MC EXCLUSIVE Infusing fresh capital in IndusInd Bank may come with riders for Hinduja Group

Infusing fresh capital in IndusInd Bank may come with riders for Hinduja Group

Conditions may apply if fresh capital is to be infused into IndusInd Bank by the Hinduja Group.

Highly placed sources, aware of initial talks between the promoters of IndusInd Bank and the banking regulator, said a few prerequisites have been communicated to the Hindujas by the Reserve Bank of India for the former to infuse capital in IndusInd Bank.

Among others, the two critical conditions, are revocation of pledge created by the promoters of IndusInd Bank on their shareholding and the mandate to appoint at least one member as promoter's representative on the bank’s board of directors. Other conditions include pricing of shares for capital infusion, voting rights, maintaining arms-length in dealing with the bank, though these are usual conditions which the RBI imposes on promoters of banks.

An email sent to Hinduja Group and the RBI seeking comment remained unanswered till publishing the article.

“Satisfying the two conditions would be crucial for the Hindujas if they want to increase their stake in IndusInd Bank,” said a senior official who did not want to be named.

To put things in context, IndusInd International Holdings Limited and IndusInd Limited, both part of the Ashok Hinduja-led group, collectively hold 15.83 percent stake in the bank and are regarded as the bank’s promoters. Nearly 51 percent of total promoters' stake has been pledged, something which was first reflected in the February 2021 shareholding as per stock exchange filings.

While 35.5 percent of IndusInd International Holdings Limited’s (IIHL) shareholding (12.06 percent of IndusInd Bank’s shares) has been pledged, 100 percent of IndusInd Limited’s shares held (3.77 percent of the bank’s equity) are pledged.

The promoters or the Hinduja Group representatives have not divulged the exact reason for creation of pledge on their holdings, though it is understood that the pledge may have been created to possibly fund the acquisition of Reliance Capital. “The RBI is clear that with the pledge on promoter shares already existing, it may not allow the group to increase their shareholding in the bank unless the pledge has been released. Otherwise, from a fit and proper standpoint, the Hindujas may not allowed to increase their stake when there is an existing encumbrance in the current shareholding,” said another source.

"Though the Capital Adequacy of the Bank is quite healthy, for business growth, should any further equity be required, IIHL, as the promoter of IBL(IndusInd Bank Limited), remains committed to supporting the Bank, as it has done over the past 30 years," said Ashok Hinduja, Chairman, IIHL and promoter of IndusInd Bank on May 22, a day after the bank published its March FY25 quarter results.

To be sure, the RBI’s internal working group (IWG) recommended that promoter holding in banks be increased from 14 percent to 26 percent and this proposal of the IWG was accepted by the RBI in November 2021. Following this change in norms, the Hindujas are said to have formally approached the regulator to permit them to increase their stake in the bank from about 15 percent to 26 percent. It is understood that the regulator, too, may have okayed this request, upon the condition that the pledge on promoter holdings be squared off.

Further, the Hindujas have also been asked to nominate representatives to the board of IndusInd Bank. At present, while the bank has two board members – Pradeep Udhas and Sudip Basu - who hold board positions in other Hinduja group companies, the group does not formally hold board seats in the bank.

“From a regulatory standpoint, this casts a cloud over the accountability of promoters as they may not be aware of day to day functioning of the bank,” said a senior executive who didn’t want to be named. “As promoters they should have knowledge of what is happening in the bank and the regulator expects this from promoters”.

IndusInd Bank is currently going through a troubled phase with forensic audit underway. In March this year, it declared a hit of Rs 2,000 crore to its net worth owing to lapses in derivatives accounting. Subsequently, more accounting irregularities have been uncovered at the bank and it is in the process of appointing a new leadership team including a new chief executive officer.