RBI should push for fresh issuance of shares by banks to meet licensing guidelines, say investors

By: | Updated: November 25, 2018 11:20 AM

As the RBI deadline approaches for the Kotak Bank promoters to reduce their stake to 20 per cent, investors are getting anxious about possible scenarios given the difference of opinion between the lender and the RBI over ways to meet the directive.

RBI, RBI deadline, Kotak Bank, promoters, investors, RBI promoters, bank promotersThe RBI had earlier asked promoters of Kotak Mahindra Bank to bring down their stake to 20 per cent by December 2018 and 15 per cent by March 2020 in line with the guidelines for new bank licenses released four years ago.

As the RBI deadline approaches for the Kotak Bank promoters to reduce their stake to 20 per cent, investors are getting anxious about possible scenarios given the difference of opinion between the lender and the RBI over ways to meet the directive. Some investors on condition of anonymity said the RBI should push for fresh issuance of shares by banks to meet licensing guidelines. Fresh issuance of shares is a process that serve dual purpose, it avoids creating any conflict of interest vis-a-vis the promoter on one hand while simultaneously bringing in more resources for the banks which would support its growth plans going forward, they noted.

The RBI had earlier asked promoters of Kotak Mahindra Bank to bring down their stake to 20 per cent by December 2018 and 15 per cent by March 2020 in line with the guidelines for new bank licenses released four years ago. The RBI licensing guidelines for new private sector banks 2013, calls for promoter holding to be brought down in phases, first to 40 per cent at the end of five years from the date of commencement of business operations.

Subsequently, it needs to be brought down to 20 per cent at the end of 10 years and 15 per cent at the end of 12 years. The 2016 guidelines calls for reduction in promoter shareholding to 15 per cent in 15 years. Experts however feel that while the RBI’s objective of diversified ownership is well reasoned but this may actually end up stifling the banking industry’s growth as a widely held institution does not guarantee governance and ensure success.

In August this year, Uday Kotak, the founder and promoter of Kotak Mahindra Bank, had pared down his stake in the bank to 19.70 per cent from about 30 per cent following issuance of Perpetual Non-Cumulative Preference Shares (PNCPS) to eligible investors. Kotak’s holding in the bank prior to the preference share issuance was 29.74 per cent. The RBI however, has not approved this plan and the bank is currently engaging with the RBI on this matter as less than two months are left to meet the guidelines.

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According to a Morgan Stanley analysis, there can be three possible consequences to this situation — first, the RBI gives approval for stake reduction via PNCPS issuance; second, the RBI delays 20 per cent stake reduction timeline by few months, but keeps milestone of stake reduction to 15 per cent by March 2020 unchanged and third, the RBI disagrees to stake sale reduction via PNCPS issuance.

The report further noted that in case the RBI disagrees on stake sale reduction via PNCPS, it can lead to secondary stake sale by promoter, or the bank may take legal action against the RBI, there is possibility of M&A, or primary issuance or the bank does not meet its promoter stake sale reduction deadline of 20 per cent by December 2018.

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