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This article is more than 3 year old.

Kotak Mahindra Bank’s peculiar offer, explained

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If the RBI disapproves, sentiment for the stock could turn sharply down.

Kotak Mahindra Bank’s peculiar offer, explained
Has Kotak Mahindra Bank pulled off a masterstroke or is it treading on a thin line that might see the banking regulator, Reserve Bank of India, chiding it for clever interpretation of the rule book?
Let’s take a closer look at what Kotak Mahindra Bank has done.
It has issued 100 crore Non-Convertible Perpetual Non-Cumulative Preference Shares with a face value of Rs 5 each with a dividend rate of 8.1 percent to raise Rs 500 crore. This will increase its paid-up (Tier 1) capital, which is seen at par with equity, by an amount of Rs 500 crore or just about 1.3 percent of the bank’s net worth and 0.2 percent of its equity market cap.
However, it will expand the number of shares by about 52 percent. This leads to the promoter group’s percentage of total shares issued declining sharply from 30 percent to just under 20 percent.
The move seems clearly aimed at meeting the promoter shareholding norms as Rs 500 crore doesn’t move the needle for such a large bank.
Besides, Kotak Mahindra Bank had a more than adequate capital adequacy ratio of 18.2 percent at the end of the previous fiscal, so it did not require any funds in a hurry. The payout of Rs 40.5 crore annually at 8.1 percent isn’t really steep in present market conditions for a perpetual paper that doesn’t ensure carry-forward of dividend obligation (non-cumulative). This should also be seen in the context of the bank delivering a return of equity of 16.5 percent, which is far higher.
So, is the move good for shareholders? Consider this, had the promoters been required to sell equity to pare their holding from 30 percent to 20 percent, this would have meant supply of additional shares worth about Rs 24,700 crore in the market. This big supply overhang for the stock has receded with the issue of preference shares.
What’s more, because holding on to 30 percent of equity doesn’t give the promoters more voting rights than 15 percent as a shareholder—a cap prescribed by RBI.
While it does restrict the other votes to 70 percent, giving the 15 percent more heft, the reason why the promoters might wish to hold on to their stocks could have more to do with wealth creation. It suggests that the promoters believe they can realise greater value over time by remaining invested, and that is always a positive sign for minority shareholders.
Shareholders therefore can rejoice, but whether the central bank sees this as a clever act that violates the spirit of its directive will be important to watch out for.
If the RBI disapproves, sentiment for the stock could turn sharply down. It may also lead to questions on governance being raised for a bank and promoter group that has been for the longest time been well respected and regarded.
Remember, Uday Kotak who leads the bank was also head of the committee on corporate governance, which has submitted several recommendations for improving these standards across Indian companies.
All eyes are on the RBI for a final word. If the central bank consents, it could open up a pandora’s box. For one, Life Insurance Corporation may be able to lower its holding requirement in several banks—following the acquisition of IDBI Bank—with these banks raising annuity-return offering preference shares. The government-owned banks might not find it too difficult to find investors for such instruments.
We can’t wait to hear the central bank’s verdict.
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