MUMBAI | KOLKATA: Reserve Bank of India (RBI) may question Kotak Mahindra Bank’s decision to use a wholly new instrument to bring down the promoter stake to 19.7% from 30% in line with the central bank’s rules on promoter ownership in private sector banks.The regulator may approve Kotak’s use of non-convertible preference shares but is likely to study the rationale and logic given that promoters of other banks are also under pressure to lower their stakes. Insiders in RBI said the regulator may ask questions as to why the bank issued preference shares instead of a straight forward equity shares.Kotak Mahindra Bank announced late on Thursday that it has decided to issue non-convertible perpetual non cumulative preference shares (PNCPS) to a set of investors to reduce the promoter stake to less than 20% as required under RBI rules.These shares are not considered as core equity but are calculated as part of tier 1capital. Core equity refers only to equity shares.Chief financial officer Jamin Bhatt said the bank issued the shares after taking into account Basel III regulations. He defended the sale by saying that there are no voting rights and that dividend cannot be carried forward.“The bank has issued the shares after taking into account Basel III regulations. RBI regulations say we do not need any special permission if the issuance is in line with Sebi rules. We have issued these instruments and have informed the RBI about it on Thursday, Now it is up to RBI if they have any observations.”“These are perpetual, non-convertible not redeemable preference shares which are non voting and non cumulative. Which means that holders of these instruments do not have a voting right and the dividend that the shares carry cannot be taken forward to the next year if not paid in one year.”“These shares do not have a put option but there is a call option after five years which will need RBI’s permission. But it is speculative to say that the shareholding will go back to its original level if this call option is exercised because we may have expanded our capital base by then or looked at some inorganic opportunities,” he added.Diversification of HoldingIn the 2016 guidelines on ownership and governance in private sector banks, RBI said that promoters or promoter group shareholding shall be 15% of paid-up capital. It does not explicitly mention whether the capital would be equity capital and the issue is likely to revolve around interpretation of the words paid-up capital.The wording of the 2016 rules does not mention the word equity but it is possible for RBI to interpret it in that manner. The RBI insider cited earlier said that would be the case. “Common sense says promoters’ equity has to be paid-up equity capital.
There are doubts if RBI would pass it off as equity capital,” said a former RBI executive director with knowledge of banking laws and regulations. RBI officials did not reply to an email seeking comment.R Gandhi, former RBI deputy governor in charge department of banking operations & development, said he doesn’t see any issue with approval for the issue. “I don’t see any issue with this instrument because Uday Kotak’s voting rights are any way capped at 15% and this instrument is part of paid-up capital as defined by RBI. Technically the bank is on the right side of law. Now the question arises on personal holdings and acceptability. Kotak has to bring down promoter stake as directed by RBI. But as he is a fit and proper person according to RBI, I personally think this should not be a problem. Of course RBI may take its own view.”Matter of precedence Analysts said that while Kotak has not flouted any norms, preference shares goes against the spirit of RBI’s direction to reduce promoter stake in the bank. “The spirit of the RBI direction was to diversify holding in the bank which has not happened after the issuance of these shares. It remains to be seen how RBI reacts to this because it will set a precedence for others to follow,” said Udit Kariwala, associate director at India Ratings and Research.With a market capitalisation of Rs 2.45 lakh crore, Kotak would either have needed to raise about Rs 25000 crore by way of share sale or dilution through acquisition to pare promoters’ capital. In 2017, he had to sell his personal holdings twice — the last one in May 2017 to lower holding to below 30%.Kotak on Thursday sold 100 crore of PNCPS at Rs 5 a piece to a bunch of domestic institutional investors and companies raising Rs 500 crore which reduced promoter Uday Kotak’s stake to 19.70% ahead of the RBI deadline of December 2018. The sale ensured the bank did not raise unwanted equity capital and at the same time complied with RBI directions on promoter holding. Promoter Uday Kotak needs to pare the stake to 15% by March 2020.These shares are perpetual with a 8.10% coupon and have a call option after 5 years, which means the bank can buy back the securities after that period.“There is no dilution for equity shareholders…Kotak amended its articles of association last month to include preference share capital,” said Suresh Ganapathy, research analyst, financials, at Macquarie.Analysts said the call option may create trouble for the bank. “The call option means that assuming the equity base remains the same five years from now and the bank decides to use the call option then the promoter stake will go back to 30%. RBI has to now make a decision whether this is allowed because it could be used by other banks as well,” said Karthik Srinivasan, group head, financial sector ratings at ICRA.Ganapathy from Macquarie said that Kotak must have taken legal opinion before going ahead. “Everything that Kotak has done is within the rules and I am sure they would have taken legal opinion too. Having said that, the management said that they have intimated RBI. So there is no official approval taken as of now. We will have to see because this has implications for the entire financial system as everyone else will try to do this for stake reduction requirements,” Ganapathy said.Ganapathy said new banks like Bandhan which also have to reduce promoter holding could also follow this route using this example. “Even small finance banks have to reduce their promoter holding. Let see how this all pans out as this opens the door for everyone,” Ganapathy said.
Read more: economictimes.indiatimes.comSome content on this is sponsored.