What Does Emirates NBD-RBL Bank Deal Tell Us About Indian Banks?

A mega deal announced on Saturday between Emirates NBD and RBL Bank is being tagged as the largest ever equity infusion into an Indian private bank. The transaction involves a $3 billion investment into RBL Bank, where Dubai’s second largest lender will own 60% stake.

The transaction is being done at a price of Rs 280 a share. Post the transaction, RBL Bank will become the India subsidiary of Emirates NBD. NDTV Profit was the first to report this transaction on October 13, with details of the size of the investment and the stake purchase. 

The last major equity raise by a domestic private lender was Yes Bank’s Rs 15,000 crore follow-on public offer, back in 2020. The Emirates NBD-RBL Bank deal is also a major milestone for India’s banks because this would be the first time that a foreign investor is buying majority stake in a healthy bank.

Previously, the regulator has allowed transactions such as DBS Bank India acquiring Lakshmi Vilas Bank and Canadian billionaire Prem Watsa’s Fairfax International buying controlling stake in CSB Bank (then called Catholic Syrian Bank). But in both those cases, the transaction was allowed because of a distressed situation.

Reserve Bank of India has so far been reticent about allowing a foreign buyer to take over a domestic bank. Most significantly, the government’s efforts to sell controlling stake in IDBI Bank have seen delays as the banking regulator is not in favour of large private equity players taking over a local lender. Interestingly Emirates NBD is one of the potential buyers of IDBI Bank as well.

The regulator’s mood change is palpable. Just a few months ago it allowed Japan’s Sumitomo Mitsui Banking Corporation to acquire 24.99% stake in Yes Bank. This is just shy of the 25% mark, after which a buyer must mandatorily announce an open offer for existing shareholders. 

One of the key contentions for the regulator has been the cap on voting rights it implements on promoters. It is something the RBI does not and cannot budge on, because it is coded into the Banking Regulation Act, which is the law under which the central bank regulates banks. Whatever the economic interest a promoter may have in a bank, the voting rights are capped at 26%. To be sure, no other listed company in India needs to follow this rule.

Even in the RBL Bank deal, Emirates NBD will continue to keep its voting rights at that limit. As RBL Bank is a 100% publicly held entity, the Dubai buyer does not expect any material challenges in pushing through resolutions. 

The current deal (as well as the Yes Bank-SMBC one) is also a key development in the way Indian banks access capital. Owing to the onerous regulations over bank ownership, domestic lenders have been largely limited to narrow fund raising options. 

India does not allow corporates to acquire banks. It also limits investments by a single investor to 4.99% under the automatic route. Anything above that requires special clearance from the RBI. Even with that special clearance, the regulator allows only 9.99% stake to be sold to an investor. For anyone to buy a larger stake, the regulator must conduct its fit and proper checks and formally approve the transaction before it is closed. 

There is a strategic lobby asking the RBI to ease up on investments and look at fund infusion separately from voting rights. This could allow domestic lenders to tap into global investment pools, without giving up too much control to the buyer. Corporate governance standards are crucial to the RBI, though one may argue that linking shareholding to voting rights in banks has not necessarily given the best results. 

Governance structures have been compromised in the past, swaying to promoter and/or management interests in domestic private banks. A change in thinking is afoot and this could lead to large foreign capital entering Indian banks.

This would also aid the government’s goal to develop large domestic lenders who can compete among the global big banks, pushing up India’s stature as a financial powerhouse. The regulator may still only prefer strategic investments, rather than short term funds from the likes of private equity.