Last week Kotak Mahindra Bank took a giant leap towards challenging the big boys of private banking by acquiring ING Vysya Bank, but the merger process could have a minor twist in the tale. Both parties will need more support from public shareholders.
Voting cap means both Kotak and ING need more public support than they would have for this deal to go through. The deal is done under the Banking Regulation Act and not the Companies Act.
The first thing both banks need is approval from their shareholders. That approval threshold is based on those present and voting at the shareholder meeting. The resolution needs approval of 'a majority in number representing two-thirds in value of the shareholders' of those present and voting including proxies.
Two-thirds, that is 67 percent, which in the case of both banks would have been easy in the ordinary case, because in each case the promoter owns approximately 40 percent. So in both cases, assuming full attendance at the meeting of every owner of every share - the maximum public support needed would be 27 percent or even less.
But banking regulations cap an individual's voting rights in a bank to 10 percent, which means Uday Kotak cannot exercise full 40 percent vote and nor can ING. Hence in both cases they will need some more public support than they would have needed otherwise.
Illustration: Imagine that Kotak Bank equity capital was 100 shares and all 100 shares were present at shareholder meeting. 67 shares would need to vote in favour of the deal. Of that 67, Uday Kotak has 40 shares, so public shareholder support needed would be 26. But Udak Kotak cannot exercise all 40 shares, he can vote on only 10. Hence, the base become 70 shares as 30 are non-voting. 2/3rds of 70 is 47 shares. Of that 47, Uday has 10. So he now needs 37 public shares in his favour.
The same calculation applies to ING as here promoter shareholding is about 43. But promoter can vote on only 10. The voting universe reduced to 70. The requisite approval needed is of 47 shares. Of which the promoter has 10. The deal needs 37 public shares in favour.
In the case of ING Vysya the ING promoter stake is held via two entities. The language of the banking regulations suggests that the 10 percent voting cap applies to each person or each entity. So, strictly on the basis of that language one could conclude that ING Mauritius Holdings’ voting rights will be capped at 10 percent and ING Mauritius investments can exercise its full 9.5 percent voting rights giving promoter ING a total of 19.5 percent voting rights and not just 10.
One could argue that this goes against the spirit of banking regulations, hence it will not prevail but it is not clear what stance the RBI will take. So, assume for a moment that ING is allowed to exercise 19.5 percent voting rights then only 23.2 percent promoter shareholding becomes non-voting. Hence the voting base gets reduced to 77 from 100 and the deal needs support from only an additional 32 public shares to reach the approval threshold of 51; 51 is the approval threshold for a base of 77. So that makes it tougher for those dissenting public shareholders who believe that ING didn’t get the deal. It should have to prevail in this vote because you need fewer public shareholders to support the promoter in voting in favour of this deal.
It will be interesting to know which way RBI decides on what kind of voting power ING can exercise. Both banks though will definitely need shareholder approval first and then approval from RBI. They will also have to inform the stock exchanges and running parallel to this process is the CCI filing process.
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