Neha Dave Moneycontrol Research
In response to the writ petition filed by Kotak Mahindra Bank (KMB), the Bombay High Court has refused to stay the December 31 deadline for promoter stake dilution.
Brief background
RBI’s licensing norms require a bank to bring down promoter holding to 40 percent within three years of starting operations. Thereafter, banks are required to reduce their shareholding to 20 percent and 15 percent within 10 years and 12 years, respectively.
RBI had granted a five-year extension to Uday Kotak, MD of KMB, over the original deadline of March 31, 2015. As per RBI’s rules, KMB has to lower the promoter holding to less than 20 percent by December 2018 and 15 percent by March 2020. Uday Kotak currently holds around 30 percent stake in the bank.
In August, KMB proposed issuing non-convertible, non-cumulative, perpetual preference shares (PNCPS) to bring down the promoter stake down below 20 percent. The same was turned down by RBI following which bank moved Bombay High Court.
What does this mean for the investors?
With no interim relief, KMB is left with no option but to dilute the promoter stake within the given deadline or attract the regulator’s irk.
Earlier this year, RBI pulled up Bandhan bank for not complying with the shareholding requirement under licensing norms within the stipulated timeline. As a penalty, the regulator withdrew its general permission to the bank to open new branches and also ordered the freezing of the remuneration of the MD & CEO. KMB may also likely go the Bandhan way with regulator putting business restrictions on KMB as it is unlikely that it will meet the deadline of December end.
Bandhan too tried its luck just like KMB. While Kotak Bank tried using a very innovative way to avoid the equity dilution, Bandhan displayed a willful ignorance of clashing regulations to defer the dilution. But RBI’s message was very clear and consistent in both these cases.
In an immediate reaction to the High Court order denying extension of the December 31 deadline, the stock price of the KMB fell around 2 percent. The regulatory requirement of bringing down the promoter holding will remain an overhang for the stock. As such, we don’t expect a sustainable up move in bank’s stock price till it fully complies with the regulation. The speculation of a potential merger or acquisition will further add to stock’s volatility.
The banking space is ripe for some large M&A due to RBI’s licensing requirement. The stocks of private banks wherein the promoter need to reduce its holdings could be set for a wild ride. Investors need to tread carefully.
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