Gaurav Choudhury
For the Indian banking industry, the new year has rung in with a marriage between Bandhan Bank and Gruh Finance that has left many scurrying to read the subtext rather than the headline.
The merger announcement raises four basic questions. One, to what extent was it driven by the Reserve Bank of India’s (RBI’s) command asking Bandhan Bank to bring down promoter shareholding? Two, is this enough for Bandhan Bank to deal with the RBI’s rules? Three, what value does it bring for the two companies’ investors, particularly, the minority shareholders? Four, what does it mean for Gruh Finance’s original promoter HDFC?
Let’s examine each one of these.
The jury is still out on whether this deal would have taken place now, but for the RBI’s strict insistence on paring promoter shareholding,
The RBI has made no bones about its fixation on obedience of regulatory directions. Its universal banking licence guidelines state that promoters’ holding in banks should progressively come down to 15 percent within 15 years of starting operations.
The rationale for such an approach is that a widely held/diverse ownership would lead to better governance through lack of concentration of power.
Promoters’ voting rights are capped, implying that promoter group cannot ‘control’ the board or push through decisions even if it enjoys greater shareholding.
In September, Bandhan Bank, one of India’s newest full-fledged private commercial bank, informed stock exchanges that the RBI has ordered the freezing of its CEO Chandra Shekhar Ghosh’s salary and barred it from opening new branches without the central bank’s approval.
The bank failed to bring down the promoter’s shareholding to 40 percent by August 23, the day it completed three years of operation.
The RBI’s bank licensing rules mandate that a private bank’s promoter will need to pare its holding to 40 percent within three years, 20 percent within 10 years and to 15 percent within 15 years.
That brings us to the second question. Is this marriage enough for Bandhan Bank to make it compatible with the RBI’s rules.
Not quite.
HDFC holds close to 60 percent (57.83 percent) in Gruh Finance as the promoter. Bandhan Financial holds 82.28 percent as the promoter in Bandhan Bank.
After the merger, HDFC’s holding will fall to slightly less than 16 percent (15.44 percent on a six-month weighted average basis), while Bandhan Financial will pare its holding to 60.27 percent.
That will still leave Bandhan Financial with a 20.27 percent higher holding than what the RBI guidelines allow. The job, therefore, is only half done and it still has to look for another target to merge, buyout another financial institution or find out a way to sell substantial shares.
Now for the third question. What does the deal bring for the shareholders, mainly the minority and retail investors who hold the two institutions’ stocks?
It is early days yet, but no shareholder seems to have to come out smelling a rose until now. Since January 7, when the merger was announced, the share prices of both Bandhan Bank and Gruh Finance have plunged substantially. From opening at Rs 544 on January 7, Bandhan Bank’s share price closed at Rs 460.44 apiece on January 11, a fall of more than 15 percent.
Likewise, Gruh Finance’s share prices have fallen 25 percent at the BSE from an opening of Rs 323 on January 7 it closed at Rs 241 on January 11.
The minority investors, perhaps, have been the worst sufferers, unless the stocks rebound quickly enough to more than offset the losses.
That brings us to the fourth question. What does the merger entail for HDFC? It now becomes a co-promoter of the merged entity as well as India’s largest private sector bank — HDFC Bank.
HDFC will hold 15.44 percent in Bandhan Bank-Gruh Finance, implying another round of share sale is in the offing. HDFC will have to trim its stake in the merged bank for RBI rules do not allow the promoter of one bank to hold more than 10 percent in another bank as a co-promoter.
The deadline to lower Bandhan Bank’s promoter shareholding to 40 percent was August. In four months since then, it has been able to manage to reduce it by just about half — from 80.28 to 60.27 percent. How long will it take for Bandhan Financial to trim another 20 percent stake? Nobody knows the answer yet, least of all the minority shareholders.
A similar, but not identical, act is playing out in Kotak Mahindra Bank. In August, Kotak Mahindra Bank informed stock exchanges about the RBI’s rejection of its proposal to issue perpetual non-cumulative preference shares (PNCPS) to cut promoter holding.
The RBI has asked the bank to trim promoter shareholding to 20 percent of paid up capital by December 31, 2018 and 15 percent by March 31, 2020.
Uday Kotak, vice chairman and managing director of the Kotak Mahindra Bank, currently holds a 30.03 percent stake in the bank. The PNPCS issue, which the RBI rejected, was part of Kotak’s plan to pare his holding and meet the December 2018 deadline.
The bank has challenged the RBI’s contention in the Bombay High Court, which is hearing the matter. Like in the case of Bandhan Bank, nobody, least of all Kotak Mahindra Bank’s minority shareholders, know what’s in store.
The RBI’s rules on cutting promoter holding in private banks is predicated upon the principle that concentrated ownership can lead to greater governance risks.
Rightly so. However, it may also be time to rewrite the rules factoring in the minority and small individual shareholders’ interest into the mix as well, without compromising on the non-negotiable orthodox framework.
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