Investors Want RBI To Push For Fresh Issue By Banks To Meet Promoter Holding Caps

As the Reserve Bank of India's deadline approaches for the Kotak Mahindra Bank Ltd. promoters to reduce their stake to 20 percent, investors are getting anxious about possible scenarios, given the difference of opinion between the lender and the central bank 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 serves dual purposes: it avoids creating any conflict of interest vis-a-vis the promoter, and simultaneously brings in more resources for the banks which would support its growth plans going forward, they noted.

The central bank had earlier asked promoters of Kotak Mahindra Bank to bring down their stake to 20 percent by December 2018 and 15 percent by March 2020 in line with the guidelines for new bank licenses released four years ago.

The RBI's 2013 licensing guidelines for new private sector banks calls for promoter holding to be brought down in phases, first to 40 percent at the end of five years from the date of commencement of business operations.

Subsequently, it needs to be brought down to 20 percent at the end of 10 years and 15 percent at the end of 12 years. The 2016 guidelines call for reduction in promoter shareholding to 15 percent in 15 years.

Experts, however, feel that while the RBI's objective of diversified ownership is well reasoned, this may actually end up stifling the banking industry's growth since a widely held institution does not guarantee governance and success.

In August, the founder and promoter of Kotak Mahindra Bank, Uday Kotak, had pared his stake in the bank to 19.70 percent from about 30 percent following issuance of Perpetual Non-Cumulative Preference Shares to eligible investors.

Kotak's holding in the bank prior to the preference share issuance was 29.74 percent.

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.

According to a Morgan Stanley analysis, there can be three possible consequences to this situation: first, the RBI gives its approval for stake reduction via PNCPS issuance. Second, the RBI delays 20 percent stake reduction timeline by a few months, but keeps milestone of stake reduction to 15 percent by March 2020 unchanged. Lastly, the central lender may disagree to stake sale reduction via PNCPS issuance.

The report said that in case the RBI goes with the third option, it can lead to a 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 percent by December 2018.