Company has filed a writ for PNCPS issuance satisfying RBI norms; irrespective of outcome, HDFC Bank’s a better bet
In an unprecedented event (ex of the development of RBI Governor resigning), KMB has filed a writ petition with a High Court to ensure its PNCPS (perpetual non-convertible preference shares) issuance satisfies RBI’s promoter ownership norms for banks, which was denied earlier. We have looked at various changes to ownership rules over the years to figure out the point of difference. Irrespective of outcome, we prefer HDFCB over KMB.
The key debates
While we claim neither a better legal understanding nor ability to interpret the law, we believe the writ petition has sought validity on two counts — both under Section 12 of Banking Regulation (BR) Act, 1939, viz. (i) whether PNCPS may be considered as capital, and (ii) whether RBI is empowered to regulate promoter ownership. However, the BR Act permits the RBI to progressively raise voting capital rights to 26% against 10% currently — that may also be a contention for KMB to figure as, should RBI raise the limits, the promoter ownership which is at 30%, may not need a reduction to 15%, as advised by the RBI earlier. The RBI licensing norm also seems to use equity capital, or paid-up capital or voting equity capital interchangeably, which may possibly be a case of poor drafting as well.
KMB got its banking licence in February, 2003 with licensing conditions as put out in 2001. The licensing conditions allowed promoters to maintain at least 40% of paid-up capital at any point of time. In July, 2004, RBI altered ownership norms for private sector banks. The modified regulation sought promoter shareholding to be brought down to the limit of 10% within a period of three years of commencement of banking operations. In June, 2012, the RBI advised KMB to bring down the promoter shareholding (then at 45.21%) to 20% by 31 March, 2018. The RBI further indicated it will take a view on dilution over the next two years thereafter, from 20% to 10% or such other percentage depending upon the prescription of promoter holding in the new bank guidelines.
In February, 2013, as a part of new banking licences, RBI for the first time used voting equity capital as a metric for promoter ownership to be brought down to 20% within 10 years and to 15% within 12 years from the commencement of banking operations. In May, 2016, RBI allowed promoter ownership norms for existing banks based on February, 2013 guidelines, while retaining limit of 10% of paid-up capital (prefix voting no longer used) on retrospective basis. In February, 2017, RBI advised KMB to bring down its promoter shareholding to 30% by 30 June, 2017, to 20% by 31 December, 2018 and to 15% by 31 March, 2020.
A buying opportunity?
We believe filing a writ with the Court should help KMB avoid any adverse regulatory pronouncement post the 31 December, 2018 deadline. Irrespective, we find the valuation to be very expensive versus the average cross cycle RoE. And to that extent, our relative preference for HDFCB over KMB stays.