of LIC will be limited since the life insurer already has 9.33 percent stake in the bank and FIIs have very little headroom to absorb the marquee paper.
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